Securities and Exchange Commission
Chairman William Donaldson Wednesday told the
National Association of Securities Dealers
his agency wants to ferret out future abuses of securities laws, come down hard on wrongdoers and keep a closer eye on hedge funds.
Donaldson called on the securities industry to police itself and create "a change in mindset," after a "high-octane era" marked by "the serious erosion of ethical principles in business, coupled with a dangerous short-term performance mentality." The SEC chief made the remarks at the NASD's annual conference in Baltimore. A text of his speech was distributed by the SEC.
The chairman covered little new ground in his address to the organization that governs the licensing and conduct of broker-dealers and operates the
and American Stock Exchange, but emphasized aspects of the SEC's plan to clean up various corners of the securities industry with stiffer, more frequent penalties and a closer eye on any developing problems.
Potential increased regulation of the nearly $1 trillion hedge fund industry is among the proposals. "Commission staff is evaluating a form of registration and an oversight regime for hedge fund managers," Donaldson said. "The goal is simple: to enable the Commission to collect more accurate information about this important industry and better target our inquiries to those hedge fund managers where there is some reasonable concern that they may be violating the federal securities laws.
"There is no desire to regulate how hedge funds make their investments, or to choke off their expansion, as hedge funds have an important role to play in our equity markets."
While Donaldson in recent weeks has stepped up the frequency of his comments about hedge fund regulation, stiff industry opposition and a rift between SEC commissioners has made the subject more contentious than reform of the mutual fund industry. Industry observers say the differences that will delay any vote on the matter, if one comes up at all.
Donaldson, who was appointed to the top SEC job by President George W. Bush in late 2002, and Democratic appointees Roel Campos and Harvey Goldschmid are said to favor recommendations that hedge fund managers must register as investment advisers, while Republican appointees Cynthia Glassman and Paul Atkins oppose such a measure. Donaldson recently hinted that the measure might be passed with a 3-2 split vote, though the agency generally seeks a more unified stance on major changes to regulations.
Donaldson also discussed the SEC's new office of risk assessment and strategic planning, which he said would help the agency "become better equipped to anticipate potential problems, and then to prevent those problems from infecting our markets."
The agency has stepped up its enforcement actions, particularly in the last year, when it brought charges of misconduct against 12 of the 25 largest mutual fund companies. It also took a record number of enforcement actions, imposing a total of $1.7 billion in penalties and disgorgement over the last seven months, he said.
The SEC is also seeking comment on Regulation NMS, a package of rules for the national market system it proposed in February to integrate uniform trading rules for securities listed on manual exchanges such as the
New York Stock Exchange
, and electronic markets such as the Nasdaq. The proposal has sparked sharp debate, Donaldson conceded, creating "difficult policy choices" for the commission.
He also said there were limits to the SEC's reach and effectiveness in policing the securities industry, and said organizations like the NASD needed to create "a culture of compliance."
"Our rules never have been enough, are not enough today, and never will be enough," he said. "In this climate, business practices will frequently outpace any government regulator's ability to develop specific rules governing these practices, and they will further outpace any lawyer's ability to provide conclusive guidance by interpreting existing rules. This is where having a culture of doing what is right -- in the absence of specific rules and even in the face of your competitors' choosing a different path -- is vital."