Securities and Exchange Commission Chairman William H. Donaldson took advantage of his time before an audience of leading legal minds to sharply criticize the role some lawyers have played in the ongoing mutual fund industry scandal.

Since the scandal broke on Sept. 3, 2003, the Commission has brought 61 cases and levied about $1.4 billion in disgorgement and $1 billion in penalties.

Speaking before the Practising Law Institute in Washington late last week, Donaldson reminded the group that it is in the best interest of their clients "to prevent their issues from becoming our problems."

Donaldson cited the SEC's new rule requiring the registration of hedge fund advisors, which will allow the Commission oversight of a previously unregulated segment of the investment management industry, as an opportunity for legal advisers to promote the ethical behavior of their clients.

"Similarly, think how much anguish we could have avoided if a few more lawyers had pointed out to their hedge fund clients that late trading of mutual fund shares is illegal, as are duplicitous market timing and quid pro quo sticky asset arrangements.

"That sort of common sense advice would have been more effective in keeping the client out of trouble than engaging in rhetorical somersaults to justify the activities the client wanted to pursue," said Donaldson, a Republican.

The 73-year-old chairman, who was appointed by President Bush to steady the SEC after several tumultuous years under his predecessor, Harvey Pitt, urged the Beltway lawyers not to "expend significant time, money and energy devising structures aimed at evading requirements."

"You can help corporations to encourage their employees to learn from their mistakes," he added. "If there is a breach in ethics or compliance, it is imperative to figure out what went wrong and how it can be prevented from happening again."

Donaldson also offered an update on the Commission's rulemaking efforts in the last 18 months, focusing primarily on what he characterized as positive outcomes from heightened disclosure surrounding revenue sharing and the process behind selecting directors for mutual fund boards.

Donaldson, however, expressed frustration over the current rules behind executive compensation, an area where the Commission has brought several cases.

"This is an area where I have been disappointed by the contribution of some lawyers, who appear in at least some cases to devise their own narrow interpretations of the rules while disclosing as little as possible, rather than to seek helpful disclosure for investors," he said.

The SEC's Division of Corporation Finance is currently exploring ways to enhance and clarify rules regarding executive compensation disclosure, Donaldson reported.

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