Scandals Show Need for US Regulatory Reform

Financial News, November 9, 2003 | Go to article overview

Scandals Show Need for US Regulatory Reform


Byline: Peter Wilson-Smith, Editor- in-chief

Financial regulation in the US is badly in need of a fundamental overhaul. That much is clear from the scandals currently engulfing the US mutual fund industry and the New York Stock Exchange (NYSE).The damage to investor confidence in the US from these developments is potentially much greater than the fall-out from the scandal over biased research in the banking industry. Outside Wall Street, the US public has always regarded plausible investment bankers with a degree of suspicion - an attitude that probably dates back to the 1930s. But mutual funds are different.

They are part of the fabric of US life: safe, respectable and an opportunity to share in the greatest capitalist system in the world.

About one-third of the population, or 95 million Americans, have money invested in mutual funds. Now, however, they are learning to their dismay that fund managers have been quietly picking investors' pockets by conniving in fraudulent or dodgy practices, such as late trading or market timing. The scandal has already involved the cream of the US mutual fund industry. Last week, Larry Lasser, chief executive of Putnam, the fifth-biggest mutual fund company, was forced to fall on his sword and it is not going to stop there. It is unlikely that Putnam was alone among the leading firms in engaging in these practices and other top names are likely to be dragged into the mire before long.

As for the NYSE, it is hard to overestimate the reverence in which it was held as a national institution. I remember once suggesting at a lunch in New York that perhaps Europe's stock exchanges, with their electronic order book, were more efficient than the NYSE with its specialist system. The suggestion was met by my Wall Street hosts with a combination of shock and blank incredulity.

Now the NYSE has been tarnished by the sums paid to Dick Grasso, the former chairman, and by the evident governance shortcomings. But none of that compares with the allegations emerging about the behaviour of the specialists or traders on the floor of the NYSE. Details of a confidential Securities and Exchange Commission report revealed last week by the Wall Street Journal paints a horrifying picture: specialists routinely front-running or trading ahead of their clients and an NYSE regulatory department wilfully turning a blind eye to improper practices, ignoring repeat violations and failing to make offending firms return illegal profits. …

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Scandals Show Need for US Regulatory Reform
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