Senators: SEC should move faster to boost confidence
Published: Wednesday, October 1, 2003 at 6:01 a.m.
Last Modified: Tuesday, September 30, 2003 at 11:03 p.m.
WASHINGTON - Senators for the first time showed impatience Tuesday toward the head of the Securities and Exchange Commission over the pace of actions they said are needed to shore up investors' confidence.
SEC Chairman William Donaldson was given a mandate to aggressively act against corporate wrongdoing when he took over the SEC in February, and has received a bigger budget to do so. But the agency says it can't hire attorneys and accountants fast enough to spend the money.
In the aftermath of a series of corporate scandals, and with turmoil at the New York Stock Exchange and new complaints against mutual funds, members of the Senate Banking Committee grilled Donaldson.
"We've got to get this thing up and going," declared Sen. Paul Sarbanes of Maryland, the panel's senior Democrat and co-author of last year's sweeping legislation to combat corporate fraud.
Sarbanes described the SEC as "this perhaps semi-slumbering lion . . . having been fed a very good meal" when Congress nearly doubled its budget earlier this year.
Donaldson, who had enjoyed mostly friendly treatment from lawmakers since taking the helm of the SEC, acknowledged that investor confidence is at a low point and promised: "We're on the job."
Senators of both parties warned that failure to rebuild confidence in the markets and corporate America would undermine the economic recovery.
Donaldson, grappling with a host of issues including the question of reforms at the NYSE and new allegations of fraud in the mutual fund industry, said the NYSE's combined roles of regulator and competitive business must be questioned.
"We are at a stage now, in my view, where we really have to re-examine the locus of the regulatory mechanism" at the NYSE, Donaldson said.
The issue of whether the NYSE's self-regulatory and enforcement function should be split from its exchange business has been a key element in the debate over reforming the 200-year-old exchange. About half the NYSE board's seats are assigned to executives of large investment banks, floor trading firms and brokerage houses - the very businesses the NYSE is charged with regulating.
"I think there are a number of different approaches to this," Donaldson said, noting that he had discussed the issue Monday with John S. Reed, the NYSE's new temporary leader. "The stock exchange is going to have to come up with a governance structure that guarantees the independence of the regulatory aspect of what they're doing."
Those remarks were his strongest statements on specific changes for the world's biggest stock exchange since a crisis erupted in late August over its former chairman's pay package.
Donaldson said the first step is for the exchange "to get at" its structure of governing itself and devise an overhaul plan.
The board's composition and its vulnerability to conflicts of interest have been frequently cited by critics of the NYSE, and some observers believe it is inevitable that several directors will step down. The board includes six top executives from major Wall Street firms, including Merrill Lynch, J.P. Morgan Chase and Goldman Sachs.
Under brisk questioning by lawmakers, Donaldson also said the SEC is investigating alleged illegal late trading in mutual funds. Late trading, which is prohibited by federal regulations, involves buying mutual fund shares at the closing price after the New York markets shut down.
Sarbanes, though, lashed out at Donaldson's approach of requiring fuller disclosure of special compensation given to brokers for selling certain mutual funds. What is needed are new rules outlawing abusive practices, he said, telling Donaldson: "I think that's a very limited answer."
Sarbanes said changes in the system are called for, rather than simple punishment of some miscreants.
He cited a recent $2 million civil fine against Morgan Stanley by the brokerage industry's self-policing group, settling allegations that the firm held prohibited sales contests - offering tickets to Britney Spears concerts and the NBA finals - to push its brokers to sell in-house mutual funds and certain annuities.
Senators also asked Donaldson about one of the biggest recent accounting cases, involving government-sponsored mortgage giant Freddie Mac, which has ousted two chief executives since June. The SEC and the Justice Department are investigating.
If evidence of fraud emerges, "We would have a role there," Donaldson said. "We're looking at that right now. . . . We're in touch with any evidences of fraud there might be, there might not be."
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