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Tuesday, June 18, 2002

Getting in Deeper

by: Tony Pennino

In this volatile market, the one thing we know for sure is that there is a lack of investor confidence in the markets and financial services institutions. Last week, some firms began lobbying the United States Congress to prevent state governments from investigating Wall Street companies that might be in violation of securities laws. There couldn't be a worse idea.

In today's New York Times, Gretchen Morgenson reports that an amendment has been making its way through the corridors of the Capitol which would prevent states' investigations of stock analysts. That includes current investigations, such as the one recently completed by New York State Attorney-General Eliot Spitzer concerning Merrill Lynch. The amendment would also restrict states' abilities to enforce securities laws. The amendment could be attached to the bill proposed by Senator Paul Sarbanes (D-Md), which is designed to protect investors.

Whether or not this amendment is passed, an aggressive effort to turn the piece of legislation into law could have a devastating impact on the financial services community, including the mutual fund arena. Though the focus of the issue is stock analysts, the entire financial services community will feel the heat on this one.

There is a reason investor confidence is on the wane. There is such a long litany of scandals -- Enron, Arthur Andersen, Merrill Lynch, Global Crossing, Tyco, etc. -- not to mention the general state of the economy that the only logical response open to investors is to be at least a little skeptical. If the industry fully backs this legislation, then it doesn't look like the industry is trying to do anything but hide its dirty laundry from public scrutiny.

"It is a really sad situation when Congress is rushing to defend stock analysts rather than investors," a spokesperson with Spitzer's office told the MutualFundWire.com. "Investors need protection from stock analysts, not the other way around. We were shocked and surprised when we first heard about this amendment."

If the amendment is passed and signed into law by President Bush, don't expect the fight to end there. The states could very well take their case to federal court and argue that the legislation violates states rights. Given the Supreme Court's current favorable view of federalism, the states could very well win.

And that doesn't even take into consideration the further erosion of confidence Main Street has for Wall Street. Support for this amendment and a long-protracted political and then legal fight could tarnish the financial services community for decades.

Look, mutual funds were created so that the average middle-class individual could have the benefits of expert portfolio management. Why pick stocks when a trained professional can do it for you and thousands of other people? Mutual funds were designed as vehicles for the average investor, to keep the little guy in mind. If mutual fund managers and professionals want to maintain favor with their core constituency, they are going to have to act.

In any large financial services firm, the mutual fund/retail unit is just one pole in a gigantic tent. But it may be up to executives in this field to speak for their investors in the executive suites. If investor confidence continues to erode, John Q. Public could turn away from equities all together and put his/her money into other investment vehicles such as money markets, fixed income offerings, or REITs.

As the article states, "The paradox of attaching an amendment restricting state enforcement activities to a bill intended to solve those conflicts was noted by Barbara Roper, director of investor protection at the Consumer Federation of America. 'On the securities analyst issue, Congress held hearings and thought that was an adequate response,' she said. 'The S.E.C. adopted the industry's voluntary standards as rules and thought that was an adequate response. And now some in Congress appear intent on ensuring that the states cannot force real reform. And they wonder why there's a crisis in investor confidence?'"

Financial services firms need to be seen to be wanting and accepting of transparency, of disclosure, and of protection for the individual investor. If Wall Street looks like it has something to hide, then investors will hide their money from it.

Morgenson's article can be found by following this link

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