updated 5/20/2009 5:24:53 PM ET 2009-05-20T21:24:53

The head of the Securities and Exchange Commission is objecting to a plan being weighed by the Obama administration to create a new financial watchdog for consumers that would assume oversight of mutual funds.

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The SEC chief’s split with the administration shows how hard it may be for a broad overhaul of financial rules to overcome turf wars among various regulators and for a consensus to be reached on Capitol Hill.

SEC Chairman Mary Schapiro on Wednesday said she opposed the plan discussed Tuesday night by Treasury Secretary Timothy Geithner and other administration officials that would chip away at the SEC’s own powers. She said giving any new entity authority over mutual funds would lessen the government’s protection of investors — her agency’s core mission.

“I would question pretty profoundly any model that would try to move investor protection functions out of the Securities and Exchange Commission,” Schapiro told reporters at the agency’s headquarters. “Investor protection is woven through everything that happens in this organization.”

Many of the SEC’s responsibilities — such as companies’ financial disclosures, shareholder rights, stock trading, brokerage firm practices and mutual funds — involve investor protection, Schapiro said.

“So it’s not a discrete thing that gets moved away without really damaging the fabric of the entire investor protection regime,” she said.

The plan the administration is weighing would centralize the enforcement of laws that protect consumers of financial products, such as credit cards, mortgages and mutual funds. That mission is now spread across a patchwork of federal and state agencies, including the SEC, Federal Reserve and Federal Trade Commission.

Any changes to the nation’s financial oversight would require congressional action. And it’s unclear whether lawmakers will unite behind a single approach this year.

Rep. Barney Frank, D-Mass., who heads the House Financial Services Committee, favors in principle changes that would bolster consumer protection, but in this case “there’s no proposal right now to endorse,” said his spokesman, Steve Adamske.

Adamske declined to comment on the issue raised by Schapiro concerning mutual funds.

Schapiro’s comments marked her first sharp public breach with the administration over an overhaul of rules designed to prevent another financial crisis. Schapiro in recent weeks has told Congress, which is debating the changes, that she thinks the SEC must play a key role as an independent watchdog protecting investors in any new regulatory system.

Schapiro also has said she favors an idea floated by Sheila Bair, head of the Federal Deposit Insurance Corp., for a new “systemic risk council” to monitor large institutions against financial threats. This council would include the Treasury Department, Federal Reserve, FDIC and SEC.

By contrast, the White House leans toward recommending that the Fed alone become a new supercop for “too-big-to-fail” financial companies that could set off another meltdown.

Schapiro says she’s concerned about an “excessive concentration of power” over financial risk in any single agency.

Lawmakers are divided. The Fed has been widely criticized in Congress for failing to constrain aggressive mortgage lending that fueled the economic crisis. As a result, some have questioned whether the Fed should be entrusted with the responsibility of policing big financial institutions.

Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, recently said he is “more attracted to the council idea” than having a single regulator play that role. But other key lawmakers, including Frank, lean toward giving the responsibility to the central bank.

Officials said the administration has been exploring the new approach on a financial watchdog for consumers in meetings over the past few days with executives of the financial industry. Some industry groups already have expressed opposition to the plan. It was discussed at a dinner Tuesday at the Treasury Department attended by Geithner and Lawrence Summers, director of President Barack Obama’s National Economic Council.

“I find it surprising that this is what the administration wants,” said Chester Spatt, a former chief economist of the SEC. “If one is concerned about ’systemic crises,’ why create a regulator with different goals?”

Schapiro, who didn’t attend the dinner, said she has spoken with administration officials about her views on the issue and didn’t view the proposal as being in its final form.

“I certainly hope they’ll be refining it,” she said. “And I will tell you that I very strongly represented the view ... that the SEC’s sole responsibility is investor protection, and we will not flinch from that.”

An administration official who confirmed that the dinner had taken place said no final decisions had been reached.

Under one possible approach, some federal banking agencies might be combined and some powers over consumer products might be consolidated into a new body.

Geithner has said extensive changes were needed to ensure that the financial crisis, the worst in seven decades, is never repeated. In remarks to the Senate Banking Committee on Wednesday, Geithner said new financial products have resulted in benefits, but lax regulation has exposed Americans to abuses. He said government rules should ensure that financial choices are clear, reasonable and appropriate.

A leading advocate of the commission approach has been Elizabeth Warren, the Harvard law professor who heads the Congressional Oversight Panel for the government’s $700 billion financial rescue effort.

Sens. Richard Durbin, D-Ill., Charles Schumer, D-N.Y., and Edward Kennedy, D-Mass., introduced legislation earlier this year that would create a commission like the one proposed by Warren.

The Financial Services Roundtable, which represents some of the biggest institutions, has argued against separating the regulation of financial products from the regulators who oversee the institutions selling the products.

It was unclear whether the administration will propose creating a new agency to house the commission or placing the commission under an existing agency.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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