By Michael Barbaro
Washington Post Staff Writer
Tuesday, June 18, 2002; Page E06
Major Wall Street firms have drafted amendments to federal legislation that would block state securities regulators from investigating whether stock analysts misled investors, the head of the state regulators' trade group charged yesterday.
The proposed amendments to pending legislation don't yet have a sponsor but could be offered today as the Senate Banking Committee considers an accounting reform bill.
The proposals are a sign of the growing debate over the states' role in the investigation of the national securities markets, which is usually handled by the Securities and Exchange Commission.
New York state's attorney general, Eliot Spitzer, led an inquiry that forced Merrill Lynch & Co. to pay $100 million to settle charges that its analysts derided stocks privately while touting them to investors to win investment-banking fees from the companies that issued the stock.
"This is shameful, cynical and brazen attempt to shut down a legitimate investigation by the local cop on the securities beat," Joseph Borg, president of the North American Securities Administrators Association, which has a 40-state task force joining Spitzer, said at a briefing yesterday. "Let the investigation go on."
Borg alleged that Wall Street giant Morgan Stanley and other unnamed brokerage firms authored the amendment, copies of which he released.
Morgan Stanley's spokeswoman, Diana Quintero, declined to comment on whether the company wrote the legislation. She said of the drafts: "We would favor language that is narrowly focused on preserving uniform national regulatory standards for securities research."
Wall Street firms and even some federal regulators have expressed concern over state efforts to regulate analysts, saying that a patchwork of differing rules in dozens of states would cripple investors and markets. The states counter that cleaning up the industry is too large a task for any one regulator.
The state regulators are coordinating their efforts with the SEC, the National Association of Securities Dealers and the New York Stock Exchange. Each has come up with its own rules to rein in analysts' conflicts of interest.
Among those who favor federal regulation only is Rep. Richard H. Baker (R-La.), chairman of the House Financial Services subcommittee on capital markets. Late last month he threatened to introduce legislation that would ban state efforts to impose new rules on financial firms.
"If 30 different states come up with 30 different sets of rules regulating financial service firms, that's a calamity," Baker said at the time.
The legislation being considered today was drafted by Sen. Paul S. Sarbanes (D-Md.), chairman of the Banking Committee, to cure problems in the accounting industry in light of Enron Corp.'s bankruptcy. The bill would subject the accounting industry to tougher rules, including a new independent regulatory board to oversee accountants, set audit standards and adopt ethics rules.
Banking Committee members proposed 47 amendments to the bill as of last Friday's deadline, according to Sarbanes spokesman Jesse Jacobs. Included are 20 "place holders," which can be filled in with amendments like those Borg complained about yesterday.
Sen. Richard C. Shelby (R-Ala.), who has three of the placeholders, is considering substituting the Wall Street firms' proposed analyst amendment for one of them, said his spokeswoman, Andrea Andrews.
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A Wall St. Push to Water Down Securities Laws
By GRETCHEN MORGENSON
Some members of the securities industry are pushing Congress to prevent states from pursuing those who violate securities laws, including Wall Street firms now under investigation for conflicts of interest by their stock analysts.
A proposed amendment on the subject may be attached today to legislation that is actually intended to increase protections for investors by strengthening controls over the nation's accounting system and over stock analysts' practices.
But the draft of the amendment, which began circulating last week, would block the states' current investigation of stock analysts and would severely restrict their enforcement of securities laws in the future, according to the association of state regulators.
At a time when investor confidence in the market has been eroded, opponents see the effort as keeping an important cop off the beat.
"State securities cops have a duty to protect investors in their states, something they've been doing longer than the S.E.C.'s been around," said Joseph P. Borg, director of the Alabama Securities Commission and president of the North American Securities Administrators Association. "The question for the authors and supporters of this amendment is: Are you going to stand with 100 million-plus investors on Main Street who expect and deserve the truth from their brokers or with a handful of rich firms on Wall Street who have a serious credibility problem?"
Two legislative sources said Philip J. Purcell, chairman of Morgan Stanley, had recently made the rounds on Capitol Hill to promote legislation to curb state regulators' powers. One person said Mr. Purcell's idea had gained support among both Republicans and Democrats.
A Morgan Stanley spokeswoman declined to comment on Mr. Purcell's role in the amendment. But in an interview last Friday, Mr. Purcell said, "I personally believe that legislation could make a positive contribution to restoring investor confidence." He was referring to the Republican legislation on corporate disclosure, supported by Representative Michael G. Oxley of Ohio.
But he also discussed a proposal by Paul S. Sarbanes, the Maryland Democrat and chairman of the Senate Banking Committee, that would tighten regulations of accounting firms and brokerage analysts. "Likewise, the Sarbanes bill has some elements in it that are very constructive," Mr. Purcell said. "I would hope that both bills can get tailored in conference to the point where the end result is very positive."
The proposed amendment says no law, rule, regulation, order, administrative action, judgment, consent order or settlement agreement shall be imposed by any state on people subject to Securities and Exchange Commission rules.
It has been circulated as a draft attachment to the Sarbanes bill, formally the Public Company Accounting Reform and Investor Protection Act. Last Friday, lawmakers added 47 amendments to the bill, and the proposal limiting the states' regulatory functions was absent. But 20 of the amendments are called placeholders and now belong to eight senators who can add something as the bill is being marked up. The draft amendment with a Senate sponsor, as yet unidentified, could appear today if state regulators fail to block it.
State regulators are calling the new amendment Wall Street's response to the investigation into analyst practices begun about a year ago by Eliot L. Spitzer, the attorney general of New York.
In April, Mr. Spitzer filed an affidavit against Merrill Lynch and released documents, including e-mail messages, that appeared to show the firm's analysts making derisive comments privately about companies they followed even as they recommended that investors buy those stocks. The documents also indicated that the firm's analysts worked closely with its investment bankers.
Merrill Lynch, which neither admitted nor denied the allegations, settled the case by agreeing to pay a fine of $100 million last month. Mr. Spitzer is now turning to other firms, particularly Morgan Stanley and Salomon Smith Barney. Regulators from several other states, including California and New Jersey, have agreed to help Mr. Spitzer.
Since Mr. Spitzer's campaign, some representatives of the securities industry and lawmakers have voiced fears that investigations by various states into Wall Street practices could lead to a hodgepodge of securities laws rather than a uniform set of standards overseen by federal regulators. The state regulators overseeing the analyst investigations say that they too want uniformity in laws but that they must also be free to protect their constituents.
In a statement yesterday, the Securities Industry Association, the lobbying organization for Wall Street firms, said its members supported vigorous law enforcement. "The implication that we are seeking to hinder investigations is absolutely without merit," a spokesman said.
The paradox of attaching an amendment restricting state enforcement activities to a bill intended to solve those conflicts was noted by Barbara Roper, director of investor protection at the Consumer Federation of America.
"On the securities analyst issue, Congress held hearings and thought that was an adequate response," she said. "The S.E.C. adopted the industry's voluntary standards as rules and thought that was an adequate response. And now some in Congress appear intent on ensuring that the states cannot force real reform. And they wonder why there's a crisis in investor confidence?" |
