NYSE told to do its job or else

Mutual funds, regulators to be `major' issue before Congress, Sarbanes says

`They need to do it right'

November 21, 2003|By Bill Atkinson | Bill Atkinson,SUN STAFF

Sen. Paul S. Sarbanes of Maryland, co-author of the landmark Sarbanes-Oxley Act cracking down on corporate malfeasance, said yesterday that mutual funds will be a "major" issue in the next congressional session, and he warned the New York Stock Exchange that if it can't regulate itself, someone else will.

The exchange and other organizations that regulate themselves "need to do the job, and they need to do it right," Sarbanes said in an interview after a day of hearings on the scandal gripping the mutual fund industry and NYSE governance. "It needs to be understood that they are not the only game in town to do this job."

The mutual fund industry has been rocked by revelations that fund managers have engaged in abusive, sometimes illegal, trading schemes that harmed long-term shareholders.

Some companies allowed large customers to make trades after the 4 p.m. market close, which is illegal. Others allowed customers and their own portfolio managers to make rapid-fire trades, which is not illegal but drives up fees for long-term investors.

The NYSE has come under fire for conflicts of interest between its regulatory and business units. In September, its longtime chairman, Richard A. Grasso, resigned amid outrage over his $188 million compensation package. The Securities and Exchange Commission has begun an investigation into improper trading among NYSE specialists, who are in charge of keeping orderly markets.

With the congressional session nearing its end, Sarbanes said cleaning up the mutual fund industry will be a priority next year.

"Obviously, we need to look carefully at what is going on in the mutual fund industry," said Sarbanes, the ranking Democrat on the Senate Committee on Banking, Housing and Urban Affairs. "Mutual funds will obviously be a major item on the agenda in the Senate banking committee."

He said time will tell whether the industry will need a new "framework or structure." He said that the SEC already has broad regulatory powers that go beyond a bill designed to curb industry abuses that was approved by the House Wednesday.

"In the meantime, the SEC has power and authority to move ahead on this mutual fund issue," Sarbanes said. "There is nothing in that bill that the SEC needs now in order to act. The actions they [the SEC] are considering taking in some instances go further than what is in the legislation. I think we are in a position to, in effect, wait and do a thorough and careful effort in the new session."

The SEC has come under sharp criticism for failing to detect problems in the mutual fund industry, which were exposed by New York state Attorney General Eliot Spitzer in early September.

Sarbanes said the SEC needs more resources to carry out its mission. The agency suffers from high turnover, lagging pay and outdated equipment, he said.

"I have always been pushing for a more adequate budget for the SEC," Sarbanes said. "They need money to hire additional people ... accountants and lawyers. They need to update and modernize their technology systems."

Sarbanes said the spate of financial scandals, from Enron to Arthur Andersen to crooked analysts to mutual funds, shows that "proper standards had been allowed to deteriorate" and that the interests of investors were "being neglected or abused."

The problems that erupted in the mutual fund industry caught him off guard, the senator said.

"I think most people were surprised," he said. "We had been constantly assured that the mutual fund industry had been in good shape by the spokesmen of the mutual fund industry. In retrospect, it is clear the SEC was not exercising sufficient review and oversight."

He said the scandal has been a "blow to our effort to restore investor confidence, although I think we are making headway."

Sarbanes said the Sarbanes-Oxley Act, enacted last year, and the investigations under way in the mutual fund industry will make the financial markets safer for investors.

"I think investors can have some sense that a lot of action is taking place," Sarbanes said.

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