By Carrie Johnson
Washington Post Staff Writer
Thursday, June 28, 2007

Treasury Secretary Henry M. Paulson Jr. yesterday began an effort to examine regulatory overlap in the financial services sector, citing three recent industry-funded reports that argue a thicket of rules is constricting American business.

Treasury employees will study such things as greater regulatory efficiency and "the ability to adapt to market participants' constantly-changing strategies," a department statement said. Recommendations are due early next year.

Domestic Finance Undersecretary Robert K. Steel declined to predict whether the department would suggest that federal agencies such as bank regulators, the Securities and Exchange Commission and the Commodity Futures Trading Commission merge into a single regulatory body like the Financial Services Authority in Britain.

Business groups increasingly are urging the United States to adopt a more European-style approach to financial oversight as a way to draw foreign capital and make markets more attractive.

"We start with no preconditioned point of view," said Steel, who like Paulson spent most of his career at Goldman Sachs. "We'll invite perspective from others. I'm optimistic that people will reach out to us."

Steel said the project was "mission critical" because of the rise of private-equity capital pools, new debt instruments and the blurring of lines between insurance, stocks and other products marketed to investors.

Harvard University law professor Hal Scott, who led a committee that last year produced a report pushing for regulatory overhaul, said he hoped that the Treasury's initiative would result in a less prescriptive focus on enforcement and more analysis of the costs of rules before they are adopted.

"This isn't going to happen anytime soon, but it's important to get the process started," Scott said.

Merging certain regulatory agencies, such as the SEC and the CFTC, has been under consideration for years. But the political and bureaucratic dimensions have presented a significant challenge for reformers.

"There will hopefully be some things we can act on more quickly, but other things we can set the tone moving forward," Steel said.

Barbara Roper, director of investor protection at the Consumer Federation of America, said, "There was a case to be made for eliminating overlap and consolidating regulation."

But, Roper said, "that has traditionally proven extraordinarily difficult to accomplish, and it can be used to erode investor protections rather than to strengthen them."

Last month, Paulson named another panel to assess possible changes to the accounting industry, including whether the nation's four largest audit firms need greater protection from lawsuits.

Separately yesterday, SEC Chairman Christopher Cox announced an advisory group to recommend ways to make corporate financial reports more clear to average investors.

Former Fidelity Investments vice chairman Robert C. Pozen will lead the group. Other members will be named later this summer. Pozen said items under consideration include encouraging companies to submit a one- or two-page description of their activities in easily digestible language and urging them to present more sophisticated measures of performance for institutional investors.