A sharply critical House oversight subcommittee report released yesterday accuses the Securities and Exchange Commission and its chairman, Harold Williams, of undermining progress toward a national stock market by inaction and failure of leadership.
A streamlined national stock-market system that would link traders around the nation was mandated by Congress five years ago, in part because of fears that existing systems might be swamped by growing volume and in part to make sure traders would have access to the best prices available.
The system would allow any broker on any exchange to trade stocks listed on any other exchange. It also would reduce the power of the New York Stock Exchange, which dominates securities trading.
The law gave the SEC "sweeping rulemaking authority" to help bring about such a system, said Rep. Bob Eckhardt (D-Texas), chairman of the House Interstate and Foreign Commerce subcommittee on oversight and investigations. Instead of using that authority, the SEC "has approached its task of shepherding the development of a national market with timidity and apparent purposelessness" so great that the statute "is being eroded away by agency inaction."
"The danger of its current hands-off approach is that the commission will be led by the strongest, most articulate and persistent voices in the industry rather than its own independent assessment of the systems and rules necessary," according to the report.
The report was released hurriedly yesterday after portions of it appeared in a securities industry publication. It was accompanied by a dissenting report from five Republican subcommittee members who took a more limited view of how involved the SEC should be in creating a national market system.
"Development of a national market system cannot be measured in spectacular technological breakthroughs or by newspaper headlines," said the minority report. "The past five years have been marked more with subtle, though substantive, institutional changes that are more in keeping with congressional intent," they wrote.
SEC Chairman Williams was unavailable for comment because of the Jewish holiday. Director of Market Regulation Douglas S. Scarff declined to comment, saying that the commission was still sorting through the report.
Securities industry officials were quick to defend the SEC's progress toward a national market, pointing to the importance of avoiding disruptions in existing markets.
Donald J. Crawford, senior vice president of the Securities Industry Association, characterized the report aas "relatively strident in tone" and suggested that Eckhardt was somewhat isolated in his views. Pointing to the fact that the minority report was signed by five members, he noted that the majority report was signed only by Eckhardt. He also noted that, although both Eckhardt's subcommittee and the subcommittee on consumer protection and finance held hearings on the subject, the report was issued by only Eckhardt's committee.
However, all 10 Democratic members of the committee who attended the session where the report was approved voted for it, a committee staff member said. An aide to the chairman of the consumer protection subcommittee said that the intention from the outset was to have the report issued only by the oversight subcommittee and that it indicated no disavowal of the report by the other subcommittee.
"I can understand the frustration with the relatively slow pace, but in the past three to six months the commission and particularly Chairman Williams has shown some forceful and constructive efforts in the national market area," said Gordon Macklin, president of the National Association of Securities Dealers.
Among the points the report made is that the commission has moved slowly to eliminate all restrictions of offboard trading. Those restrictions -- which limit where an exchange member may trade -- have been modified, the report noted. But the fact "that the rules [restrictions] are still in place five years after the legislation was enacted, demonstrates that the commission's process is about as speedy as an arthritic gastropod on a drizzly day," the report said. A gastropod is a slug.
The report also noted that the SEC has shown more enthusiasm for the Intermarket Trading System, a communications system developed by the New York Stock Exchange to link exchange markets, than it has for an alternate computerized system developed by the Cincinnati Stock Exchange.
Congress urged progress toward a national market system out of concern in the 1970s that the nation's financial system otherwise might face serious strain and crisis. In the current economy, the nation would be even less able to cope with such a crisis, the report said.