Judge OKs Sending SEC Education Funds to NASD Group

Trying to salvage a stalled effort at investor education, a federal judge said Friday that the Securities and Exchange Commission could give $55 million to a foundation created by NASD -- the self-regulatory agency for brokerages -- to run the program.

The money was part of a $1.4-billion settlement of charges by Wall Street firms that had been accused of deceiving investors with rosy research results. The Wall Street firms used the phony research as a way to please corporations and try to win their investment banking business.

But the SEC’s investor education program failed to get off the ground, and securities regulators this year asked U.S. District Judge William H. Pauley III for permission to shift the $55 million to the NASD Investor Education Foundation. On Friday he complied.

“We are pleased that the Court has approved the transfer of the investor education funds to the NASD Investor Education Foundation to support programs that will help equip investors with the knowledge and skills necessary to make informed investment decisions,” SEC Commissioner Cynthia A. Glassman said in a statement.

“We believe that the new plan will result in the efficient, cost-effective and expeditious use of these funds for this worthy goal.”

NASD, formerly known as the National Assn. of Securities Dealers, has supported the SEC’s plan to move the money to its investor education foundation and maintained that the foundation would handle it independently. It had no immediate response Friday to the judge’s ruling.

Advocates of investor education have contended that such programs, which may be tailored to particular population groups, such as the elderly, young workers and women, can make the public less vulnerable to financial fraud. Yet even as a cottage industry has emerged to offer investor education, some say little is known about the lessons that would prove most effective.

In Friday’s ruling, Pauley sought to ensure that the NASD foundation could oversee the education programs while remaining independent from the brokerage industry.

He ordered that a majority of the NASD foundation’s board “shall consist of members of the public who are not employed by a securities regulator and who have no material business relationship with the securities industry.”

A separate organization, the Investor Protection Trust, also had sought a share of the $55 million to overhaul the federal effort. Under the $1.4-billion Wall Street settlement reached in 2003, the Investor Protection Trust received about $30 million to support investor education programs at the state level.

Competition between NASD and the trust, whose trustees typically are state securities regulators, had grown testy at times.

The trust raised questions about whether NASD’s ties to industry were appropriate for a group overseeing investor education, and it described itself to the court as an ideal candidate to oversee the federal program.

But an SEC attorney had argued sharply against giving the trust more money for the effort, questioning the trust’s handling of certain past investments and contending that the trust’s share of the education money already reflected a state-federal division negotiated in 2003.

Officials of the trust did not comment Friday on Pauley’s ruling.