Financial industry faces renewed regulatory mood Congress targets advisers, dealers


Washington -- Lee Mayfield still gets the chills when sh

recalls her brush with financial disaster in the late 1980s. She and her husband had been told by a financial adviser to sell her husband's life insurance policy and to invest the money in mutual funds.

Through blind luck -- the Mayfields did not properly cancel the policy, leaving it in effect -- they held onto their insurance.

A year later, Mr. Mayfield was dead at age 50 from pancreatic cancer.

"That would have been it. An $80,000 policy lost," Mrs. Mayfield says. "I don't know what I would have done."

Although the Mayfields lost at least $30,000 through the financial planner's dubious advice and undisclosed commissions, she was spared further damage. Today, she's using the insurance money to study for a career as a research librarian in her hometown of Chapel Hill, N.C.

Mrs. Mayfield's tale was one of many heard recently as Congress began debating new proposals to regulate advisers and other segments of the financial industry. Unlike previous years, when such proposals were killed by partisan squabbling, several bills are moving through Congress -- marking the end of the go-go 1980s and the deregulation that accompanied it.

"The Republicans have controlled the White House and the government for 12 years and much of the past two decades, but they didn't slay the urge to regulate. That beast still exists and we're seeing it slowly come back to life," said Mark Melcher, director of Washington research for Prudential Securities Inc.

More far-reaching regulations could come from the Securities and Exchange Commission, which is expected to gain a Democratic majority within the coming months. Another relatively independent agency moving into the Democrats' sights: the Federal Reserve, which regulates banks and controls the money supply. Proposals call for greater political control of the Fed, as well as a possible merger of all banking regulation agencies.

Making over the SEC and changing the Fed aren't likely to take place immediately. But the Democrats' control of Congress and the White House will spark a rush of legislation -- including the measure to regulate financial advisers -- in the coming months.

Among the bills slated for early consideration is one that would regulate sales of government securities. Since the 1991 Salomon Brothers scandal surrounding the auction of those securities, Congress has been trying to break the closed circle of dealers in the $3 trillion market. The proposal, authorizing the SEC to make rules regulating the market, probably has enough votes to pass.

There are plenty of other regulatory proposals on Capitol Hill. A bill that would protect investors in a limited partnership from having the partnership restructured, or "rolled up," into other partnerships already has passed the House. Another bill would require auditors to report any fraud to the company's board of directors or the SEC. And later this session, Congress is likely to consider stricter mutual fund regulation.

The renewed regulatory fervor reflects a belief that the financial world is no longer the exclusive preserve of wealthy, sophisticated investors. These days, cutbacks in corporate pensions and employee benefits are forcing people such as Mrs. Mayfield to make more and more investment decisions.

"In the current low-interest rate environment, the elderly and other savers increasingly are turning to professional financial advisers for help in achieving higher returns. Experts have expressed concern that without more 'cops on the beat,' there will be an increase in financial fraud and losses to millions of investors," said Sen. Christopher J. Dodd, D-Conn., chairman of the Senate subcommittee on securities.

The proposal to regulate financial advisers -- supported by Mrs. Mayfield's testimony -- would create lots of cops. The measure would more than double the number of SEC regulators, to 96. It calls for an audit of the 17,000 registered advisers more frequently -- at least once every seven years. And it would require advisers to disclose the commissions they stand to make from a sale, so consumers could detect conflicts of interest.

Last year, a similar bill died because of bickering between Democrats and Republicans. But this time, even though Congress has no hard figures on fraud by financial advisers, the measure has passed the House and is headed for the Senate.

The bill, however, has its opponents. Erick Kanter of the Investment Company Institute objects to pegging the frequency audits to the size of an adviser's account. Much fraud -- including the Mayfields' case -- involves small-time advisers without large accounts, he says.

Another problem with the bill, he says, is that it finances the SEC audits through fees that the advisers must pay. The sliding scale goes from $300 for advisers managing accounts under $10 million to $7,000 for managers with accounts over $500 million.

Alan Snyder, a San Francisco financial adviser with $250 million under management, says the fee structure will cost midlevel advisers such as himself proportionately more than giants such as Merrill Lynch & Co. "This would make accounts at a middle-sized manager more expensive than at big companies, so it disadvantages us."

In Congress' eagerness to reach the $5.3 trillion managed by financial advisers, some political analysts see a fulfillment of Wall Street's belief that a Democrat-controlled government cannot resist the urge to regulate.

Proponents of the legislation, however, say they are only responding to the times. Many laws regulating the financial world were written in the decade after the 1929 stock market crash -- before computer trading, derivatives and the widespread participation of ordinary folks in the stock market.

In addition, regulatory cuts made during the 1980s must be reversed, says Rep. Edward J. Markey, D-Mass., chairman of the the House Subcommittee on Telecommunications and Finance. "During the first half of the decade, budgets were cut, personnel levels were reduced and enforcement efforts . . . constrained. Is it any wonder that our nation subsequently reaped the whirlwind of overleveraging, merger-mania, junk bond abuses, insider trading scandals, penny stock scams, excessive market volatility and investor rip-offs?"

That analysis highlights the major difference between the Democrat-controlled government and the financial markets.

Many in Congress view the 1980s as a decadent period whose excesses must be cleaned up. Wall Street concedes that the deregulation and freedom of the Reagan era led to some problems, but it views the period as one of prosperity and progress.

Still, few expect Congress to try to roll back the 1980s' deregulation. Instead, a steady stream of reforms is expected to strengthen old financial laws and to encompass new financial products and technologies, such as derivatives and computer trading.

"I believe there will be some changes in approach, but not a radical break from the recent past," Mr. Markey said.

The argument against radical change is also strengthened by President Clinton's choice of Robert E. Rubin, the former co-chairman of Wall Street's Goldman Sachs, to head the National Economic Council.

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