Securities overseers confer in Baltimore

NASD, SEC officials seek ways to regain investors' confidence

May 13, 2004|By Bill Atkinson and Paul Adams | Bill Atkinson and Paul Adams,SUN STAFF

Top private and federal regulators met in Baltimore yesterday and laid out a plan for a securities industry rocked by trading scandals to win back investors' trust.

Brokerages should make fees, account statements and other key information more transparent to customers, they said.

Robert R. Glauber, chairman and chief executive of the National Association of Securities Dealers, said rising markets are bound to attract more investors, but many will have a "deeper suspicion" of the industry after recent revelations of practices that catered to the interests of brokerages or big traders at the expense of small investors.

"Our challenge, then, is to win back the American investors' faith and confidence in the cleanliness and trustworthiness of our industry," Glauber told more than 800 industry representatives at a NASD conference in the Baltimore Marriott Waterfront.

"In the aftermath of the bubble and various scandals in the mutual fund industry, investors, the media, Congress, federal and state regulators all are demanding that the industry turn away from opaque disclosure and toward unambiguous transparency," he added.

Glauber said the NASD, a private sector financial services regulator that oversees U.S. brokers and securities dealers, will form a mutual fund task force to improve disclosure of mutual fund costs and distribution arrangements.

William H. Donaldson, chairman of the Securities and Exchange Commission, who also spoke, called on the industry to adopt a culture that puts investors ahead of the bottom line after a year in which the SEC broke its own record for enforcement actions against U.S. corporations.

"Our rules have never been enough, are not today enough and never will be enough," he told conference attendees. "What's really needed is a change of mindset - one that fosters not only a culture of compliance, but also a companywide environment that fosters ethical behavior."

The SEC has proposed a series of rules aimed at eliminating late trading and market timing - trading abuses at the heart of the mutual fund scandals revealed last fall. Speaking to reporters after his speech, Donaldson said the agency is considering changes to some rules in response to industry comments, but is not backing away from reform.

Despite the regulatory crackdown on securities firms and mutual fund companies, Glauber still sees problems in the industry.

Transparency in the fixed-income bond market is "badly needed, as the corporate bond market continues to grow in importance for all investors," he said.

He said that in the past 10 years, the total amount of outstanding corporate bonds has reached about $4.3 trillion, surpassing U.S. Treasury bonds outstanding by about 25 percent. Many investing in bonds are individual investors.

Another concern that has cropped up is brokers persuading elderly homeowners to refinance their mortgages, take out the cash and invest the money in stocks or variable annuities.

Glauber called the practice "particularly offensive."

"If the homeowner has no other means of raising cash to invest in the market, then it is absolutely the wrong strategy for him," he said.

Others recoiled at Glauber's description of the scheme.

"That is absolutely wrong," said Jean Baley, senior vice president of compliance at Milwaukee, Wis.-based Landaas & Co. "Why would they ever think of that? There is so much more that needs to be addressed."

The regulators' statements come as the mutual fund industry is fighting to recover from widespread trading abuses that have resulted in multimillion-dollar fines, the ouster of top executives and criminal investigations. Once highly regarded mutual fund companies - including Janus, Putnam and Strong Funds - have been come under fire from regulators as well as from Congress.

In just the past year, the SEC has brought charges of misconduct against 12 of the 25 largest mutual fund organizations. In the past 7 1/2 months, the SEC has obtained orders for about $1.7 billion in penalties and forfeitures, Donaldson said.

"I cite these numbers as measures of just how pervasive malfeasance has become in the securities industry in recent years, and the impact of the enforcement powers vested with the SEC as a result of the Sarbanes-Oxley Act," he said.

The act, co-sponsored by Maryland's Democratic Sen. Paul S. Sarbanes, who is to speak at the conference today, increased disclosure and penalties for misconduct in corporate boardrooms and in the securities and accounting industries.

Industry officials attending the conference agreed that the industry's image has suffered.

"It is stained," said Barry I. Grossman, a securities attorney from New York. "I think the industry realizes there is a problem. The most basic problem is lack of disclosure."

Grossman said the industry's image will recover when "people start making money again."

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