“We thought the enemy was Mr. Madoff. I think it is you.”
— Rep. Gary Ackerman, D-N.Y., in comments to Securities and Exchange Commission officials on Feb. 4
America’s love-hate attitude toward regulation found expression in President Franklin Roosevelt’s reason for appointing Joseph Kennedy — who had profited from financial manipulation in his career — as the first chairman of the Securities and Exchange Commission. Roosevelt reportedly defended his appointment by saying, “It takes a crook to catch a crook.”
In recent months observers on the left and the right have voiced their unhappiness with the SEC. On the left, critics argued that its laissez-faire regulatory approach in recent years left it unprepared to stop the brewing financial crisis. Tanner Frankel, a Boston University professor specializing in financial regulation accused the SEC of “doing as little as possible — the market will take care of it.”
On the right, opponents felt that regulators cannot effectively involve themselves in the minutiae of every financial transaction. Regulators should keep firms within safe limits and build appropriate firewalls to stop financial conflagrations.
The SEC administered seven major laws that govern the securities industry: the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Sarbanes-Oxley Act of 2002 and the Credit Rating Agency Reform Act of 2006.
SEC critics argued that the agency failed to use its regulatory power. First, they cite the failure to prosecute Fannie Mae, Freddie Mac and Bear Stearns executives and board members’ for not providing full and accurate disclosure. Secondly, the SEC reviewed public filings that contained inadequate, incomplete or opaque information. Thirdly, the SEC did not revoke the operating licenses of national regulatory credit agencies such as Moody’s and Standard and Poor’s despite their errant ratings on thousands of securities. Lastly, the SEC eliminated laws that curbed unbridled short selling.
Former SEC chairman Arthur Levitt wrote on Dec. 16 that “the regulatory structure that has been in place for the past eight decades to keep our markets free and fair may no longer be appropriate. The agency needs an office that will collect information from all of the agency’s divisions and propose inspection and examination priorities. It should identify problems such as excessive leverage and risks posed by new structured financial products. The office should answer directly to the SEC chairman and report monthly to the entire commission.”
Levitt expressed outrage over the emasculation of the Office of Risk Management, which currently has only one employee. Instead of being a sideshow, Levitt argued that risk assessment must be central to the SEC’s efforts.
Congress recently hit a roadblock when SEC officials refused to give detailed explanations to a House oversight committee about the agency’s failure to pursue Bernard Madoff, accused of engineering a massive investment-focused Ponzi scheme.
Independent financial investigator Harry Markopolos says he had provided a detailed roadmap of Madoff’s scheme. Markopolos cynically testified that the agency’s Boston regulators could not find first base in Fenway Park, and he confirmed Leavitt’s contention that the SEC lacks enough financially experienced staff to systematically investigate large-scale scams.
Budgetary cutbacks over the past few years led to an SEC staff reduction, from 1,232 full-time officials to 1,093. This undermined their scrutiny of 12,750 companies that file securities; 10,800 registered investment advisers; 4,735 investment companies; and 6,000 broker/dealer firms.
President Barack Obama’s administration gave Mary Schapiro, the SEC’s new chairwoman, a mandate to institute large scale reforms of the agency. She possesses superb credentials, being the first person to head both the Commodity Futures Trading Commission and the Financial Industry Regulatory Authority, two large, nongovernment industry regulatory bodies. Nevertheless, even supporter Sen. Charles Schumer, D-N.Y., wondered if Schapiro has what it will take, if she is “willing to take no prisoners.”
The SEC must evolve updated 21st century capabilities to execute its broad range of authority. The nation believes that unbridled greed has wrought havoc. But we do not need a crook to resurrect the reputation of the SEC, for Mary Schapiro is no Joseph Kennedy.
Originally published in the Sarasota Herald-Tribune
