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Earlier this month, senior staff members of the

Securities and Exchange Commission's

fund division discussed their regulatory agenda at a conference sponsored by the

Investment Company Institute

, the trade association for fund management companies. Any citizen could have bought a seat at the conference, but only on the condition that the panelists' comments -- including those made by SEC staffers -- be kept confidential.

As a private membership organization, the ICI obviously has the discretion to decide who may attend its conferences. But the confidential discussion of SEC policies by senior SEC officials on government time and at taxpayer expense with 600 industry professionals seems at odds with the agency's policy on fair and equal access to market information.

ICI spokeswoman Elizabeth Powell explained that the group had closed the meeting to the press in part "to encourage open discussion between members and with regulators participating" in the conference. The SEC had no comment.

The SEC has made great progress in breaking Wall Street's stranglehold on public market information by forcing fair disclosure to all investors. In October, it adopted landmark rules, known as Regulation FD (for fair disclosure), that prohibit companies from selectively disclosing information to Wall Street analysts before making it publicly available to all investors.

When it comes to its own regulatory agenda, however, the SEC takes a less democratic view of fair and equal access to information. Indeed, the SEC staff's participation in the ICI's closed-door affair reflects a pattern of keeping important aspects of the lawmaking process from public view.

Unbeknownst to much of the investing public, the SEC has broad authority to grant mutual funds and financial services firms a free pass from mutual fund rules. The industry knows this all too well, and it relentlessly barrages the SEC staff with formal and informal demands to permit transactions and procedures that would be illegal under the law as written.

Loophole Option: No-Action Requests

One particularly insidious practice is the so-called "no-action" request. Securities lawyers ask the SEC to agree informally not to sue if a fund or fund affiliate engages in a transaction that is illegal but that the staff believes poses no threat to investors. Once these requests are granted, any fund can take advantage of the loophole they created. These no-action positions, which effectively rewrite the mutual fund laws, often are kept hidden from the press and investors.

On occasion, these positions are even kept secret from the industry. SEC files are filled with internal memos memorializing no-action positions to which only the SEC and the lawyer who made the request are privy. SEC staffers, as I can tell you from personal experience, occasionally receive calls from irate fund lawyers who have heard through the grapevine that the staff had confidentially allowed some funds to engage in practices that were not permitted for anyone else.

Even written responses to no-action requests can be hard to find. Once a response is issued, copies are available from the SEC's public information office but are not posted on its Web site. In any case, the requests are never released before the SEC issues its final response, so by the time any information is "public," it's too late to stop, much less comment on, the SEC's plan.

One illegal transaction to which the SEC has given no-action protection is the sale of securities by an adviser, acting as placement agent for the issuer of the securities, to a fund it advises. Congress prohibited this practice in 1940 to prevent underwriters from dumping unmarketable securities in their funds. Indeed, this practice was common in the 1920s before fund legislation was enacted.

A few years ago,

Merrill Lynch

asked the SEC to promise not to sue if its mutual funds bought securities for which Merrill was acting as placement agent. Underwriters normally act on "firm commitment" basis, which means that they buy the securities from the issuer and then sell them to their customers. What they can't sell they're stuck with, so they have a strong incentive to unload unmarketable issues on whomever they can, including the funds they advise.

Merrill argued that a placement agent does not have the same incentive. A placement agent does not buy the securities from the issuer, but rather acts on a "best-efforts" basis, more like a broker.

The SEC disagreed, stating that the transactions still created a risk of fraud because "a placement agent could dump unmarketable securities on a

fund with which it was affiliated in order to receive commissions and to enhance its reputation." Yet in the same breath the SEC promised not to sue if Merrill, acting as placement agent, sells securities to the funds it advises.

The result? Merrill got a reliable outlet for its underwriting business without the threat of an SEC lawsuit. The SEC got Merrill off its back while avoiding the scrutiny that a public hearing on Merrill's request would entail. And shareholders of Merrill funds are left in the dark, never knowing whether they are getting the short end of the stick when Merrill unloads its favored clients' securities into its funds' portfolios.

