The SEC’s doomed reinvention attempt

By Felix Salmon
June 4, 2009

After reading Zach Goldfarb’s 1,800-word article on Mary Schapiro‘s attempts to rebuild the SEC, I’m more convinced than ever that rebuilding the SEC is a bit like running Citigroup: the organization is too broken, and the job simply can’t be done — by anybody.

All organizations, regulators included, are focused first and foremost on self-perpetuation, so it’s pretty obvious why Schapiro is trying her hardest to make the SEC powerful and relevant. But I see no reason to bet on her succeeding, especially when there doesn’t seem to be anybody in Treasury who is thinking about a revamped SEC as the centerpiece of a new regulatory infrastructure. To the contrary: the SEC was the centerpiece of the old regulatory infrastructure, and failed miserably. It’s time to move on.


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I’ve said it before, and I’ll say it again: Burn it down. Start over.

You cannot reform a clotted, sclerotic bureaucracy like the SEC as it currently stands, any more than you can untie the Gordian Knot. You must cut it. 009/06/these-dark-satanic-mills.html

There are really several problems that get bundled together.
1. The SEC is a captured regulatory body. The revolving door just spins too quickly and the money is just too good on the other side. I don’t know how to solve this.
2. The SEC was designed for a narrow set of purposes and over time, through deregulation, businesses have escaped regulation. This can be solved by broadening the commission of the SEC. For example, the SEC is really doing several jobs: (i) it regulates the issuance of securities, (ii) it regulates fraud in the secondary market, (iii) it regulates (directly and indirectly) brokers to make sure that they don’t rip off customers, (iv) it regulates (directly and indirectly) brokers to make sure that market making and the securities markets generally are working, (v) it regulates investment advisors to make sure that they don’t rip off their clients, (vi) it regulates investment companies for the same reasons, and (vii) it regulates holding companies. There are probably more functions. Before you go off tarring the SEC with a broad brush, look at what has worked and what hasn’t.
3. The SEC screwed up by not being imaginative enough in the ways that criminals operate. For example, I can easily imagine the scenario where the SEC examiners looking into Madoff and other fraudsters had a checklist of items to look out for, checked off their list, and then stopped looking.
4. Politicians and journalists and the public are sending conflicting signals about what they want the government and regulators to do. On the one hand, they want an active enforcer of the laws and fraud fighter, on the other hand, they don’t want an intrusive, powerful regulator. As in all things in life, you can have one, but not both. Given a choice, I think that we’re better off with lighter regulation and harsher penalties.

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