Stock markets need trustworthy regulation

Investing in the stock market has always been a gamble. But, unlike playing slot machines at casinos, investing relies on an individual's ability to make an informed decision about where his money goes and what is likely to happen to it. That wasn't always the case.

In the period right after World War I, there was a boom in stock-market investing. Thousands of America workers sought to move from rags to riches based on little more than hunches, tips and inside information. They might as well have gone to the racetrack. But while the stock market performed well, investors gave little heed to the need for government interference. Efforts to require financial disclosure and block fraudulent stock sales never gained steam.

Then came the crash in October 1929 that heralded the Great Depression. Public confidence in stocks and in the companies that relied on investors' cash quickly evaporated. Some 20 million investors had taken advantage of the post-World War I prosperity by investing in stocks. After the crash, half those investments became worthless. Not only were individual investors wiped out, but so were many banks and other financial institutions.

Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934, setting in motion the close regulation of stocks, stock exchanges, broker-dealers, investment advisors, mutual funds and public utility holding companies.

The purpose of this government oversight by the U.S. Securities and Exchange Commission is to protect investors and to maintain the integrity of stock markets. This effort is based on the concept that investors have a right to basic information about any investment.

Under this concept, companies offering stocks to the public must tell potential investors the truth about their businesses, about the securities and about the risks. At the same time, brokers, dealers and stock exchanges must treat investors fairly and honestly.

It is against this backdrop that the SEC is currently facing a severe test of its ability to perform its regulatory functions. Never in the almost 70-year history of investment regulation has there been such turmoil. And never before have there been so many investors, thanks in large part to 401(k) and similar retirement funds that allow wage earners to decide for themselves how their money should be invested.

When Harvey Pitt resigned on Election Day last week as SEC chairman, it was because confidence faltered in his ability to oversee the fairness and honestly of the regulators. He had withheld vital information about his pick, William Webster, to be chairman of an accounting industry oversight board. Webster resigned this week to avoid "new distractions."

This was the culmination of other concerns about Pitt, who also had close relations, prior to becoming chairman, with many companies currently under scrutiny and with the accounting industry.

Given the trillions of dollars of future retirement dollars at stake, the Bush administration must act swiftly to name a new chairman who can restore the public's confidence in this vital regulatory agency.