Some members of the securities industry are pushing Congress to prevent states from pursuing those who violate securities laws, including Wall Street firms now under investigation for conflicts of interest by their stock analysts.
A proposed amendment on the subject may be attached today to legislation that is actually intended to increase protections for investors by strengthening controls over the nation's accounting system and over stock analysts' practices.
But the draft of the amendment, which began circulating last week, would block the states' current investigation of stock analysts and would severely restrict their enforcement of securities laws in the future, according to the association of state regulators.
At a time when investor confidence in the market has been eroded, opponents see the effort as keeping an important cop off the beat.
"State securities cops have a duty to protect investors in their states, something they've been doing longer than the S.E.C.'s been around," said Joseph P. Borg, director of the Alabama Securities Commission and president of the North American Securities Administrators Association. "The question for the authors and supporters of this amendment is: Are you going to stand with 100 million-plus investors on Main Street who expect and deserve the truth from their brokers or with a handful of rich firms on Wall Street who have a serious credibility problem?"
Two legislative sources said Philip J. Purcell, chairman of Morgan Stanley, had recently made the rounds on Capitol Hill to promote legislation to curb state regulators' powers. One person said Mr. Purcell's idea had gained support among both Republicans and Democrats.
A Morgan Stanley spokeswoman declined to comment on Mr. Purcell's role in the amendment. But in an interview last Friday, Mr. Purcell said, "I personally believe that legislation could make a positive contribution to restoring investor confidence." He was referring to the Republican legislation on corporate disclosure, supported by Representative Michael G. Oxley of Ohio.
But he also discussed a proposal by Paul S. Sarbanes, the Maryland Democrat and chairman of the Senate Banking Committee, that would tighten regulations of accounting firms and brokerage analysts. "Likewise, the Sarbanes bill has some elements in it that are very constructive," Mr. Purcell said. "I would hope that both bills can get tailored in conference to the point where the end result is very positive."
The proposed amendment says no law, rule, regulation, order, administrative action, judgment, consent order or settlement agreement shall be imposed by any state on people subject to Securities and Exchange Commission rules.
It has been circulated as a draft attachment to the Sarbanes bill, formally the Public Company Accounting Reform and Investor Protection Act. Last Friday, lawmakers added 47 amendments to the bill, and the proposal limiting the states' regulatory functions was absent. But 20 of the amendments are called placeholders and now belong to eight senators who can add something as the bill is being marked up. The draft amendment with a Senate sponsor, as yet unidentified, could appear today if state regulators fail to block it.
State regulators are calling the new amendment Wall Street's response to the investigation into analyst practices begun about a year ago by Eliot L. Spitzer, the attorney general of New York.
In April, Mr. Spitzer filed an affidavit against Merrill Lynch and released documents, including e-mail messages, that appeared to show the firm's analysts making derisive comments privately about companies they followed even as they recommended that investors buy those stocks. The documents also indicated that the firm's analysts worked closely with its investment bankers.
Merrill Lynch, which neither admitted nor denied the allegations, settled the case by agreeing to pay a fine of $100 million last month. Mr. Spitzer is now turning to other firms, particularly Morgan Stanley and Salomon Smith Barney. Regulators from several other states, including California and New Jersey, have agreed to help Mr. Spitzer.
Since Mr. Spitzer's campaign, some representatives of the securities industry and lawmakers have voiced fears that investigations by various states into Wall Street practices could lead to a hodgepodge of securities laws rather than a uniform set of standards overseen by federal regulators. The state regulators overseeing the analyst investigations say that they too want uniformity in laws but that they must also be free to protect their constituents.
In a statement yesterday, the Securities Industry Association, the lobbying organization for Wall Street firms, said its members supported vigorous law enforcement. "The implication that we are seeking to hinder investigations is absolutely without merit," a spokesman said.
The paradox of attaching an amendment restricting state enforcement activities to a bill intended to solve those conflicts was noted by Barbara Roper, director of investor protection at the Consumer Federation of America.
"On the securities analyst issue, Congress held hearings and thought that was an adequate response," she said. "The S.E.C. adopted the industry's voluntary standards as rules and thought that was an adequate response. And now some in Congress appear intent on ensuring that the states cannot force real reform. And they wonder why there's a crisis in investor confidence?"
