- The Washington Times - Tuesday, November 18, 2003

Securities and Exchange Commission Chairman William Donaldson yesterday took issue with Democratic state attorneys general who are criticizing the Bush administration for weak and belated pursuit of mutual funds that scammed small investors.

Mr. Donaldson called the charges by New York Attorney General Eliot Spitzer and others “spurious” and “misguided.” He suggested the more aggressive state prosecutors — who have made headlines moving ahead of the SEC on various scandals — are overreaching and trying to exercise broader authority than they possess.

“Those lacking rule-making authority seem to want to shoehorn” regulation of the $7 trillion mutual fund industry into a settlement the SEC announced last week with Putnam Investments, one of the largest mutual funds, he said. In what the SEC described as a partial settlement, Putnam agreed to make restitution to investors and adopt internal reforms to prevent future abuses.

The SEC’s goal in the settlement was to “produce immediate and lasting benefits for investors” through the restitution process, which provided a way to determine how much money investors lost as a result of illicit fund trading by Putnam employees, and set a timetable for making refunds to investors, he said.

Mr. Donaldson’s remarks, both in testimony before the Senate Banking, Housing and Urban Affairs Committee and an op-ed piece in the Wall Street Journal yesterday, were a tit-for-tat response to an op-ed piece Mr. Spitzer wrote in the New York Times Monday that said the Putnam settlement showed the administration “values corporate interests over the interests of average Americans.”

Contending the Putnam agreement “let the industry off with little more than a slap of the wrist,” Mr. Spitzer asserted that “if the Bush administration won’t enforce the law, the states will.”

Although probably not intending to step into the political fray, Federal Reserve Chairman Alan Greenspan yesterday advocated an approach to the mutual fund scandal that appeared closer to the SEC’s in a joint letter to the Senate banking panel along with Treasury Secretary John W. Snow.

“Criminals who misuse funds to steal from investors” should be “promptly punished,” Mr. Greenspan said, but the SEC and Congress should avoid heavy-handed regulation that drives up mutual fund fees without benefiting investors.

Mr. Donaldson has been slow to respond to the criticism from Mr. Spitzer, Massachusetts’ prosecutor William Galvin and other state authorities, apparently in deference to the productive, if at times uneasy, relationship the SEC had developed with state enforcers since the outbreak of numerous corporate scandals last year.

The SEC has announced joint actions with Mr. Spitzer and state authorities in several high-profile cases this year.

Mr. Donaldson conceded that the SEC was late in responding to mutual fund abuses involving market timing and late trading that Mr. Spitzer was the first to expose and investigate in September.

A top SEC official in Boston, who learned of the abuses last spring but did not act on them, resigned in the wake of the disclosures.

Mr. Spitzer also was ahead of the SEC in moving against widespread abuses by Wall Street analysts last year.

Cooperation between the SEC and state authorities traditionally has been as much by necessity as by choice. Mr. Spitzer and other state prosecutors lack the SEC’s authority to broadly regulate mutual funds and business in general.

The SEC lacks criminal-enforcement authority and must rely on state prosecutors or the federal Justice Department to pursue criminal abuses.

All the authorities individually lack the resources to go after every abuse that surfaces.

Concerned that a partisan turf war between federal and state agencies could hurt investors, Senate banking panel Chairman Richard C. Shelby and Sen. Christopher J. Dodd, Connecticut Democrat, yesterday urged Mr. Donaldson to keep cooperating with the states.

“There’s a real urgency here,” said Mr. Shelby.

The Alabama Republican and others in Congress are calling for strong action to curb the mutual fund abuses. He said he does not want to try to rush out legislation addressing them this year, however.

The House was expected to vote on its version of a mutual fund bill this week.

Putnam, which has seen massive withdrawals from its stock funds totaling more than $22 billion, took another blow yesterday when the California Public Employees’ Retirement System, the nation’s largest pension fund, announced it will withdraw $1.2 billion because of concern about the funds’ abuses.


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