Policing Wall Street
nytimes.com
Policing Wall Street
he White House and Congress have done an abrupt about-face about corporate malfeasance this summer, belatedly recognizing the need to crack down on financial chicanery in the executive suite. Whether the rush to reform is translated into a new era of stricter law enforcement now depends largely on whether the Securities and Exchange Commission can snap out of the coma it fell into during the first year of the Bush administration.
The S.E.C., created in the aftermath of the 1929 market crash to protect the integrity of financial markets, was aptly described as "the investor's advocate" by William O. Douglas, a chairman of the commission in the 1930's before becoming a Supreme Court justice. When energetically managed, it serves both as Wall Street's cop and rule maker, regulating the stock markets and ensuring that companies that sell stock to the public provide accurate and timely financial reports. The commission can, and should, strike fear in the boardroom, as it did in the 1970's when Stanley Sporkin, a hard-charging chief of enforcement, brought high-profile cases against United Brands, Lockheed and Robert Vesco, an international financier.
Until the recent wave of corporate abuses, President Bush and his S.E.C. chairman, Harvey Pitt, were singing from the deregulation hymnal and doing their best to weaken the commission. The S.E.C. today is badly in need of an infusion of money and manpower. Its 3,000 staff members represent a growth of 20 percent in the last decade, a time when its workload, by most measures, has more than doubled. The agency has been devastated by high turnover rates. It wasn't until last month — after the collapse of Enron and WorldCom and all the other corporate disasters — that Mr. Bush asked Congress for a still-insufficient $100 million increase to the S.E.C.'s budget.
Mr. Pitt, who worked alongside Mr. Sporkin as the S.E.C.`s general counsel and later became a highly paid lawyer for the accounting industry, has presided over a flurry of enforcement activity in reaction to the scandals, but he has been far too timid in addressing some of the systemic problems that led to the betrayal of so many investors. Mr. Pitt has ordered the chief executives of major corporations to certify their companies' financial reports by Aug. 14. That's fine, but it doesn't begin to make up for his lax approach in regulating the practices of Wall Street firms and the accounting industry.
We continue to believe that Mr. Pitt is ill suited to lead the S.E.C. during these critical days, but if Mr. Bush sticks with him, one measure of Mr. Pitt's leadership will be found in whether he appoints tough regulators to the new accounting oversight board created by Congress.
Mr. Pitt must also strongly support the work of the commission's four operational divisions, all led by capable directors. The corporate finance division, charged with reviewing the filings of 15,000 public companies, is particularly overwhelmed. As the front line in detecting accounting irregularities, it needs a substantial increase in staff. Last year it reviewed only 16 percent of corporate reports it received.
The market regulation division, which oversees the exchanges and brokers, needs to be more vigorous in fighting Wall Street's glaring conflicts of interest. These involve the corrupt allocation of initial public offering shares and the hyping of stocks by analysts to please banking clients.
The investment management division regulates all types of investment vehicles. It should tighten oversight of the secretive world of hedge funds and require greater transparency on the part of mutual funds.
The enforcement division investigates securities law violations and can bring civil cases. Its director, Stephen Cutler, is highly respected, and Mr. Pitt must allow him to vigorously pursue all cases, even such sensitive ones as the inquiry into Halliburton's accounting practices during Dick Cheney's tenure as chief executive. The corporate reform law's toughened criminal liabilities on executives who mislead investors will mean little if the S.E.C. fails to pursue such cases or does not refer them to federal prosecutors.
At a time when more than half of American households are invested in the stock market, and a loss of faith in the integrity of Wall Street is a drag on the economy, it is imperative that the S.E.C. truly act as "the investor's advocate." |
