Administration seeks to bolster SEC’s authority

WASHINGTON — The Obama administration has sent Congress legislation designed to protect investors by bolstering the authority of the Securities and Exchange Commission.

The proposal unveiled Friday is part of the sweeping plan for overhauling the U.S. financial rule book that the administration is pressing lawmakers to enact to help avert another meltdown. It seeks to put investment advisers providing services to retail investors and stockbrokers under the same standards of conduct, and to strengthen rules governing the timing and quality of disclosures by investment funds.

For example, the SEC could require that investors be given a concise summary prospectus of mutual funds and a simple disclosure showing the costs of a fund before the completion of a sale. Currently, most fund disclosures and prospectuses don’t have to be delivered to investors until after a transaction is completed.

The 20-page legislative proposal also clarifies the SEC’s authority to conduct consumer testing as a way of creating more effective and clearer disclosure documents.

In addition, the SEC would be empowered to establish a fund to pay whistleblowers for information leading to enforcement actions and financial penalties against companies and individuals violating securities laws. Gaps would be closed in the SEC’s legal authority to pursue parties that aid securities fraud.

The plan appears to be less controversial than other aspects of the administration’s overhaul blueprint. The creation of a new Consumer Protection Financial Agency to police the fine print on products like mortgages and credit cards, and expanding the Federal Reserve’s powers to oversee big complex financial companies for risk, have drawn considerable opposition from lawmakers. The administration’s investor-related proposals, floated several weeks ago, didn’t stir opposition on Capitol Hill.

The SEC was widely assailed over its failure to detect the multibillion-dollar fraud scheme of money manager Bernard Madoff despite red flags raised by outsiders over a decade. SEC Chairman Mary Schapiro has taken steps aimed to strengthen and speed the agency’s enforcement efforts and installed a new enforcement director.

If made earlier, the administration’s proposed changes “could have assisted in the matter of Madoff,” Michael Barr, the Treasury Department’s assistant secretary for financial institutions, told reporters on a conference call. They “would have raised the price of engaging in illegal activity,” he said.

A recent SEC proposal to require most investment advisers to submit to surprise exams by outside auditors was aimed especially at patching gaps that allowed Madoff to deceive investors about their funds’ condition.

The SEC also recently has proposed rule changes to bolster investor protection, including strengthening oversight of money-market mutual funds and making it easier for shareholders to nominate directors for ballots of public companies.

Treasury Secretary Timothy Geithner, testifying before a House panel Friday, called for greater government control over the mostly unregulated and complex market for derivatives blamed for contributing to the financial crisis.

Republicans are wary of the move, but the effort to add government restrictions to those financial instruments has gained support among Democrats.