ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Friday, August 9, 1996 TAG: 9608090038
SECTION: BUSINESS PAGE: A-9 EDITION: METRO
DATELINE: WASHINGTON
SOURCE: Associated Press
Nasdaq's parent company broke federal securities laws by failing to punish brokerages that conspired to inflate trading costs on the nation's second-largest stock market, federal regulators said Thursday.
``Investors paid too much, and received too little ... when they bought and sold many securities on Nasdaq,'' said Arthur Levitt Jr., chairman of the Securities and Exchange Commission.
In a news conference to announce details of an unprecedented investigation, Levitt said the National Association of Securities Dealers, which owns Nasdaq, ``was not blind to these practices in the marketplace. It simply looked the other way.''
The 18-month probe, involving hundreds of witnesses and more than 1million pages of documents, represents the biggest enforcement case against a U.S. stock market. The NASD wasn't fined and didn't admit wrongdoing, but agreed to spend $100million over five years to improve market surveillance. The annual enforcement budget is $120million.
In addition to owning Nasdaq, the NASD is a industry self-regulatory group with broad policing powers over Wall Street's 510,000 brokers and 5,400 firms.
The SEC charged that the NASD capitulated to undue influence of large Wall Street firms in its oversight and supervision of Nasdaq. Brokerages went unpunished when they harassed others for offering more competitive quotes and engaged in secret trading agreements that inflated costs for investors.
``The NASD failed over a period of time to conduct an appropriate inquiry into an anticompetitive pricing convention among Nasdaq market makers, even though the NASD knew of facts and circumstances evidencing such matters by 1990,'' the SEC's detailed report said.
The SEC didn't spell out how much more investors paid because of these arrangements, but a lawsuit against dealers estimates billions of dollars.
The SEC case requires the NASD to undertake reforms that will enhance independence of its regulators and prevent dealers from engaging in agreements to inflate their profits.
William R. McLucas, the SEC's enforcement director, defended the lack of a fine: ``The better idea is to write the check and improve the market and improve the system and improve the discipline.''
The SEC investigation is continuing, and legal problems of Nasdaq dealers persist. A major civil lawsuit pending against 33 firms in U.S. District Court in Manhattan seeks certification as a class action. And the SEC is poised to release new rules this year to improve handling of customer orders on Nasdaq.
Last month, the Justice Department completed a price-fixing investigation involving 24 big Nasdaq dealers that required new and expensive procedures to prevent traders from colluding to keep prices artificially high.
The NASD defended itself by saying it has made many reforms already, changes that Levitt readily praised.
The NASD created a separate division, NASD Regulation Inc., to handle its market policing duties; hired several seasoned regulators to run the new operation; expanded public membership on its boards of directors; increased its budget by $10million; and began hiring 131 new professionals.
``We have put in place a tough, experienced, effective enforcement team, and our boards have committed the resources we need to have a state-of-the-art enforcement program,'' said Mary Schapiro, president of the NASD's new regulatory arm and a former SEC official.
Some veteran securities lawyers said the SEC's case doesn't break much ground, considering the reforms already under way at the NASD.
``This particular action isn't going to have a direct effect on investors. Most of what it involves is, in a sense, what the NASD has already implemented,'' said Harvey L. Pitt, a veteran securities lawyer in Washington.
McLucas disagreed, saying the SEC's settlement provides for a series of specific reforms he expects will immediately halt anticompetitive behavior by dealers.
``I don't think we can expect there will be monumental change overnight in a market or in market behavior,'' he said. McLucas argued that investors stand to benefit from the SEC's case because the publicity over such charges, coupled with the rule changes, will create a ``cultural change'' in Nasdaq.
The SEC and Justice investigations were driven by academic studies, and subsequent private lawsuits, showing the gap between the buy and sale price of Nasdaq-listed stocks is much wider than that of comparable stocks listed on the New York Stock Exchange.
That price gap, known as the ``spread,'' represents a major portion of the dealers' profit. A wider spread also increases investor trading costs.
But the SEC drew criticism itself.
``One might wonder how it could have gone on under the SEC's nose all of these years,'' said William Lerach, a San Diego-based securities lawyer. ``I hope the SEC will do a better job in overseeing the market than it has in the past.''
Levitt acknowledged the SEC ``should have acted sooner,'' adding that the agency has reorganized its market oversight duties.
Nasdaq isn't a stock market in the conventional sense, but a broad network of computers and telephones that allows brokerages worldwide to trade stocks.
LENGTH: Medium: 95 linesby CNB