How to fix the SEC
— Matthew Goldstein is a Reuters columnist. The views expressed are his own —
Many critics of the Securities and Exchange Commission point to Christopher Cox’s appointment as chairman in August 2005 as the day the wheels came off Wall Street’s top cop.
But in some ways, the SEC began to veer off course a few months earlier, when the agency moved its Washington headquarters into a sparkling new office building that would make even a corporate law firm jealous.
The plush environs made it all too comfortable for lawyers and investigators and discouraged them from venturing out to discover what the Wall Street banks were doing with all that leverage or sniffing out what Bernie Madoff and R. Allen Stanford were really up to.
As she fights to keep Congress from diminishing her agency’s mandate, Mary Schapiro, the commission’s chairwoman, vows to put an end to the regulatory lethargy. Schapiro, according to The Wall Street Journal, recently told some of her senior lawyers, “We need to demonstrate that we’re going to make changes.”
That’s great news. Here are five things Schaprio can do right away to dust the cobwebs off and get the 75-year-old agency back into the business of protecting investors.
1) Transfer scores of lawyers and investigators from the Washington office to the agency’s 11 regional offices. Roughly 60 percent of some 3,500 employees work in the headquarters.
Now to be fair, only 500 of those 2,100 workers in Washington are directly involved in either enforcement work or regulatory oversight.
But that’s probably several hundred employees too many. The SEC would be better off with more eyes and ears on the ground in the regional offices-which would allow for more direct oversight of public companies and brokerage firms.
2) Open more regional offices. Moving lawyers and investigators out of the home office would make it easier for Schapiro to open more regional offices, enabling the agency to better protect the investing public.
It’s crazy that the SEC doesn’t have a regional office in Charlotte, N.C., which is home to Bank of America, the nation’s largest lender by assets. Even after Wells Fargo’s acquisition of Wachovia, Charlotte will remain a major banking hub.
The SEC needs to be there on the ground. Opening a regional office in Phoenix, one of the fastest-growing cities and home to many retirees, makes a lot of sense. For that matter, Las Vegas is a natural place too. After all, retirees are prime target for investment scams.
3) Require public companies and brokerages to report prominently on their websites if they are the subject of an active SEC investigation.
It’s long been up to the discretion of public companies and Wall Street firms to disclose whether the SEC has opened a formal investigation. And many companies and brokerages, on the advice of their lawyers, don’t disclose, arguing that many regulatory inquiries never result in an enforcement action.
But this does a disservice to the investing public, especially since SEC investigations can often take years to complete. Just imagine how many investors might have been protected, if Stanford Financial had been forced to put a red flag on its website, noting the SEC was investigating its certificates of deposit business since 2005.
4) Publish meaningful investor alerts. A year ago, the SEC initiated a good investor protection program called PAUSE-a website that lists unregistered investment firms operating in the U.S. that appear to be involved in fraudulent schemes.
Never heard of it? That’s not surprising because the SEC has done a poor job of publicizing its own initiative. In fact, since the PAUSE website began in April 2008, the number of potential bad actors identified by the SEC has nearly doubled to 112 unregistered investment firms.
But the SEC has not once issued a press release announcing the addition of new name to the PAUSE list. Publishing an investor alert about PAUSE firms would not only bring attention to the good work the SEC is doing, it also makes it easier for investors to do online due diligence.
5) Think like a cop on the beat. To catch bad guys, you sometimes have to think like them. For too long the history of the SEC is that it ends up fighting yesterday’s battle.
By the time it brings a regulatory action, the Wall Street scamsters are coming up with another way to defraud investors.
Or the big Wall Street firms have dreamed up another way of slipping through the regulatory cracks and coming up with an investment product that skirts SEC oversight-think credit default swaps.
Now it may be asking too much of the SEC to stay one-step ahead of the fraudsters, the investment bankers and derivatives traders. But there’s nothing preventing them from staying current by getting out more and talking to traders, investors, hedge fund managers and the mathematicians who develop trading algorithmic formulas.
For too long, critics have joked that the SEC brings its enforcement cases after reading about them in the business press. That’s not totally fair. But if the SEC got more of its people spread across the country and started talking to investors and traders like reporters do, it might actually stop looking like it is always late to the game.