Wall Street, which often monitors changes in the business climate, may be in for some major alterations itself.
A rare convergence of investigations, criminal prosecutions, attacks by major financial institutions, and pressure from Washington are forcing the nation's financial capital to revisit its practices and structures. The aim is to make it fair and transparent for all investors. And this, in the long run, may make it easier for corporations to raise money - the process called "capital formation," which fuels the economy.
The scrutiny ranges from the mutual funds that millions of Americans rely on, to the board of the venerable New York Stock Exchange.
"This is all about looking at Wall Street's behavior and its structure," says Stanley Keller, a partner at Palmer & Dodge, a law firm in Boston. "We have seen accumulate over the years, the acceptance of conflicts of interest that are routine and customary, and everyone is doing it."
Wall Street's behavior has drawn fire from such regulators as New York Attorney General Elliot Spitzer and Massachusetts Attorney General Bill Galvin. But federal regulators are also trying to crack down: their latest case - now before an apparently deadlocked jury - involves charges that a Wall Street analyst, Frank Quattrone, ordered documents destroyed as regulators investigated whether fishy business was going on in the overheated markets for new stock offerings.
New investigations seem to surface monthly:
• New York and Massachusetts regulators are investigating allegations that some mutual fund companies may have allowed short-term trading, which is discouraged. Already, several large financial institutions have fired portfolio managers, and transgressions are likely to result in significant fines.
• The Securities and Exchange Commission is investigating whether specialists - who act like traffic cops managing the flow of orders on the floor - have been trading for their own accounts at the expense of investors. The NYSE recently fined five firms $150 million for "interpositioning," or getting between a natural buyer and seller to make money.
• The NYSE continues to be under fire for the large compensation packages the board of directors approved for its executives. Last week, the Big Board disclosed that six executives received pay and retirement benefits of more than $140 million.
The SEC is trying to determine if structural issues need to be changed. "In the coming months, the Commission will be focusing with increased intensity on the structure of the US equities markets, with particular regard to their fairness and efficiency," said Chairman William Donaldson last week before the US Senate.
Mr. Donaldson says most of the SEC's aim will be directed at creating a national market system to provide fair competition and the execution of orders in the fastest way, at the best price. Currently a number of new electronic exchanges are competing with the NYSE for business.
The opening of the debate over system reform has prompted some in the private sector to chime in. Last week, Fidelity Investments suggested the NYSE eliminate the "monopoly trading privileges" of the specialist system. Fidelity proposed four concrete steps to promote competition and transparency. "We want a level playing field," says Anne Crowley, a Fidelity spokeswoman.
Problems began last month when it was disclosed that NYSE chairman Richard Grasso received a $139.5 million retirement package, which many consider exorbitant. Unlike the companies it regulates, the exchange has not disclosed the remuneration of its top executives.
"The exchange clearly has a credibility problem, the double standard that is their biggest problem," says Tom Murphy, head of securities and corporate governance at the Chicago law firm McDermott, Will & Emery.
The new chairman of the exchange, John Reed, a former executive at Citigroup, is now hoping to change the board of directors and figure out a way to solve the problem of how to regulate its own members without conflicts of interest. "There are probably a number of business people who have not worked at publicly held companies or maybe they have spent a lot of time in government or the accounting or legal professions that are not really regulated by the exchange and would not raise a conflict issue," says Mr. Murphy.
However, it's less clear that Mr. Reed, who is only at the exchange temporarily, will try to change the specialist system, which is really the heart of its business. "The exchange has kept a lot of large trades," says Steve Thel, a former SEC attorney, now teaching at Fordham University. "The reason is that its members provide a service - in a complicated business having a person exercising judgement is still valuable."
Eric Fry, editor of Daily Reckoning, a market commentary, says one of the best things to come from the turmoil is a move towards transparency. He's skeptical that sending one hundred Frank Quattrones to jail will level the playing field. Instead, he says, "If anyone wants to change anything and make it better, insist on disclosure."