How to fix the SEC

June 12, 2009

Matthew Goldstein

— 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.


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Having spent 37 years in the securties industry working in some facet of compliance, your recommendation rings true. I have represented groups of investors in arbitration as well as filed formal compliants on their behalf with the SEC. Particular to the SEC, is there a pattern of concern at Enforcement as to whether or not any of the petitioners have friends in high places. It is a total disgrace and a waste of taxpayer funds, as the SEC seems committed to protectting the larger invetment firms and their illegal practices.

I for one, can’t wait to see the agency streamlined, then sent on the mission of enforcing the laws so brilliiantly crafted by Joe Kennedy. If the old man had a legacy to the public, it was his ingenious crafting of the Acts of 1933 and 1934. Lets begin to enforce them!!

Posted by John P. Crowley | Report as abusive

The SEC is a piece of garbage… — WorldCom, Tyco, Enron, Adelphia, — then they fired the guy in the mailroom (martha stewart) — what a joke… Now we have Madoff, Stanford, SEC lawyers trading on inside information; Bank of America’s ken lewis making millions trading on inside info (govt. will prop up BAC; not let it fail; guarantee its obligations, etc.) … Crooked Timmy and Helicopter Ben giving away billions of taxpayer dollars to their rich buddies so fast it makes the head spin… CEOs so greedy that it is mind-boggling… Completely dysfunctional Congress… President in bed with the richies… Our country has been turned into a third-world banana republic…

Posted by willie | Report as abusive

How would talking to a mathematician convinced of the veracity, accuracy and robustness of his model have averted any of the recent brouhaha?

Posted by Ian Kemmish | Report as abusive

While I believe reporters play a significant role in monitoring government, from what I see reported on in the media (especially TV) is laughable.

I can think of 10 issues off the top of my head that have to do with fraud, waste,gross abuse or flaws in our system of government which need to be addressed, yet the media focuses on Ms. California, the latest IPod, or other such nonsense.

So while the SEC has its problems, so does the media.

Posted by David | Report as abusive

Goldstein’s points are nice, but don’t reflect much on reality. Most SEC enforcement work in Washington is trial-related. Not sure how moving those guys out to the burbs will necessarily help them prepare for trials in Washington or New York. On the other hand, the SEC inspections people actually are stationed in the SEC’s regional offices. (Are you confusing the two?)

Bank of America is regulated by the Fed, not by the SEC. Not sure why they would want to open an office in Charlotte. In fact, I think most SEC offices are in places where there are stock markets (Miami maybe being the exception).

And given that the SEC never tells anyone they are under investigation until they are hit by an SEC suit, how exactly would a company disclose they are under investigation? If you are a brokerage firm and get hit by a subpoena, that may only mean that your client is under investigation.

Fundamentally, your criticisms (along with those of a lot of other people outside of the law business) confuse what the SEC does. The SEC “investigates” fraud the way a prosecutor’s office does. It doesn’t investigate like the FBI does. As any securities lawyer knows, SEC “enforcement” is just a civil word for what on the criminal side of things is called “prosecutions”.

That said, the SEC does have an inspections arm, which is rather pathetic. But most of that is the result of funding. When the firms you regulate are numbered in the tens of thousands, and your examiners number in the hundreds, you’re going to have problems. In the UK, this problem is handled by the FSA providing the simple statement that if the firm isn’t in the top 15% according to size, they aren’t going to get looked at and any investor should be on notice.

Posted by MDF | Report as abusive

Math as used for equation models, requires logical variables and limits. Same with theory of numbers as was presented by Dr. Fermat long time ago. Same happen for Differential Equations, some has singular solutions.
All I know, that these persons are trying to pin the frauds, to mathematical truth we understand.

Posted by Ben R. Rodriguez MS | Report as abusive

Reforming the SEC is a laudable goal, but “reform” carries different meanings for different constituencies of the SEC. Prior to deciding what actions we need to start effecting, we need to restate the mission of the SEC.

The stated mission of the SEC is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. We can’t protect the greedy or naive from making bad decisions although these people the mission of the SEC is to do so. We can’t facilitate efficient markets without financial innovation, although innovation often has unexpected costs.

The first step in reforming the SEC has to be to convene a congressional hearing to obtain a commitment of the Congress to support legislative changes to reduce political interference that has restricted the SEC in the past.

The next step would be to hold a series of public hearings before an appointed panel of industry and political representatives charged with delivering a report to be submitted to Congress that would outline changed needed in the SEC.

Having set forth the mission statement for the SEC, we would then need to discuss what the SEC does well and what functions the SEC does not do well.

Finally, we would need to agree on jurisdictional limitations of the SEC, the CFTC, FINRA and FERC such that the changed effected in the SEC compliment needed changes in the overall regulatory structure of the financial and commodity markets.

Anyone who thinks one or two tweaks in the SEC will bring about material or substantive changes is sadly mistaken. The problems within the SEC and the regulatory structure of our nation’s financial markets are too broad and too complex to be solved with a few cosmetic changes.

Posted by Big Al | Report as abusive