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Here’s a challenge for you savvy readers: Name a group of people who must submit to fingerprinting, have their letters and e-mails scrutinized, and make their phone calls on taped lines. If you guessed prison inmates, sorry. The winning answer is Wall Street employees. These practices have long been the norm for people in the securities business, whether or not they’ve misbehaved. I’m not asking anyone to shed tears for Wall Street, where I worked as a lawyer for 15 years. I’m as pleased as the next guy at the downfall of Jack Grubman and his fellow analysts, whose venality entitles us to boo them as loudly as we would a mustached villain in a silent film. But, as the saying goes, bad facts make bad law. And from Ivan Boesky to Jack Grubman, so many bad facts have oozed out of Wall Street scandals over the past two decades that the law is showing signs of strain. Since the mid-1980s, Congress has passed at least seven major laws to tighten broker-dealer regulation. But just as some say the military is always fighting the last war, the government is always heading off the last financial scandal — whether it’s insider trading, abuses in penny stocks or the latest scourge, analyst conflicts of interest. In between congressional forays, regulators layer on more and more rules. And the SEC isn’t Wall Street’s only regulator. The Treasury Department and the Fed also have important roles, as do the “self-regulatory organizations” (SROs, in the industry lingo). These include the NASD and the NYSE, which enforce their own rules with the SEC’s blessing, and a separate SRO just for the muni bond business. Bank-affiliated brokers have federal and state banking regulators to watch them as well. For the futures side of the business, there’s the Commodity Futures Trading Commission along with yet another SRO. Each of the 50 states has its own securities laws and the power to enforce them, as New York State Attorney General Eliot Spitzer has lately reminded everyone. And most Wall Street firms also do business abroad under the eyes of foreign regulators. This mass of regulation is applied in a hands-on manner. Examiners from various bodies come and go at each brokerage firm all year long, sometimes so many descending at once that it’s hard to find room in the office for all of them. To meet tough employee supervision requirements, the firms have systems that let compliance officers sift through the e-mails and faxes of personnel on the trading floor and in other business areas. Despite warning employees to be careful with personal e-mails, Wall Street compliance officers are now privy to more people’s naughty secrets than most psychotherapists. Yet people still manage to break the rules. The current system, in all its complexity and intrusiveness, hasn’t prevented nefarious doings. Many legislators and regulators, indignant at the Street’s latest debacle, are calling for even more of the same medicine. But in an industry that already has so many agencies looking over its shoulder, employs hordes of compliance personnel and imposes on its employees an extraordinary level of surveillance, can the government keep ratcheting things up when the next scandal comes, as it surely will? And the one after that, and the one after that? Does it have the stomach to put securities firms out of business, Arthur Andersen-style, in order to appear tough enough? I wish I had the wisdom to offer a ready solution. No sane person would propose that Wall Street go unregulated. But it might help to give up the pretense that any amount of micro-regulation will keep a firm out of trouble without something much more important: people in top management who will go nose to nose with big-shot producers to make them knuckle under to legal requirements. Imagine the pressure on an in-house lawyer (known in the trade as a “nonproducer”) whose refusal to OK a questionable transaction is the only thing standing between a trader and his or her outlandish yearly bonus. Seasoned legal and compliance employees equipped with the best surveillance systems are paper tigers unless the CEO stands strongly behind them. The analyst fiasco is a case in point. At Citigroup, the scent of smoking gun e-mails was wafting all over the building. Many employees reportedly expressed concern about the analysts’ conduct, but the practices continued because CEO Sanford Weill, it seems, wanted it that way. There’s another simple truth that those wanting to tame the Street would do well to keep in mind: The extent to which money talks in Wall Street culture cannot be overstated. So no one in the business who profits from wrongdoing should be allowed to keep a single penny. In fact, the law shouldn’t hesitate to impose fines that impoverish those whose misconduct has impoverished their clients. Lifetime bans from the industry, as Spitzer has rightly recognized, also send a strong message: Wall Street professionals know that, short of hitting it big in Hollywood, they will never duplicate the standard of living the Street affords them. It’s certainly important for the nation’s economy that Wall Street be as squeaky clean as possible. But, blasphemous as this may seem, there is something weirdly over-the-top about government and media reaction to the Street’s perennial scandals. Aside from the occasional fun of skewering some overpaid scoundrels, it’s not entirely clear why these events merit such intense attention. It can’t be explained by concern about ordinary people’s financial health; if so, those selling homes, cars and insurance would be as closely watched. And people on the lowest economic rungs — with no pensions or investments — surely would prefer that similar energy be directed at other subjects, like strengthening and enforcing wage-and-hour laws. It’s also not enough to say that the financial services business carries “systemic risk.” Many industries, from chemical production to food to private aviation, pose a danger of large-scale damage, yet we seem to lack the focus and will to step up oversight of these areas meaningfully after Sept. 11. There are rules to keep a broker from marketing investments considered “unsuitable” for a particular customer. I recently read, though, that a gun vendor legally sold a rifle to a woman with a known history of mental illness, who used it to kill her young child. The mother’s illness barred her from buying a handgun, but the law deemed a rifle a suitable purchase. Our legal system, however, kept her safely away from junk bonds and inverse floaters. Wendy Fried is a lawyer and freelance writer in New York City. Her e-mail address is [email protected]

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