More Watchdogs on Wall Street: Feds, Markets Move on Reforms

Changes include better policing and smaller role for states

Winds of reform are once again sweeping through US financial markets. But don't look for tornado-like gusts, like the widespread trading restrictions that followed the stock market crash of 1987 and a series of highly publicized insider trading convictions in the late 1980s.

Rather, what's coming is a modest breeze at best, financial experts say. Pending reform measures will benefit consumers through stepped-up services, greater competition, and slightly tougher surveillance of illegal trading practices. Meanwhile, the securities industry is also expected to profit through some deregulatory moves.

States' role redefined

In Congress, House lawmakers are expected to give an overwhelming thumbs up to a measure diluting the role of state securities regulators and facilitating increased national competition by investment houses and mutual-fund companies. Brokers would be able to sell some securities in states where they are not currently licensed. Mutual-fund companies would be able to provide more material in newspaper and broadcast advertisements.

The legislation, which was recently unanimously approved by the House Commerce Committee, is still being modified. "The bill is very popular," both in the House and among federal regulators, a committee spokesman says. It has been endorsed by Arthur Levitt, chairman of the US Securities and Exchange Commission (SEC).

A version is expected to clear the House by late summer, the spokesman says. A similar measure is likely to come before the Senate later this year, where sentiment is believed to be favorable. The White House has not said that President Clinton will sign such a bill, but congressional support is expected to be broad enough to overcome a veto. Still, some Democrats are wary of hobbling state securities regulators.

Nasdaq polishes its image

The National Association of Securities Dealers (NASD), the trade organization controlling the Nasdaq stock market, is boosting its internal compliance and monitoring programs. Nasdaq is often called the "over-the-counter market," because there is no centralized trading floor, as there is with the New York Stock Exchange. After the NYSE, Nasdaq is America's second-largest stock trading system.

But Nasdaq has come under intense regulatory scrutiny during the past few years regarding the size of the share-price "spreads" between investors and the dealers who put transactions through. Concerns have also been raised about whether the NASD polices the Nasdaq-listed companies well enough. Listing requirements are far easier at Nasdaq than at the NYSE or the American Stock Exchange.

Among reform steps under way: NASD plans to hire 131 new "enforcement" aides, so that Nasdaq firms can be better monitored for compliance with listing standards; NASD is revamping its overall regulatory unit; and it is increasing scrutiny of small-capitalization companies, firms with a low market value.

"Small-cap" firms tend to be volatile, since investors often buy shares for speculative purposes. While small-company stocks are considered safer than "penny stocks" - very high-risk small enterprises - they often have relatively unknown management teams or sparse financial track records against which to measure performance.

NASD officials say they are also increasing surveillance of companies that tout themselves on Internet computer sites.

Insider trading action

Federal and industry regulators are stepping up surveillance of insider trading, thanks to advances in computer programs that can identify suspicious activity.

One example: Earlier this month, the SEC settled a series of civil actions against six individuals accused of profiting from insider information about Microsoft's proposed takeover of software firm Intuit in 1994. The individuals included the wife of a former top official from Intuit, who told vital information to others, who then told more people. (No officials of the two firms were charged.) Penalties ranged from $21,000 to more than $200,000 for the wife.

Regulators are also increasingly likely to seek criminal penalties, instead of milder civil penalties.

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