Group Offers Plan to Curb Insider Abuses : Securities Industry Panel Urges Self-Policing, Congressional Action

Concluding that Wall Street’s insider trading scandals were spawned by a “structure that made it too easy,” the Securities Industry Assn. called on investment firms Wednesday to strengthen their compliance divisions and urged Congress to ban takeover measures that favor some shareholders over others.

In a comprehensive plan for curbing stock trading abuses, the trade group also recommended tighter controls to force a stricter separation between investment firms’ stock arbitrage and mergers and acquisitions divisions.

However, it declined to endorse a proposal forcing firms active in takeover work to give up their arbitrage operations altogether, a notion that has been gaining support since the current insider trading scandals erupted last year.

Notably absent from the association’s 16-page report was a suggested definition of insider trading. The group criticized Congress and the Securities and Exchange Commission for “refusing” to clearly define illegal behavior in stock trading but said that it did not feel qualified to propose a definition itself.

In insider trading, information not available to the public is used to profit illegally in the securities markets, a practice that federal regulators and prosecutors have been cracking down on. But there is no specific law banning this practice and there has been a growing demand among some congressman and securities industry officials for a definition of the crime that has netted such big Wall Street names as Ivan F. Boesky and Dennis B. Levine.

Few Wall Street executives have yet seen the association’s report. One who has, Raymond J. Kalinowski, vice chairman of the A. G. Edwards brokerage firm of St. Louis, said the “report is the industry consensus.” So at A. G. Edwards, he said, its recommendations “will be implemented.”

In Congress, the report was greeted with cautious praise.

While applauding the plan as “a promising start,” Rep. Edward J. Markey (D-Mass.) said: “It remains to be seen if these recommendations go far enough.” Markey, whose House Energy and Commerce finance subcommittee is hearing testimony on securities industry abuses, singled out for praise a recommendation “elevating the stature of compliance officers within investment firms.”

To address recent criticism that the first line of defense against trading abuses--investment firms’ own compliance departments--is too often a “garden variety” operation with no real authority, the trade group proposes that securities firms overhaul their compliance divisions.

What the trade group is advocating is “a new concept of a compliance officer,” association President Edward I. O’Brien told reporters Wednesday. Each firm should appoint a senior officer, assign him to the corporate finance area and arm him with real enforcement powers, O’Brien proposed.

William Clark, a spokesman for Merrill Lynch, said he had not yet seen the actual proposal but was slightly taken aback at the suggestion. “We feel our compliance mechanisms are already among the best in the industry,” he said, noting that it was Merrill Lynch that passed on the tip that eventually led the SEC to confessed inside trader Levine.

In a separate set of recommendations on takeover issues, the trade group advocated a ban on “greenmail” payments and “poison pills” without shareholder approval. Both are defense tactics aimed at deflecting unwanted suitors.

It also recommends that investors contemplating a corporate takeover be required to file their intentions with the SEC before acquiring a 5% stake instead of after, that anyone buying more than 20% of a company be required to make a tender offer for all outstanding shares and that the sanctions for disclosure violations be more severe.

O’Brien said the group also discussed such issues as the controversial practice of financing takeovers with so-called junk bonds, but declined to make any recommendation.

The association decided against backing complete separation of stock arbitrage and mergers and acquisitions departments, even though “I don’t think you can stop people from talking to other people” simply by strengthening the so-called Chinese Wall between the two departments, Shapiro said.

He said the group found evidence that “arbitrage is often an important factor in establishing proper pricing mechanisms.”

HOW THE SIA WOULD CURB INSIDER ABUSE

Companies should restrict dissemination of corporate information on a “need-to-know” basis.

A special officer with responsibility for compliance should be assigned to the corporate finance area of each securities firm.

Firms should require employees to sign agreements requiring them to keep corporate information confidential.

The SEC should require disclosure of stock accumulations before the current 5% limit is exceeded.

Create stronger sanctions for violations of SEC stock purchase disclosure rules.

Prohibit “greenmail” and “poison pills” unless shareholders approve in advance.

Require all purchases above 20% of a company’s stock to be made only by tender offer. Source: Securities Industry Assn.