A Strong Start for Bill Donaldson's SEC

William H. Donaldson just celebrated his 100-day anniversary as chairman of the Securities & Exchange Commission, and investors should buy him a cake. The SEC is moving fast to restore confidence just as stocks are showing new signs of life and individuals are wondering if it's safe to buy equities again. In the latest move, the SEC subpoenaed the top officials of Wall Street's biggest firms to determine whether they failed to supervise their analysts and investment bankers during the bubble years. This follows the $1.4 billion settlement between regulators and 10 Wall Street firms of charges that analysts misled investors by writing bullish reports on companies to generate big investment banking fees. Now, the SEC may hold accountable those managers above the analysts who were responsible for their misleading behavior. This should complete the cleanup of one of the worst examples of corporate and financial fraud in America's history, paving the way for a return to a broad-based equity culture.

Back in April, when the settlement was reached, Donaldson said he would investigate top-level managers. Now, he's delivering on that promise. As the firms' internal e-mails have shown, supervisors structured analysts' compensation to enrich them when their research reports, television appearances, and road-show performances brought business to the investment banking side. And these supervisors, in turn, were managed at the highest levels by chief executives who cynically maximized profits on the backs of small retail customers. Under U.S. securities laws, failure to supervise subordinates can result in sanctions. We'd like to see wrongdoers expelled from the industry entirely.

Donaldson has some unfinished business left:

-- The SEC needs to write new rules on initial public offerings. Investment banks should be barred from doling out shares to both chief executives and money managers who do business with them. IPO road shows should be open to all investors, not just big institutions. The SEC should also tighten up the giving of IPO shares to "friends and family."

-- The SEC should take a close look at whether hedge funds need supervision. In the past, these funds were small, high-risk vehicles for the wealthy few. Today, they are big, high-risk vehicles that many people use.

-- The SEC needs to clean up the mutual-fund industry. Many individual investors are returning to the market via mutual funds, but the industry's excessive costs, fees, and compensation for managers seriously erode returns. Many of these expenses are hidden. They need to be made transparent.

Washington has just passed a big investor-friendly tax cut. But that will have limited economic impact and benefit mostly the rich if middle-class investors continue to boycott stocks. Donaldson is doing a fine job of restoring trust in the market. Now, he has to finish it.

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