Commentary: The SEC Is Too Hush-Hush

By Christopher H. Schmitt

When the Securities & Exchange Commission issued rules in January to shore up the independence of outside directors who oversee mutual funds, some SEC watchers were caught by surprise. Why? One reason: The commissioners didn't meet in public. Instead, after getting comments on the proposal, they circulated it privately for approval among themselves.

Other federal agencies do the same. But the SEC isn't just any agency: It has crusaded to force companies, markets, brokers, and others to disclose reams of data to investors. Under former Chairman Arthur Levitt Jr., the SEC went out of its way to shake up the status quo and avoid donning the mantle of apologist for the industry it oversees.

And yet the SEC hasn't changed its own practices much. "It's a funny dichotomy--some pretty significant issues can be decided in a process that doesn't invite public participation at all," says Barbara Roper, investor protection director for the Consumer Federation of America.

SKIRTING THE LAW. There's more that needs fixing than the SEC's nonmeeting meetings. In a confusing process closed to public view, the SEC grants exemptions from the securities laws. A bank or brokerage might be considering a new product or way of handling investor funds that skirts or crosses what's allowed. So it seeks assurances the regulators won't come calling later. In late February, the SEC allowed Goldman, Sachs & Co. (GS ) to trade municipal securities with mutual funds it advises. Normally, such trades are banned. The SEC gave no reason why it agreed.

Companies can also seek interpretations of laws by telling the SEC what they have in mind and asking for "no-action" letters, or promises not to launch enforcement cases later. Popular items this time of year: companies seeking the SEC's blessing on decisions to stop discussion at annual meetings of shareholder proposals that management doesn't like.

The SEC handles thousands of exemption and guidance requests each year. It's supposed to make them--and its replies--public, though it doesn't always do so promptly. Thus often "the only persons participating are the commission and the industry," says Mercer Bullard, a former divisional assistant chief counsel at the SEC who now heads Fund Democracy, an advocacy group for mutual-fund investors.

Of course, there is a need for some confidentiality--and exemptions and guidance, too. But that doesn't mean the SEC can't be more forthcoming about its business.

Acting SEC Chairman Laura S. Unger didn't return phone calls seeking comment. An agency spokesman says the SEC "has always been dedicated to operating as openly as possible," and has plans, but no timetable, for improving public access to information. Representative Richard H. Baker (R-La.), who chairs the capital-markets subcommittee of the House Financial Services Committee, says he may push for more openness. But the real power to make change lies with the next chairman. President George W. Bush shouldn't miss his chance to let the sun shine on an agency that has demanded an awful lot of sunlight from others.

Schmitt covers securities regulation from Washington.

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