ALL BUSINESS: Risks of Dismantling SEC

Under a Bush administration proposal to restructure the financial system, the power and authority of the Securities and Exchange Commission which oversees investment banks, stock exchanges and publicly traded companies could diminish.

That could hurt all investors. This plan may be proof that the government serves the business lobby's interests rather than those of smaller investors.

"The Treasury Department's blueprint is designed to boost Wall Street's competitiveness, not Main Street investor protection," said Karen Tyler, president of the North American Securities Administrators Association and the securities commissioner of North Dakota.

It's not that the SEC, considered the top cop for the securities industry since it was founded in 1934, is being thrown off the beat. But how the agency would monitor entities under its watch could change under the plan announced Monday by Treasury Secretary Henry Paulson.

The 218-page proposal calls for a sweeping overhaul of how the government regulates thousands of businesses from the nation's biggest banks and investment houses down to the local insurance agent and mortgage broker. Leading the charge will be the Federal Reserve, which will have the power to protect the stability of the entire financial system.

Paulson is spinning the plan as a way to improve and modernize the regulatory system, something needed given the current financial turmoil. But many of the changes aren't necessarily drawn from new ideas; they've been on the administration's to-do list, which has been growing since President Bush took over the White House in January 2001.

In November of that year, then SEC chairman Harvey Pitt spoke of the need "for a fundamental reexamination of our regulatory framework." But as he acknowledged in an interview this week, the flurry of scandals beginning with the implosion of Enron late that year never made a thorough review possible.

So now, as uncertainty plagues the marketplace, some old ideas with a seemingly current timeliness are being trotted out, and among the biggest targets is the SEC.

"This is the last great attempt by this administration to undo SEC regulation," said Lynn Turner, former chief accountant at the SEC in the late 1990s who now is an independent consultant. "They say they want the make the system more efficient, but they really want to dismantle the system."

The plan calls for the merger of the SEC and the Commodity Futures Trading Commission. Of itself that isn't a bad idea because many financial futures track securities products.

More troublesome, though, is that the Treasury endorsed the CFTC's use of so-called principles-based regulation, in which conceptual guidelines are used instead of specific rules. The government also said the SEC, which follows a "rules-based" approach, should apply the principles approach to its oversight of stock exchanges. Critics say that opens regulation up to interpretation.

The plan also calls for more reliance on self-regulatory bodies, modeled after groups such as the Financial Industry Regulatory Authority the watchdog for securities firms for oversight and rule making. In making the case for establishing a self-regulatory framework for the investment advisory industry, the proposal says that would "be more cost-effective than direct SEC regulation."

The plan gives no clarification on what practices need to be stopped or how to make the system more transparent. It also doesn't discuss issues like improved enforcement or how to curb risky financial products like derivatives that have been the root cause of the financial turmoil seen in the last year.

The plan won immediate praise from industry trade groups that would benefit from any easing of regulation. Among those supporters are the Wall Street-focused Securities Industry and Financial Markets Association and the Business Roundtable, which represents CEOs at many of the nation's largest companies.

The SEC gave a more ambiguous response. "The proposed consolidation of responsibility for investor protection and the regulation of financial products deserve serious consideration as a way to better address the realities of today's markets," SEC Chairman Christopher Cox said in a statement.

Cox may see the writing of his legacy on the wall the SEC under his tenure has been considered largely ineffective, with few significant changes coming since the former Republican congressman took the agency's helm in 2005. If this plan goes though, he could be the last chairman of the SEC as we know it.

The man who Cox replaced, former chairman William Donaldson who served from 2003 to 2005, says modernizing and reorganizing the financial system make a lot of sense. But he warns against any quick dismantling of the SEC, especially in a proposal where the "devil is in the details," he said this week.

He's got that right this plan is a dressed up way to bolster a hands-off approach to regulation. Given what has happened in the financial world in recent months, it doesn't seem like the right time to give anyone a longer leash.

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Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org