By Suzanne Barlyn
Dow Jones Columnist

A proposal to hire an investors' advocate at the Securities and Exchange Commission begs the question: What is the SEC advocating now, if not the interests of investors?

The new office is envisioned in the financial regulatory overhaul approved Monday by the U.S. Senate Banking Committee. The provision was inserted in the massive bill by Daniel Akaka (D.-Hawaii) "to ensure that the interests of retail investors are better represented," according to a statement on his Web site.

The Office of the Investor Advocate would assist investors in resolving "significant problems" they may have with the SEC, or self-regulatory organizations such as Wall Street's self-policing watchdog, the Financial Industry Regulatory Authority.

The advocate also would, among other things, identify possible regulatory changes that would benefit investors, at both the SEC and Finra.

Some lawmakers and political observers say the Securities Exchange Act of 1934 already establishes the SEC's mandate to protect investors.

"I don't think it's a constructive change," says former Harvey Pitt, a former SEC Chairman. The proposed advocate's authority "couldn't be a more troublesome way to hamstring an agency" just when it needs more freedom to do its work, he said.

The advocate would have power to make judgments and recommendations about SEC actions, inactions and personnel. That could, for example, set off debate over whether the agency's general counsel or enforcement director should be replaced because of something they did or didn't do in a case, and thus tie up the commission.

"In essence, this would create a super-ombudsman, constantly looking over the commission's shoulders...," Pitt said.

Two Republicans on the committee planned to try to whittle down or eliminate the proposal-until their party decided the bill itself was flawed and they would not participate in amending it. Sen. Richard Shelby (R.-Ala.) would have substituted an ombudsman to assist registered investment advisers and other businesses the SEC regulates, while Sen. Corker (R.-Tenn) would have cut the provision entirely, according to proposed amendments reviewed by Dow Jones Newswires.

John Coffee, a professor at Columbia Law School in New York, also questions the need for an advocate's office.

"I've always thought that the SEC was the investor's advocate," he says.

But he's sympathetic to the underlying problems the proposal seeks to address, and says the perceived need for such a change reflects "something seriously wrong at the agency."

The problem is Wall Street's influence in the agency's higher eschelons and in its decision-making apparatus, he says. As an example, he cited a recent SEC push to ease some terms of a landmark 2003 settlement that created a clear separation between analysts and firms' investment-banking operations.

"It illustrates that the SEC is quite cozy with investment banks," Coffee says.

Barbara Roper, director of investor protection at the Consumer Federation of America, supports creation of an advocate's office. She says Wall Street is effectively undermining the SEC's investor protection mandate, using its ample resources to engage with SEC staff and shape regulatory proposals, she says. "Industry is doing a lot better than we are," she says.

SEC officials meet frequently with Wall Street firms. Comment letters in response to the agency's rule proposals often include memoranda from agency heads documenting their meetings with brokerage representatives and industry groups, according to a Dow Jones Newswires review of the SEC's Web site. Memoranda typically include only a vague description of the subjects they discussed.

An SEC spokesman says the agency generally meets with all parties that ask to discuss proposed rules. Investor groups, however, are far outnumbered by instances of meetings with Wall Street firms, according to a review of the Web site.

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