Remaking The SEC For Tomorrow

Many are raising questions about the future of the SEC – will it survive the current market turmoil and the restructuring of the financial regulatory landscape? Some proposals have called for the SEC to be merged with the CFTC or other agencies. Media stories have circulated claiming that the Commission will be stripped of its investor protection role. Many wonder if an agency born so many years ago in the aftermath of a huge market crisis of another era is so far out of date that it has passed its usefulness.

Despite what may be some surface appeal, on examination these ideas make little sense. At the same time, they ignore the long history of this agency and its accomplishments, apparently lost in the unfavorable headline of the moment. To be sure, the agency and its statutes were crafted in a different time and during a different financial crisis. Yet, over its long history, the SEC has been a protector of the markets and an effective advocate for the investor, typically with very limited resources. As markets and the environment changed, the Commissioners and the staff have evolved the regulations and practices, tailoring and retooling them to new conditions and challenges for the protection of investors and the markets.

There are many examples. The creation of the integrated disclosure system is one. This system improved the information available to investors by essentially giving them a flow of pictures or snapshots over time of the company in which they have invested. This resulted from the hard work of the Commission and the Division of Corporation Finance, bringing together two statutes through a series of regulations despite the differing focus of each statute: The Securities Act of 1933, centered on securities offerings and the Exchange Act of 1934, focused on exchanges and broker dealer regulation. This system continues to aid investors today.

The 1970’s volunteer program created by the Divisions of Enforcement and Corporation Finance helped usher in a new era of corporate accountability and ethics that is still critical today. Born of the Watergate scandal with its slush funds, the program helped bring accountability to the corporate marketplace. Hundreds of corporations participated in the program, rooting out bribery and the falsification of corporate books that was necessary to cover up the corrupt payments. The result was the passage of the Foreign Corrupt Practices Act – a statute which has been emulated by many countries around the world and which is currently a key DOJ and SEC enforcement priority.

The insider trading program, which helped bring a new era of accountability to Wall Street in the 1980s, is yet another example. Cases against the Wall Street titans of the 1980s helped clean up the markets while reassuring investors that they could get a fair shake because the Cop of Wall Street was on the beat. Insider trading enforcement, which was revamped last year with a new market monitoring arrangement, continues to be a key enforcement priority today.

In each of these examples, the agency and its staff tailored the depression era statutes many claim are now out of date to solve current problems. To be sure, along the way SEC has made errors and lately it seems to be making more. At the moment, it seems to be jumping from one scandal to another. In part, these stem from the serious neglect the agency has suffered in recent years. Its budgets have been essentially flat for years. While doing more with less is a popular slogan, in the end having less in terms of funding and resources while faced with an ever changing and expanding marketplace will eventually mean that there is less protection.

Deregulation also has not been kind to the SEC. For the Commission, deregulation translates to gaps in its regulatory statutes such as those involving derivatives, investment bank holding companies and hedge funds. Other problems have emerged from a simple lack of leadership, which in recent times seemed to have left the agency rudderless.

These and other difficulties have accumulated over the years to create what now appears to be an agency mired in one scandal after another. While its new Chairman is working hard to try and establish a new tone at the top and roll out new regulations, she must at times feel like the kid trying to plug a dam by sticking her fingers in the holes that appear – at some point there are no fingers left but holes keep appearing.

What the SEC needs is not to be merged into the CFTC – a shop-worn idea that has kicked around for years and failed because it is a bad idea. Nor should it be stripped of its role in favor of creating some new agency – starting over always seems appealing, but throwing out all the good programs because of a few difficulties makes little sense.

What the agency does need however, is a fundamental re-evaluation of how it does business. A piecemeal approach will not do. Only a comprehensive review of how the SEC does business will translate into the forward-looking regulator that is needed today and tomorrow. To facilitate this process the Commission should consider creating an advisory panel to give it independent advice and expertise in evaluating existing processes and procedures and to help design those which will be needed to move the SEC forward in the years to come. By undertaking this process now, the Commission takes the steps now which will ensure that it is effectively carrying out its mission in the future.