Wall Street comes to Congress. Regulators look at ways to close the window on abuses and restore confidence to investors

At the same time as the Iran-contra affair, Congress is probing the country's other scandal, too: insider trading on Wall Street. Thursday, the House Oversight and Investigations subcommittee grilled regulators and top executives at major brokerage firms about the extent of illicit trading on inside information and how it can be curbed.

Momentum is growing in Congress, supported in part by the Securities and Exchange Commission (SEC) and the New York Stock Exchange (NYSE), to restrict the ways that speculators, investment bankers, arbitrageurs, and corporate raiders can profit from information that the public has no access to.

The hearings come in the wake of the SEC's biggest victory: the agreement of Ivan Boesky, Wall Street's most flamboyant arbitrageur, to pay $100 million in penalties for trading on inside information. The country and an apprehensive investment community are waiting for other shoes to drop as the SEC expands its investigations beyond Mr. Boesky.

At the hearings, William J. Anderson, assistant comptroller of the General Accounting Office, said the NYSE's surveillance systems ``have been found wanting considerably.''

A preliminary study showed that five areas need attention if insider trading is to be nipped. Surveillance systems have to be upgraded, and audit-trail data must be improved.

In addition, the government must assess whether current enforcement mechanisms and SEC resources are adequate. Finally, the government needs to get a better handle on the size and shape of the insider-trading problem.

``We have no idea whether we're get ting 10 percent, 1 percent, or 1/10 of 1 percent of the problem,'' Mr. Anderson said.

SEC chairman John Shad disputed the GAO's findings. He pointed out that in its first 47 years, the SEC brought 77 insider-trading cases. In the last four years, it has brought 107 such cases.

Nontheless, Mr. Shad told the committee that the SEC's budget and staff should be increased next year, the first major expansion in five years. John Dingell (D) of Michigan, chairman of the subcommittee, said he was ``delighted to observe'' that Shad recognized the SEC's resource problems.

Even as Congress begins its probe, regulators and others warn against shooting at the wrong target or of blowing the insider-trading problem out of proportion.

``The Boeskys of this world can help undermine the credibility of the [stock] market,'' NYSE chairman John Phelan Jr. said in a breakfast meeting with reporters Thursday. But other developments, such as computer-program generated trading operations, which have caused wild swings in financial markets, ``can destroy the market,'' Mr. Phelan said.

Asked what legislation is needed to restore some stability to the stock market and bolster the confidence of small investors, he said the issue needed ``further investigation.''

Some see irony in congressional calls for more legislative action, since, they say, the Boesky affair proves the SEC is doing its job. Regulators, however, have said some tinkering may be appropriate.

Both Phelan and Shad have said the window for potential insider trading should be closed somewhat. Under current law, an investor must file with the SEC once he has acquired 5 percent of a company's stock.

But he has 10 days to do so, during which time he can quietly acquire more shares.

It is also in that 10-day period that traders, arbitrageurs, and others may become privy to information that a takeover attempt is in the works - and buy up shares on such information.

The SEC and NYSE would shorten the 10-day period to two days.

Still, there are dissenting voices in all this.

Henry Manne, dean of George Mason University Law School, contends that ``insider trading guarantees the market quickly and accurately reflects what's going on.

``No one is hurt by insider trading,'' he says. ``Congress should be shooting at the SEC and at regulations curbing takeovers, not insider trading.''

He echoes arguments of corporate raiders such as Carl Icahn and Sir James Goldsmith when he says that hostile takeovers help the economy and the market because they frighten managers into managing better or else oust them.

``Hostile takeovers allow shareholders spread all over the country to police [corporate] managers,'' Mr. Manne says. A hostile bid, which generally runs up the price of the target company's stock ``drives the price back to the level that better management would dictate.''

Phelan agrees that managers shouldn't have sacred positions and is concerned that legislators will curb legitimate takeovers in the process of cracking down on insider trading.

``You can't stop takeovers, and you shouldn't be able to put up a defense mechanism for management,'' he says.

But he adds, ``Any guy who steps up - I don't care how much he thinks he's doing the US a favor - and makes $95 million on a trade, the white begins to fall off his armor and it begins to get tarnished.''