WALL STREET REFORM

August 2002
		How can the Bush administration and Congress clean up Wall Street and restore investor confidence in the wake of corporate scandals?

Forum Introduction Do stock options act as invitations for corporate fraud and misleading financial statements? Did Enron's trading of energy futures on the Commodity Futures Exchange enable it to mislead investors? How much should people with mutual funds worry about corporate corruption and accounting scandals? What is the role of a corporate board of directors? Will the conviction of corporate executives have any real influence on the markets? What would have happened if legislation to privatize a portion of Social Security had been approved? What happened to all the money that people lost -- was it ever 'real'? Why not limit the amount of time an accounting firm can serve as a company's independent auditors?

Jolanna Wright of Junction City, Kansas asks: ________________________________ Are the regulations for the Commodity Futures market exchange different from regulations for the NYSE and NASDAQ? How did Enron's trading of energy futures on the Commodity Futures market enable it to mislead investors? Did the new corporate reform bill address the problems of oversight in the futures markets? If not, why? Ronald Berenbeim responds: ________________________________ In at least one respect, the practice is different. Energy traders can book as revenue the total amount of the transaction rather than just the profit as is typically the case in brokerage firms. Gretchen Morgenson of The New York Times has estimated that this difference enabled Enron to rank 7th on the Fortune list rather than 287th which would have been the case had brokerage accounting practices been in effect. And, to your last question -- no, the the new bill does not address issues relevant to the futures market. A committee staff member said that the bill was not intended to address these issues. It was tailored to problems that were related to Enron-type issues. Futures, they say, did not play a major role in these scandals. It is also worth noting that the respective House and Senate committees may not have had sufficient jurisdiction to craft a bill focused on futures market problems. Frank Torres responds: ________________________________ No answer provided. Olivia Kirtley responds: ________________________________ Yes, the commodity exchange has different rules than the securities exchanges. In addition, although all the exchanges have rules they must follow that are set forth by the SEC, they also have their own rules established by their individual boards. The bill only addressed the auditing, reporting, disclosures and governance issues for public companies, not the commodities markets. The issues of corporate governance, disclosure of corporate financial data, audits of the financial statements of public companies, and the activities of stock analysts are all securities related, and not commodities related. The issues first raised in the Enron case and a number of other audit failures (e.g. WorldCom) deal with the harm to investors in stocks, losses of retirement funds invested in stocks and corporate malfeasance. The issues with regard to the commodities markets are separate and distinct, and will need to be looked at separately by Congress.