The U.S. Securities and Exchange Commission's role as market supervisor and investor protector should not be sacrificed as Congress considers creating one entity to oversee all risk in the financial system, the head of the agency said on Thursday.

Outlining a rigorous agenda, SEC Chairman Mary Schapiro said the agency would strengthen rules for money market funds and investment advisers and reiterated plans to give shareholders more rights.

Even as attention focuses on reconsidering the management of systemic risk, investor protection and capital formation ... cannot be compromised as a product of any reform effort, Schapiro told a Senate Banking Committee hearing.

Congress plans to overhaul the U.S. financial regulatory system amid the multibillion-dollar bailouts of insurer American International Group , whose hefty book of complex derivatives has endangered the global financial system.

Top policymakers are considering creating a powerful systemic risk regulator with the authority to look deep into financial firms other than banks, such as hedge funds and private equity companies.

There is some agreement among lawmakers and the Obama administration that one regulator is needed to keep tabs on risks that could threaten the entire financial system.

However, some investors fear that the SEC will be stripped of its powers, relegated to the role of a business conduct regulator and brought under the umbrella of the Treasury Department.

Senate Banking Committee Chairman Christopher Dodd expressed similar views and said he had reservations about consolidating regulators and losing the SEC's role as investor protector.

Among other issues, Schapiro said the SEC is working on reforms to better protect investors who entrust their funds to broker-dealers and investment advisers.

STAFF TRAINING

The agency has started ramping up staff training after coming under intense criticism for not uncovering Bernard Madoff's $65 billion investment fraud despite a number of red flags. Schapiro said she intends soon to ask Congress to give her agency authority to compensate whistle-blowers.

The SEC plans to require investment advisers with custody of client assets to undergo an annual, surprise third-party audit to confirm the safekeeping of those assets, she said.

I expect the staff to recommend that the commission consider requiring a senior officer from each firm to attest to the sufficiency of the controls they have in place to protect client assets, Schapiro said.

Another plan is to strengthen regulation of money market funds to improve the credit quality, maturity, and liquidity standards applicable to these funds, she said.

These efforts will be aimed at shoring up money market fund investments and mitigating the risk of a fund experiencing a decline in its normally constant $1 net asset value, Schapiro said.

Schapiro's ideas were aligned with some of Treasury Secretary Timothy Geithner's proposals for regulatory reform.

Geithner said the SEC should develop strong requirements for money market funds to reduce the risk of rapid withdrawals that could pose greater risks to market functioning.

As policymakers consider sweeping changes to the country's financial regulatory structure, Schapiro said her agency was considering asking Congress for legislation requiring hedge funds and their advisers to register with the SEC.

Responding to Democratic lawmakers' requests to give shareholders an easier way to nominate corporate board directors, Schapiro said the agency could act on 'proxy access' as soon as May.

Schapiro also reiterated support for giving shareholders more say on how executives are paid.

(Editing by Dave Zimmerman and Brian Moss)

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