Oct. 16 (Bloomberg) -- Former U.S. Securities and Exchange Commission Chairman Arthur Levitt, who's advising lawmakers on their response to the financial crisis, said Congress should stiffen oversight of hedge funds and credit derivatives and give the SEC power to regulate them.

The SEC should get ``the necessary authority to enhance the transparency'' of investors' swap positions and trades, Levitt told the Senate Banking Committee today. Any question about the SEC's ability to regulate hedge funds should be resolved ``quickly'' through legislation, he added.

The credit-default swaps market is blamed for the failure of Lehman Brothers Holdings Inc., among the top 10 backers of the swaps, and American International Group Inc., which issued contracts protecting more than $440 billion of bonds. Hedge funds, which bought and sold the credit derivatives in private transactions, were among the biggest swaps traders.

Levitt joins SEC Chairman Christopher Cox and acting Commodity Futures Trading Commission Chairman Walter Lukken in urging Congress to regulate the swaps, which pay holders face value for the underlying securities should a company fail to repay debt. They increase in value as a company's perceived financial health deteriorates.

The SEC, under former Chairman William Donaldson, tried to force hedge-fund managers to report information about their funds and investors, and submit to routine inspections by agency staff. A federal appeals court in Washington overturned the hedge-fund registration rule in 2006.

SEC Funding

Levitt, a Democrat, urged Congress to boost SEC funding by $85 million, saying the agency lacks adequate staffing and resources to police traders and financial companies. The SEC budget for the year ended Sept. 30 was $906 million.

The SEC has been challenged by senators, including Republican Charles Grassley of Iowa and Democrat Robert Menendez of New Jersey, for its oversight of Wall Street before Lehman declared bankruptcy in September and the Federal Reserve rescued Bear Stearns Cos. from collapse in March.

``It doesn't seem like these days the SEC has particularly done its job,'' Senator Sherrod Brown, an Ohio Democrat, said at today's hearing.

Levitt argued that restoring investor confidence in markets requires ``rejuvenating'' the SEC. Still, he added that the regulator deserves blame.

``By bringing a tough enforcement action, making a well- timed public statement or taking action on a critical need, the SEC builds the investors' confidence that someone is looking out for them,'' Levitt said. ``Yet at critical moments and on critical issues, the SEC has been reactive at best or has shown no real willingness to stand up for investors.''

The SEC failed to urge transparency as markets grew ``more complex'' and allowed banks to keep off-their-books entities that held mortgage securities, said Levitt, a senior adviser to the Carlyle Group and a board member of Bloomberg LP, parent company of Bloomberg News.

SEC spokesman John Nester declined to comment on Levitt's remarks.

To contact the reporter on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.

Last Updated: October 16, 2008 16:06 EDT