Editorial: A quiet SEC opens door for Spitzer

Wednesday, Nov. 5, 2003 | 8:39 a.m.

Two years ago New York Attorney General Eliot Spitzer opened an investigation into Merrill Lynch when he became suspicious that the Wall Street firm's analysts were preparing misleading reports to fool average investors and benefit insiders. The investigation grew to include a dozen other firms and resulted in major reforms designed to end conflicts of interest and restore investor confidence.

Spitzer is continuing to use the resources of his office to attack dishonesty on Wall Street. The emerging mutual-funds investigation began with his office charging that ordinary investors were being harmed because well-connected investors were allowed to engage in unethical and illegal trading practices. The investigation has been joined by the Securities and Exchange Commission and Congress is holding hearings.

We've heard the skeptics, including some from Wall Street firms, who say that Spitzer, a Democrat in his second term as attorney general, is priming himself for the 2006 race for governor of New York. In our view, however, Spitzer is performing a public service by his investigations into Wall Street practices, especially given that the Securities and Exchange Commission in recent years has needed serious prodding before taking action.

In his latest high-profile crusade, Spitzer has been pointing out the conflicts of interest prevalent within the mutual-funds industry, conflicts that have prevented millions of regular investors from realizing better returns. It took Spitzer's allegations to motivate the SEC to investigate the mutual-funds industry, which handles investments by an estimated 90 million Americans. In testimony Tuesday before a House subcommittee, Spitzer outlined the ways in which many firms give a higher priority to the short-term interests of their directors, officers and advisers than they do to the long-term interests of regular investors. He proposed several reforms that would return mutual funds to their original premise, which was to provide working Americans with the opportunity for modest financial security. Maybe the people who see this only as political ambition will soften a little when new reforms lead to new highs on their 401(k) statements.