Don't nix SEC duties for systemic regulator: Schapiro

WASHINGTON (Reuters) - 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.

"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," SEC Chairman Mary Schapiro said in testimony prepared for a Senate Banking Committee hearing.

Congress plans to overhaul the U.S. financial regulatory system amid the fallout from Lehman Brothers' collapse and 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 growing agreement among lawmakers and the Obama administration that one regulator is needed to look across the entire financial system, collect information and use that data to take corrective action across financial institutions.

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.

Schapiro said the SEC must continue to be the primary regulator of capital markets and investor protection. "Investor protection enhances the mission of controlling systemic risk," she told the Senate Banking Committee, which is one of the key committees responsible for rewriting the country's financial regulation.

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

(Reporting by Rachelle Younglai, editing by Dave Zimmerman)