Financial Regulations on the Way; POTC Welcomes Higher Quality Oversight that Won't Kill Off Risk Takers

Financial Regulations on the Way; POTC Welcomes Higher Quality Oversight that Won't Kill Off Risk Takers; Risk Takers Provide the Oil of Liquidity for Free Capital Markets to Continue their Evolutionary Cycles Washington (Dow Jones)--The chairman of the U.S. Senate subcommittee that oversees the securities industry plans to call Tuesday for a "structural reform" of the U.S. regulatory system to include greater controls over credit derivatives and hedge funds, as well as more aggressive SEC enforcement powers, according to portions of a speech to be delivered in Washington. --"Now is the perfect opportunity to reform completely and effectively the problems that have been identified in all these areas, from the structure of our regulation, to SEC's shortcomings, regulatory arbitrage, and risk management," Sen. Jack Reed, D-RI, will say in a speech to the Council of Institutional Investors in Washington D.C. Reed's office released an excerpt of the speech Monday evening. --Reed, as a senior member of the Senate Banking Committee, is likely to play an influential role in congressional efforts to draft a dramatic rethinking of the U.S. regulatory system. President Barack Obama, aided by newly confirmed Treasury Secretary Timothy Geithner, is expected to move quickly to overhaul regulation of the financial markets in the wake of the turmoil over the last year and the collapse of top U.S. financial institutions. --Reed plans to focus a portion of his criticism on the SEC's oversight of the securities industry, describing enforcement staff as "handcuffed" by limited resources and policies put in place by former Chairman Christopher Cox. --"This has had a chilling effect on attorneys in Enforcement and this policy must end with the new leadership," Reed says in the released remarks. --The key is significantly increasing the resources available to the embattled SEC, Reed says. One way to achieve this, he will suggest, may be to increase the fees on securities transactions to previous levels in order to pay for more aggressive enforcement. --The oversight regime Reed envisions would include giving regulators the ability to peer into markets for complex financial instruments and investment vehicles that have thus far been untouched. This includes unregulated products such as credit derivatives, more transparency in dark pools of liquidity and other complicated markets, as well as new regulation of hedge funds and other lightly regulated financial institutions. --"We need to ensure that supervisors have the right information they need identify systemic risks as they build," Reed will say in the speech. --Beyond securities firms, Reed suggests that the current regulatory system for banks has resulted in regulatory arbitrage, where banks seek out the most lenient regulator. He singles out the Office of Thrift Supervision, expressing skepticism for the separate bank and thrift charters and questioning the need for the thrift regulator. --"The OTS has underperformed in too many areas and has at times been too lenient with those it supervises," Reed will say. --Additionally, he will express support for giving investors greater say on executive compensation and enacting new "clawback" laws so that executives can be forced to give back compensation based on ephemeral profits. --The compensation of executives - which has often been determined without shareholder input - has misaligned incentives for managing risks, with a focus on the short term," Reed will say. --In a possible split from other top Democrats, Reed also plans to question whether the Federal Reserve is the best choice to oversee systemic risks. Some policymakers have suggested the central bank would have the best expertise of the current regulators to act as an umbrella agency maintaining market stability. --"We need to ask hard questions about whether our central bank should be handling monetary policy, regulatory oversight, and consumer protection issues," he says in the excerpt. - By Michael R. Crittenden, Dow Jones Newswires; 202-862-9273; Michael.Crittenden@dowjones.com Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=FloOr2QVH92nE1t4LpJiOQ%3D%3D. You can use this link on the day this article is published and the following day. (END) Dow Jones Newswires January 26, 2009 23:15 ET (04:15 GMT) Copyright (c) 2009 Dow Jones & Company, Inc.- - 11 15 PM EST 01-26-09