Securities group plans to restore investor confidence

BOCA RATON, Fla. -- With all the recent improprieties on Wall Street and scandals involving stock analysts, it's no wonder that investor confidence has plunged so dramatically.

That's why rebuilding investor confidence was the theme of the Securities Industry Association's annual meeting this past week.

"The public and our investors are troubled with us. But we hear what they are saying, and we're taking it very seriously," SIA president Marc E. Lackritz told the nearly 450 brokers and dealers attending the conference.

It's going to be a tough task to win back investors who lost thousands of dollars when the market bubble burst. Rebuilding the public's trust is a long-term process, one that will take months -- if not years -- to complete.

Some investors are concerned that the resignation of Securities and Exchange Commission chairman Harvey Pitt will delay efforts to reform Wall Street. But New York Stock Exchange chairman Richard Grasso said he doesn't think that will happen.

Grasso told reporters following his speech here that he expects a settlement resolving research conflicts by the end of the year.

"There were some bad people who did some bad things, and we'll deal with them," Grasso said.

Grasso said Pitt's resignation was "a sad chapter," but was not affecting talks between investment firms and regulators.

On Wall Street, the Dow rose 19.49, or 0.2 percent for the week, despite a 49.11 drop Friday to 8,537.13.

The Nasdaq had a weekly decline of 1.42, or 0.1 percent. On Friday, the Nasdaq fell 17.43 to 1,359.28. The S&P index dropped 6.22, or 0.7 percent, for the week. On Friday, it fell 7.91 to 894.74.

The Russell 2000 index ended the week down 4.45, or 1.2 percent, at 379.00 after falling 4.15 Friday.

The Wilshire 5000 Total Market Index, which tracks more than 5,700 U.S.-based companies, ended the week at 8,438.80, down 63.40 from last week. A year ago, the index was 10,297.23.

Steps already taken

SIA officials here cited steps the association already has taken to rebuild investors' trust, such as adopting voluntary "best practices" for stock researchers that address compensation, stock ownership and disclosure.

The group's efforts have been made for good reason. In its annual investor survey, the SIA found that investors' satisfaction with their brokers is at the lowest level since the association began conducting surveys in 1995.

This year, the percentage of investors who said they are "very satisfied" fell to 45 percent from 59 percent in 2001 and 67 percent in 2000.

Those who said they were very satisfied with the securities industry overall fell to 9 percent this year from 22 percent last year.

Asked to identify the main issue facing the securities industry, 41 percent said "dishonesty," a huge jump from the 8 percent who said that in 2001.

Fifty-five percent believe that the integrity of research analysts is a big problem, the survey found. This year was the first time the question about research analysts was asked.

William Ellermeyer, a 65-year-old investor in Irvine, Calif., was not at the Boca Raton conference, but he said in an interview that he was distressed with the securities industry.

"I don't trust the analysts anymore," Ellermeyer said. "They are conflicted. The brokerage firms have their hand out in the other direction, getting IPOs."

Earlier this year, Ellermeyer, an executive career consultant, said he switched brokers, moving from Merrill Lynch & Co. to a smaller local firm that he said he trusted more. This past spring, Merrill Lynch and the New York Attorney General's office reached a $100 million settlement for conflicts of interest involving stock researchers.

Ellermeyer said he was burned by Enron. Several analysts continued to rate the energy trading company strongly right up until its collapse in December. After losing about $12,000 on that investment, Ellermeyer said he's doing more of his own investment research.

"Amazingly enough, I have become a more aggressive investor, so I know what I am buying," he said.

Wait and see

Many investors are waiting to see if the new Republican-controlled Congress will push forward with stricter laws against corporate fraud. Many proposals stalled this year amid conflict between the Democrat-controlled Senate and Republican-controlled House.

Whether or not legislation is passed, it will be up to the industry to restore its reputation and win back the trust of investors.

"In the end, despite the toughest regulations, despite the most tenacious regulators, despite the most severe penalties that our courts can impose, it all comes down to one thing: how each of us behaves in our jobs," said John H. Schaefer, the 2003 chairman of the SIA.

Schaefer, who is president and chief operating officer of Morgan Stanley's individual investor group, concluded: "We each need to act as if our names are on the door."