Who knows what evil lurks in the hearts of the Securities and Exchange Commission? The Shadow SEC thinks it does.

The self-appointed panel of five - mostly free-market economists - intends to shadow and second-guess the real SEC, a presidentially appointed panel entrusted with keeping the stock markets fair and honest.The real SEC, an independent panel of five commissioners backed up by a staff of lawyers, accountants and economists, not only oversees the trading of stocks and bonds but oversees mutual funds and investment advisers - affecting the jobs, investments and futures of millions of Americans.

At its first meeting in a swank Washington hotel, the Shadow SEC debated the real SEC's policies on two hot issues: the effect of program trading on stock market plunges and the voting rights of shareholders in takeover battles.

The Shadow SEC voted for the elimination of a rule - approved this year by the real SEC - limiting index arbitrage, a form of program trading, on the New York Stock Exchange when the market rises or drops 50 points. The panel also called on the real SEC to revise rules governing shareholders' absentee ballots or proxies.

Critics have called the body irrelevent or presumptuous. Even those who think there is a place for a Shadow SEC think its role will be minor.

Samuel Hayes, investment banking professor at Harvard University's business school, thinks the concept of economic criticism "is an excellent idea. I just don't take too seriously the establishment of a regulator in exile."

"Frankly, I don't understand why some people are so upset about a Shadow SEC," said SEC Commissioner Philip R. Lochner. "There are 1,000 conferences a year around the country on securities matters and this is one of them," he added.

That's precisely the attitude the Shadow SEC, which includes 1990 Nobel Prize-winning economist Merton H. Miller and former SEC Commissioner Charles C. Cox, wants to change.

Gregg Jarrell, a finance and economics professor at the University of Rochester and one of the shadow body's creators, told reporters at the first meeting earlier this month: "One of the big purposes of this is to spur greater progress in research among the academic community" to create "one more outlet besides the normal run of academic conferences. One that's a little different, perhaps a little more exciting."

"I don't know whether we'll reach the SEC itself," said Miller, who teaches at the University of Chicago. "I think we will, but by a very indirect route."

The SEC as an institution has no official position on its shadow self. Even Richard C. Breeden, the usually outspoken SEC chairman, declined to comment on the matter.

But sources inside the commission say more than a few SEC feathers have been ruffled by the interlopers.

Following its first meeting, SEC General Counsel James Doty needled the Shadow SEC in a speech to securities lawyers saying he was worried: "Do they have a shadow general counsel, too?"

In an interview, Doty said his speech was "clearly facetious but it had a serious point" about the importance of the private securities bar's input.

"There is room for all disciplines to comment on the law and the rules, but I don't think economists can infer they have a superior vantage point, any more than lawyers can," he said.

Meanwhile, the Securities Industry Association "is totally against a Shadow SEC and believes it will be disruptive," said Art Samansky, a spokesman for the New York-based trade association.

The Shadow SEC, sponsored by the University of Rochester's Simon Graduate School of Business Administration, is financed by the John M. Olin Foundation, IBM Corp., Twenty-First Securities Corp. and Mesa Limited Partnership, the firm of takeover strategist T. Boone Pickens.

"They're good people with basically a conservative economic viewpoint, trying to make sure everybody involved pays enough attention to economic theories in the regulation of the stock market," said prominent Washington securities lawyer Arthur Mathews. "(But) I don't perceive it as a group that's going to have any power or particular influence."

If the first Shadow SEC meeting had been a movie, it could have been called: "The Revenge of the Economists." Panelists, noting that the five current SEC members are all lawyers, complained that statistical studies had been downplayed or ignored in the SEC rule-making process.

In addition to Jarrell, Cox and Miller, who teaches at the University of Chicago, the Shadow SEC consists of Ronald J. Gilson, a law professor at Stanford University and Hans R. Stoll, a finance professor at Vanderbilt University.

Steven Manaster, former chief economist for the Commodity Futures Trading Commission, now teaching at the University of Utah, heads the Shadow SEC staff.

"That's one hell of a lineup," concluded Edward H. Fleischman, the only member of the real SEC to attend part of the shadow session.

The reams of raw data presented was "fascinating," he said, adding: "I think it's very healthy for an organization, especially a so-called fourth branch of government agency, to be publicly called to account - in a constructive way."

Lochner, who did not attend the session but sent an observer, said "economists have something to teach lawyers, but I think it's kind of a foolish notion that we should wait until all the data is in, because all of the data is never in. You've got to make decisions with what's available at the time."