Sarbanes assails bid to dilute reforms

Key senator warns against backsliding at SEC on mutual funds

May 14, 2004|By Paul Adams | Paul Adams,SUN STAFF

Maryland Sen. Paul S. Sarbanes said yesterday that Congress would act if reform opponents succeed in beating back sweeping regulations aimed at eliminating abuses in the mutual fund industry.

The five-term Democrat, who co-authored landmark legislation to clean up corporate accounting and governance after the Enron scandal, said Congress will be patient while the Securities and Exchange Commission continues its work, but stands ready to enact legislation if the agency's efforts fall short.

"If the SEC gets beaten around, so that it's not putting into place reforms objective observers think ought to be done, that's going to raise the call over whether Congress should come in and do legislation," he told industry representatives attending a National Association of Securities Dealers conference at the Baltimore Marriott Waterfront.

Sarbanes' comments come at time when the SEC is under intense pressure from financial industry officials and some Republican lawmakers to weaken proposed reforms stemming mostly from late-trading and market-timing scandals revealed in September.

Sarbanes is the ranking Democrat on the Senate Committee on Banking, Housing and Urban Affairs, which recently held 10 hearings on the mutual fund scandals.

Though content at this point to let the SEC do its job, Sarbanes left open the possibility that Congress would act in the future to define the fiduciary duty of mutual fund boards toward shareholders, a proposal sought by some reform advocates.

Some critics say the power to make such a definition already resides with the SEC.

`Legal question'

"It's a legal question," Sarbanes said in remarks after his speech. "Possibly Congress would have to do something. We're working in an arena now where there's so many things that clearly need to be done, and the SEC seems to be moving to do most, if not all, of those things and I want them to carry through with their agenda."

Few lawmakers have had a greater impact than Sarbanes on corporate governance and the financial markets in recent years.

After Enron and a series of other high-profile corporate scandals, the Sarbanes-Oxley Act of 2002 created a public board to oversee the accounting industry, beefed up corporate auditing procedures and required top executives to vouch for the accuracy of their financial statements.

Many lawmakers initially called for a similar legislative effort after the mutual fund scandals.

But in congressional hearings and public comments, SEC Chairman William H. Donaldson has asked lawmakers to hold off on further reforms.

Not backing off

In a speech to conference participants Wednesday, he stressed that the agency isn't backing off its proposals to address market timing and late trading, as well as fee disclosure, certain sales practices and other issues facing the fund industry.

His comments followed an article by The New York Times Monday that quoted officials and lobbyists as saying Donaldson has indicated a willingness to bend in the face of "intense pressure" from Bush administration officials and Republican lawmakers to water down some of the proposed regulations.

Donaldson is a Bush appointee but has sided with the two commission Democrats on many regulatory matters.

Donaldson said the five-member commission is seeking to "find middle ground" on a proposal to give big shareholders the ability to nominate their own board directors. He also defended a plan to require loosely regulated hedge funds to register with the SEC and give regulators greater access to their books and trading practices.

The proposal has come under fire from lawmakers and Federal Reserve Chairman Alan Greenspan, who warned against reining in hedge funds.

"I think Donaldson, he appreciates that he's there at a historic moment and we really need to bring the standards back up and really need to be able to assure investors they can have confidence they are in a fair market and not being manipulated and taken advantage of," Sarbanes said.

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