SEC Chief "Distressed" at "Ills" in Industry

Boca Raton—SEC Chairman William Donaldson's favorite word is distressed—at least that was true during both his speech to the Securities Industry Association annual meeting and the press briefing that followed. It was somewhat ironic that Donaldson should be introduced this morning by Morgan Stanley's John Schaefer, since Morgan Stanley is being investigated for conflicts of interest in the sale of

Boca Raton—SEC Chairman William Donaldson's favorite word is distressed—at least that was true during both his speech to the Securities Industry Association annual meeting and the press briefing that followed.

It was somewhat ironic that Donaldson should be introduced this morning by Morgan Stanley's John Schaefer, since Morgan Stanley is being investigated for conflicts of interest in the sale of mutual funds. No one can tell what Shaefer was thinking, but it didn't matter. Donaldson was there to tee off equally on all of the 400-plus securities executives gathered at the Boca Raton Resort & Club, which to the dismay of the guests received a record amount of rain yesterday. (Golf and tennis was eventually played in the afternoon, but only after a two-hour rain delay.)

Donaldson's second sentence from the dais: "Let me warn you that my message today is an unpleasant but important one." And from there, it just got worse. "I have been distressed by the conduct we have seen from key participants in our nation's securities markets."

Later in a press briefing, Donaldson said the "the breakdown of rules and regulations and of supervision" was "very distressing" and "not isolated, but pervasive" to the industry. Donaldson vowed, "If there is more wrongdoing, we will find it and will punish the perpetrators."

Donaldson was referring to late trading and market timing abuses. In his speech he sternly added, "These offenses now must be added to a laundry list of industry wrongdoing." Then Donaldson listed the wrongdoings that have come out since the end of the tech bubble, largely because of the efforts of the crusading Eliot Spitzer, the New York attorney general who is likely to announce his candidacy for governor of New York.

"Analysts conflicts, IPO abuses, the failures to give investors the breakpoint discounts to which they were entitled, sales practice abuses and the hidden incentives some brokers have when favoring one mutual fund over another … I am left with the conclusion that these occurrences represent a fundamental betrayal of our nation's investors and are symptomatic of a disease that has afflicted far too many in the industry," Donaldson said.

That, basically, was the tenor of the speech: I am here to rebuke you. And to play catch up with Spitzer's office. Donaldson made it very clear to the SIA audience, executives from the nation's investment banks, broker/dealers and mutual fund companies, that brokers and financial advisors will be closely examined on how they do business. "One of our focus areas has been mutual fund sales practices and fee disclosures. In particular, our staff has been looking at precisely just what prospective mutual fund investors are being told about revenue sharing arrangements and other incentives doled out by mutual fund management companies and mutual funds themselves to brokerage firms who agree to feature their funds." He went on, "We are concerned that there may be inadequate disclosure of the source and nature of such payments."

Of course, the industry executives pledged to examine themselves and to conduct top-to-bottom reviews of their business practices. Despite the tone of the speeches and private comments from executives to reporters, Donaldson and other NASD officials present stood by the self-regulatory nature of the business and rejected the idea that self-regulation had failed.

"I, for one, hope that the [SRO] bus hasn't left the station," said NASD executive vice president Elisse Walters. "It works and it helps us from creating bad policies."

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