Securities and Exchange Commission Chairman David S. Ruder warned the brokerage industry yesterday that the combination of the insider stock trading scandal and shoddy treatment of some individual investors on Black Monday has eroded public confidence in Wall Street.
In a speech to the Securities Industry Association meeting in Boca Raton, Fla., Ruder urged the brokerage firms -- now in the midst of cutting costs -- to bolster confidence by beefing up their regulatory and compliance departments. The SEC chairman also urged brokerage firms to pay more attention to the way they treat individual investors.
Reporting on the SEC's inquiry into the stock market's October plunge, Ruder said at a press conference that a preliminary investigation has revealed no evidence that major Wall Street firms manipulated futures contracts tied to New York Stock Exchange issues on Oct. 20 in order to reverse the market's slide.
On that day, a sudden upward movement in the Major Market Index, stock index futures contracts traded on the Chicago Board of Trade, apparently helped trigger a burst of buying on the New York Stock Exchange. The Major Market Index futures contracts are tied to prices of 20 leading NYSE stocks and permit investors to speculate on the future direction of NYSE prices. The Wall Street Journal has reported conjecture that several brokerage firms may have teamed up to push the Major Market Index futures higher on Oct. 20, but Ruder said the SEC has found no evidence of improper trading.
Ruder said data gathered by the SEC shows that some individual trades apparently were pushed aside by brokers and traders in favor of institutional trades in the volatile period in October that climaxed in a 508-point drop in the Dow Jones industrial average on Oct. 19, now known as Black Monday. In recent years, as giant pension funds, insurance companies and other institutional investors have dominated trading, the relative importance of individual investors as customers of some major Wall Street firms has decreased.
Ruder tempered his criticism by saying that despite some "glaring exceptions," the security industry is "deeply committed" to fair and honest markets and to high levels of professional standards. But he left little doubt that Wall Street had not scored well with the public this fall.
"Although I am pleased that our market systems showed strength through the recent October market break, I am concerned about the impact that the break may have on public confidence in the securities markets," Ruder said.
" ... We have heard from large numbers of investors who complained that during the market break they could not reach their brokers to place orders, or that brokers delayed in notifying them whether their trades had been executed.
"The clear perception of many investors was that securities firms served their institutional customers at the expense of retail investors."
Noting that investor complaints to the SEC had more than doubled recently, Ruder summarized his views by stating that, "The events of October, coupled with the recent insider trading scandals, appear to have cast a shadow on the public perception of the industry's commitment to the small investor."
On another issue, Ruder, who is scheduled to testify before the Senate Banking Committee today on banking deregulation proposals, said the SEC believes that commercial banks should be allowed to expand into the securities business only if their securities activities are regulated by the agency. Congress is considering repeal or amendment of the Glass-Steagall Act, passed in 1933, which restricts the entry of commercial banks into businesses dominated by investment banking firms, such as underwriting (purchase and distribution to investors) of stock.
Ruder said the SEC would support repeal of Glass-Steagall only if banks conduct their securities activities through separate affiliates subject to SEC regulation. Among the reasons that banks have been prohibited from expanding dramatically into the securities business are the high risks of the business, concern about possible conflicts of interest and the strength of the investment banking lobby in Washington.
Also at the SIA meeting in Florida yesterday, New York Stock Exchange Chairman John J. Phelan Jr. said efforts to upgrade the industry's trading and communications capacity have been accelerated. The record 600 million-share trading days in October, more than three times normal trading, has prompted the NYSE to establish a special operations advisory committee, Phelan said, and the exchange plans to invest $200 million over the next five years on increasing trading capacity, including an expansion of its trading floor, according to the Associated Press. The severe demand for capital during the October stock plunge has led some NYSE specialist firms to seek partners with deeper pockets as protection against another crisis. The market's free fall tested the solvency of the exchange specialists, who have responsibility for maintaining orderly markets by buying when the public is selling and selling when the public is buying. Drexel Burnham Lambert Inc. became the latest cash-rich securities firm to announce an alliance with a specialist firm yesterday, when it disclosed a joint venture with Carl H. Pforzheiner & Co.
And in a sign that major institutional investors remain optimistic about the leveraged buyout business, Morgan Stanley Group Inc. announced that it has raised $1.1 billion in capital since the Oct. 19 collapse to invest in leveraged buyouts.