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SEC Wants Fixes, Not Fines

Agency Asks Wall Street to Help Identify Problems

By Brooke A. Masters and Ben White
Washington Post Staff Writers
Wednesday, September 29, 2004; Page E01

Securities and Exchange Commission Chairman William H. Donaldson wants to bring in a new set of tools.

Looking over the growing workload of funds and firms to be examined -- and playing catch-up on wrongdoing uncovered by New York state Attorney General Eliot L. Spitzer -- Donaldson said he was convinced that the agency has been spending too much time on routine violations and looking backward.

Charles A. Fishkin, left, plays a key role in SEC Chairman William H. Donaldson's plan to change the way his agency approaches its regulatory function. (Susan Biddle -- The Washington Post)

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Rather than assessing fines and rapping knuckles after abuse is uncovered, the chairman wants the 3,800-person staff to work with and get to know Wall Street well enough to get the jump on problems before large numbers of investors lose money.

"We've got 400 inspectors out there trying to look over 8,000 funds and 7,000 brokerage firms. It can't be done the way we are doing it," Donaldson said in an interview.

To that end, the SEC is streamlining complaint handling to track tips better and upgrading computers to bird-dog data for disturbing trends. The enforcement staff also has asked Wall Street's biggest names to identify potential problems and propose solutions before they evolve into a front-page stew of charges, settlements and indictments.

"We're trying to move toward the more prudential approach of the Federal Reserve [which regulates bank holding companies and some state-chartered banks]. When they find something wrong, they don't announce it and bring fines, they fix it," Donaldson said.

One of the key players in the makeover that Donaldson hopes will be a lasting legacy is Charles A. Fishkin, a former trader and Fidelity Investments risk-management executive who joined the SEC in July. Fishkin is hiring more than a dozen industry experts to sift through the collective knowledge of SEC staff, industry leaders and the academic community for clues to the next big issue. He also hopes to organize informational sessions with industry players -- portfolio managers, traders and the like -- so the SEC staff will have a better understanding of day-to-day life in the industry it regulates.

"What we are trying to do is get in early and treat problems in the least invasive way possible," Fishkin said in an interview. They'll be looking for gray areas -- new products, emerging conflicts of interest, ambiguous rules, dubious practices -- that the agency can then target for increased inspections, enforcement, new rules or investor education, he said.

This approach carries risks, particularly the problem known as "agency capture," a form of Stockholm syndrome in which regulators get to know the industry so well that they identify with, and reflexively defend, corporate practices that outsiders might view as improper, if not illegal, academics said.

The Federal Reserve banking regulators that Donaldson points to as a model have recently drawn harsh criticism for failing to crack down on Riggs Bank for violating laws designed to prevent money laundering, and the SEC itself was slow to address problems that had long been widespread on Wall Street, from biased stock research to abusive mutual fund trading practices.

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