SEC Chairman: Find Solutions Before Problems Explode

Securities and Exchange Commission Chairman William H. Donaldson wants the regulator to fix small problems before they become front-page news.

It's a change in philosophy for an agency that has spent the last couple of years chasing after wrongdoing uncovered by New York Attorney General Eliot Spitzer. Throughout the spate of corporate scandals, the SEC has been conducting investigations after the fact, levying fines on companies long after the abuse has occurred, and failing to spot questionable practices, such as mutual fund trading abuses.


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Donaldson wants to change that by taking a cue from Spitzer. Spitzer's strategy was to narrow his focus and concentrate on areas where small investors were being harmed. The SEC will do the same through a newly formed office of Risk Assessment, the Washington Post reported.

"We've got to be nimble at identifying problems before they become embedded in a large number of firms," said Lori A. Richards, who heads the SEC's compliance division. The risk-assessment office "will help us determine and prioritize areas of emerging risk and allow me to deploy examiners to . . . those highest-risk areas." Richards said 80 such "mini-sweeps" are under way.

The SEC has too few staffers overseeing far too many funds and firms do top-to-bottom reviews across the board. "We've got 400 inspectors out there trying to look over 8,000 funds and 7,000 brokerage firms. It can't be done the way we are doing it," Donaldson said in an interview.

Donaldson has hired Charles A. Fishkin, a former trader and Fidelity Investments risk-management executive, to help. Fishkin in turn has hired industry experts to ask SEC staff, industry leaders and academics about what they see as the next big issue.

Fishkin is also asking SEC investigators to get inside Wall Street, learn more about day-to-day operations and find out about dubious practices before they proliferate. He has also asked the financial industry's most prominent names to identify problems and solutions.

"What we are trying to do is get in early and treat problems in the least invasive way possible," Fishkin told the Post.

Stephen Cutler, who heads the enforcement division, asked brokers and compliance officers to search for potential conflicts of interest and report their findings to the agency. A dozen major firms have done such self-assessments and met with Cutler's staff to discuss the results.

"Just because a certain way of doing things is second nature to you, and appears to be standard operating procedure on the Street, doesn't mean it's the correct way of doing things," Cutler warned in a speech last September. "Find the problems and correct them now."


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