The process itself can shape the SEC's policies, argues Barbara Roper, the

Consumer Federation of America's

director of investor protection. "It's never a good idea for agencies to operate in secret," says Roper; "it can create a willingness to act, when hidden from view, in ways that would never be adopted in the full light of day."

Lawsuit Armor: Exemptions

Some fund lawyers prefer and need protection not only from the SEC, but also from class action lawyers. For this, they file a request with the SEC for a formal exemption from mutual fund rules. Such an exemption provides ironclad protection against even private lawsuits. Unlike a no-action position, however, it can be relied on only by the fund or fund affiliate that files the request.

Each year, the SEC grants hundreds of exemptions that permit funds to engage in a wide variety of practices that otherwise would violate mutual funds laws enacted by


. For example, the SEC has permitted dozens of fund advisers to sell securities to their funds or to fire and hire their funds' investment subadvisers without shareholder approval -- practices that without SEC approval would violate federal law.

Unlike the no-action process, the exemption process is technically required to be public and to afford the public an opportunity to object. But in practice, the process is limited to closed-door negotiations between the SEC staff and fund lawyers. These negotiations often are based on a "draft" application that is kept confidential until a formal filing is made, regardless of whether the application includes genuinely sensitive or proprietary business information.

Even when formally filed in nondraft form, the applications are in effect confidential because, unlike fund prospectuses and other filings, they are not electronically available on the SEC's Web site. Paper copies of the applications are destroyed 30 days after filing, regardless of the status of the request. The applications are then supposed to be available to visitors to the SEC's public information office on its internal computer system. But during a recent visit, the SEC staff was unable to access the application database.

Funds that have asked for an exemption are not required to let their shareholders know. In fact, the earliest a shareholder is likely to know that a fund has asked for an exemption is when the SEC publishes a summary of it in the

Federal Register

, 15 days before it intends to grant the exemption. Thus, a shareholder has only 15 days to consider issues that often take years for the SEC to resolve, and then to file an objection.

Such objections, or hearing requests, are extraordinarily rare, in part because the exemption process is so obscure and the rules governing it are so complex. There hasn't been a hearing on an exemption request since 1993, a period during which the SEC has granted well over 1,000 exemptions.

Information Is Power

Notwithstanding the difficulty of accessing SEC information, the news is not all bad. The good news is that public-minded SEC staff often bend over backwards to make information available to the public, uncomplainingly providing copies of exemption applications, tapes of SEC conferences and lists of public comment letters, and making themselves available on short notice to inquiries from the press and public.

But no amount of personal service can overcome institutional barriers to information about the SEC's regulatory agenda and policies. These barriers create a framework for debate in which Congress and the fund industry are well-positioned to participate, but from which investors -- who must rely on the press to provide independent information and on advocacy groups to represent their interests -- are effectively excluded.

"In advocacy, as in the markets themselves, information is power," says consumer advocate Roper. "Industry representatives with the inside track on information have an ability to shape policy that public interest advocates too often lack."

So while the SEC, through Regulation FD, helps level the playing field for the investing public, access to its regulatory agenda remains the exclusive province of the initiated. Unfortunately, the prospects for breaking the silence may be slim if SEC Commissioner Laura Unger,

as speculated, succeeds

Arthur Levitt

as SEC chairman. Levitt

announced Wednesday he would step down early next year.

Unger, who voted against Regulation FD (she once publicly referred to it as "BFD"), recently complained that "ensuring parity of information is not the SEC's mandate." She appears to be having her way when it comes to parity of access to the SEC's regulatory process.

Mercer Bullard, a former assistant chief counsel at the Securities and Exchange Commission, is the founder and CEO of Fund Democracy, a mutual fund shareholder advocacy group in Chevy Chase, Md.