SEC seen backing off on enforcement

But the SEC chief more recently has taken heat from conservative Republicans in Congress over his efforts to clean up the mutual fund and hedge fund industries. Donaldson, a Republican, responded to a congressional grilling just prior to his resignation by saying he left his party affiliations at the door when he entered public service and did what he though was best for the well being of the average investor.

Doing that often put him at odds with fellow Republican commissioners, Paul Atkins and Cynthia Glassman. Indeed, passing regulatory changes he deemed important required Donaldson to ally himself with Democratic commissioners Harvey Goldschmidt and Roel Campos. Rules established in the 1930s require both parties be represented on the commission.

California congressman Christopher Cox has been nominated to replace Donaldson. Cox comes from the conservative wing of the Republican Party and has a background as a corporate lawyer and a government counsel during the Reagan administration. He is expected to adopt a more business-friendly stance. Aegis Frumento, a partner at securities law firm Duane Morris in New York, describes Cox as a free-market enthusiast in the mold preferred by the Bush administration.

“He’s coming in at a time when the forces of pushback have gained momentum against the tide of regulation that came forward in the wake of the tech crash,” Frumento says. “So the conventional wisdom is that he will pull the reigns back on the enforcement staff.”

Frumento suggests that may not be a bad thing, given the zealous approach being taken by some SEC examiners. In a couple of cases he’s worked on recently, SEC staff never actually alleged deceit against the firms being charged (at one time, such an allegation was considered a necessary cornerstone of any SEC fraud case). “They know people will cave and settle and that they’ll never really have to prove anything. People are afraid to push back and that’s not good,” he says. “Cox’s appointment marks the edge of the pendulum swinging in one direction. It won’t go back to being as lax as before the Enron scandal, but it will swing back a ways.”

It also remains to be seen what a change at the SEC’s helm will mean for the self-regulatory organizations. The National Association of Securities Dealers’ (NASD) examination staff adopted an aggressive approach in recent years, due in part to the “tone at the top” set by SEC staff.

Last week, NASD proceeded with two major enforcement actions against major industry players. On June 8, the SRO charged 14 firms, including Wells Fargo Investments and RBC Dain Rauscher, for offering preferential treatment to certain mutual fund companies in exchange for directed brokerage. Fines exceeded $34 million for violations of NASD’s Anti-Reciprocal Rule, which prohibits a firm from favouring the sale of shares of particular mutual funds on the basis of brokerage commissions received.

And on June 9, NASD ordered three of the biggest names in the securities industry — Morgan Stanley, J.P. Morgan Securities, and Goldman, Sachs — to pay out nearly $3 million for violations of initial public offering rules. According to NASD, the wrongdoing included violations of lock-up periods established by underwriting agreements with the IPO issuers.

Filed by Philip Porado, Advisor’s Edge, philip.porado@advisor.rogers.com