Senators Cast Doubt on Self-Policing By Wall Street
Shelby, Sarbanes Say More Has to Be Done
By Kathleen Day
Washington Post Staff Writer
Thursday, May 8, 2003; Page E01
Two powerful senators yesterday questioned Wall Street's ability to police itself, saying that inherent conflicts of interest require a review of decades-old federal policy that gives the securities industry frontline responsibility for regulating its members.
"Those conflicts need to be exposed," said Senate Banking Committee Chairman Richard C. Shelby (R-Ala.). "And they need to be gotten rid of."
"How adequate are the self- regulatory mechanisms on which our securities markets rely?" said Sen. Paul S. Sarbanes of Maryland, the committee's top Democrat. "The way it's been working hasn't been working."
The comments were made at a banking committee hearing at which senators questioned government and industry executives about last week's $1.4 billion settlement between federal and state regulators and 10 of Wall Street's biggest firms. The accord ended a two-year probe that revealed unfair, widespread practices such as publishing bogus stock research to win investment banking business and rigging the allocation of initial public offerings of stock.
New York Stock Exchange Chairman Richard A. Grasso and NASD Chairman Robert R. Glauber were the target of particularly pointed questioning. The Securities and Exchange Commission regulates the nation's securities markets but has delegated some of that authority to the industry-run NYSE and NASD, known as self-regulatory organizations, or SROs.
One of Wall Street's biggest fears, in the fallout from the settlement, is that it will lose the power to regulate itself. Yesterday, senators questioned whether regulators at the SROs are reluctant to curb practices that are profitable for executives who sit on their boards.
Shelby and Sarbanes say they do not advocate abolishing SROs -- at least not now. But both said they applaud SEC Chairman William H. Donaldson's decision soon after taking office in February to review the SROs, which has included asking the organizations to evaluate how they should be restructured to avoid missing widespread wrongdoing again.
Shelby and Sarbanes said the settlement -- which sanctioned 10 firms but only two individuals -- should be only a first step in bringing Wall Street to task.
Saying that Wall Street's top executives don't understand the gravity of the charges in the settlement and are not sufficiently sorry for their misdeeds, senators mentioned a newspaper editorial-page article last week by E. Stanley O'Neal, the chief executive of Merrill Lynch & Co. O'Neil argued that regulators were trying to regulate risk out of the markets. The senators also cited public statements by Morgan Stanley Chairman Philip J. Purcell, who tried to minimize his company's misdeeds that led to the settlement.
"I believe that the Wall Street culture must change from the top down, and I am not convinced that the . . . settlement has done enough to change attitudes at the top of these banks," Shelby said. "Without holding executives and CEOs personally accountable for the wrongdoing that occurred under their watch, I do not believe that Wall Street will change its ways or that investor confidence will be restored."
"This was not a matter of a few 'bad actors,' " Sarbanes said.
Donaldson said he was "profoundly saddened and angered" by the behavior of individuals on Wall Street and assured senators that the SEC's probe is continuing. He said individuals who failed to properly supervise employees and allowed a culture of wrongdoing to exist will be punished.
Shelby and Sarbanes said hard questions need to be asked about why both the NYSE and NASD failed to detect and stop abuses.
"It should have been detected," Grasso said. "It simply was not."
Glauber put it another way. "I don't believe self-compliance has done the job it should have."
Sarbanes pointed out that the majority of NYSE board members are from publicly traded companies, including five of the 10 securities firms sanctioned in last week's settlement. He said NASD was in virtually the same situation.
Grasso defended the NYSE board, saying industry representatives have to "take off their team jerseys" and act only as representatives of the nation's 85 million shareholders.
"Have they been doing that?" Sarbanes asked.
"Yes," Grasso replied.
"Then why have they had such a run of problems?" Sarbanes said.
Sarbanes questioned whether NYSE officials "really get" the seriousness of the problems. He asked how the NYSE could have nominated Sanford I. Weill, Citigroup's chief executive, in March to its board as a representative of the public, rather than industry. The SEC's civil fraud complaint, filed against Citigroup as part of the settlement, cited Weill's role in pressing an analyst to upgrade his rating of AT&T Corp. stock as an example of the company's bad behavior.
Weill eventually withdrew his name from consideration as a director. But the fact that he was nominated has provoked criticism among regulators, lawmakers and consumer groups.
"It was a mistake," Grasso said.
After the hearing, Grasso said he agreed the SROs need a thorough self-examination and are reviewing how the board could be changed to be more representative of the public. But he said executives of large companies do bring shareholders' interests to the NYSE board because their companies are owned by shareholders.
Still, he said, whether to change the composition of the board "is a legitimate question to ask, and it's one we're asking ourselves."
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