Just a few short months ago, we met with a fairly large group of very senior public-company people…and one of the top worries that surfaced was the kind of pressure there’d be for quick regulatory ‘fixes’…with all the disruption, extra work - and all the unforeseeable ‘unintended consequences’ this would likely bring upon us..
Regulatory bodies, as we all well know, are notoriously slow at grasping the realities of complicated things like securities markets, but dangerously fast at laying blame and mandating ‘solutions’ when things go wrong: Much like a big boss your editor once had, who sheepishly admitted, after a big blunder, “like my wife always says, my instinctive style is ‘fire, ready, aim’.”
Today, however, the biggest potential threat the public-company community is facing may well come from public calls to merge the SEC with the Futures Regulators…and to divide-up most of the real ‘regulatory work’ between the Treasury Department and the Fed. As head of an SEC-regulated entity for 20 years - and as a watcher, commenter on and explicator of SEC goings on for 40+ years now – your editor has concluded that we absolutely MUST fix the SEC…and not dismember it limb by limb as the crowds in the political arena seem to be demanding.
Twelve years or so ago, the SEC was widely considered to be the very BEST Federal Agency there was. We believe that it can be – and actually MUST BE so once again…if the original, Congressionally-mandated mission to protect investors is to be carried out successfully, and if investor trust is ever to be restored. We DO have a tried and true recipe, if we choose to follow it…and to supply the needed ingredients…so here it is, for your consideration:
FIRST AND FOREMOST, WE NEED TO PLACE THE FOCUS BACK ON THE SEC’S LEGALLY MANDATED MISSION: It’s INVESTOR PROTECTION… in case, like the SEC, you’ve lost track.
Most of what the SEC has done in recent years has been simply lawyering: Look at the SEC’s recent record of ‘accomplishments’: A truly massive piling on of more and more legalistic disclosure requirements, albeit with a patronizing tip of the hat to average Moms and Pops by insisting that all of this mostly mind-boggling trivia be in Plain English…A bunch of little techie-toys like XBRL and a new version of the hopelessly dumb-from-the get-go EDGAR…A new study on the ways investors really use required SEC filings (big surprise [??]…they don’t!) and a bunch of fruitless blabbing at “roundtables” on things like proxy access…while the crooks, as we now know, were blithely pillaging the stores.
For starters, we need to make sure the new SEC understands upfront that to fulfill its real mission, real “investor protection” requires hard and rigorous work… constant vigilance, by well-informed know what they are doing, and who are dedicated to upholding the highest ethical standards too…and meaningful and well-publicized penalties when there are violations. (We were especially pleased to hear Chair-elect Mary Schapiro voice essentially the same sentiments we’d already drafted, as above, in her confirmation hearing).
STEP-TWO - OR REALLY STEP-ONE, ONCE YOU’VE GOT THE MISSION THING STRAIGHT - BROADCAST THE RIGHT TONE FROM THE TOP, AND MAKE SURE IT COMES THROUGH LOUD AND CLEAR: Arthur Levitt did it with distinction. And we feel cheered to see Mary Schapiro – also a distinguished career public servant – as SEC Chair-elect. We are also happy to see yet another distinguished career public servant – Elisse Walters - who also has hands-on knowledge about the way securities markets work - already seated on the Commission. These are the kinds of role models and mentors the SEC staff sorely need to have. Setting the right tone at the top will go a very long way toward attracting and retaining the kind of dedicated public servants the SEC had long been noted for… and now needs more than ever.
DE-POLITICIZE THE SEC: OK, we can see a certain logic in letting the majority party pick a majority of the Commission, but let’s face this too: Investor Protection is not - nor should it ever become - a partisan political issue.
But if we look at the ways the SEC has failed us in recent years, we’d have to place most of the blame on partisan wrangling over the very idea of regulation…and the incredibly foolish belief that ruled the decade - that ‘free markets’ and ‘self-regulatory organizations’ would adequately regulate themselves.
Who were the biggest malefactors here? Political appointees - mostly not-very-successful lawyers who had a few political chits to call in - and a few not-very-distinguished academics who toed the party line about “de-regulation” and basically managed to block every proposed new initiative at the SEC… none of whom had any real-world securities industry experience… except, perhaps, as professional parsers of and opinerson regulatory minutia…or as wannabe aspirers to a cushy corporate or Wall Street job.
And let’s not miss the fact that over the past ten years Congress itself deserves a great deal of the blame, for fostering de-regulation at every turn and for holding back adequate SEC funding.
ADD REAL FIRE-POWER, AND REAL BRAINPOWER AT THE TOP: We think that five Commissioners is way too small a number of top guns to adequately deal with all the issues the Securities Industry is struggling with today. We’d vote for seven – or maybe nine, like the Supreme Court. But all of them absolutely need to bring brainpower, industry know-how, a willingness to work hard, a dedication to public service - and to the mission - and unimpeachable integrity to the Commission as a whole.
MORE IMPORTANT, OVERHAUL THE ENTIRE MANAGEMENT AND MIDDLE-MANAGEMENT STRUCTURE, TO ELIMINATE POLITICAL FIEFDOMS, ROUT-OUT THE DEAD-WOOD, AND TO ADD REAL BRAINPOWER AND REAL MANAGEMENT SKILLS: Now that we think about it, we need to do away with the basically powerless “Commission” we have today – where each Commissioner has a little staff all his or her own - and where they can’t even meet with one another, except at public hearings. We need to institute a real management structure instead - with an active and able CEO, and a stellar Board of Directors in charge of a unified, professional and professionally recruited staff.
EXPAND THE SEC BUDGET SIGNIFICANTLY, IN ORDER TO HIRE STAFF WITH REAL-WORLD KNOW-HOW…THAT WILL BE COMMENSURATE IN TERMS OF SIZE AND SKILL-SETS TO THE BIG RISKS, AND THE BIG TASKS WE’RE SUDDENLY SEEING WERE OUT THERE ALL ALONG: In the year following the ENRON disaster, the SEC budget was increased by a mere fraction of the amount that then Chairman Levitt asked the Congress to award. This despite the fact that the SEC was and still is a significant net contributor to the Federal Treasury (with over $1 billion in fines and penalties alone, collected in 2007!). Few if any of the tiny amounts of new dollars granted were spent on actual inspection and enforcement activities, however: In fact, the number of fraud cases the SEC brought fell by three-quarters since 2002. Now, of course, we’re all paying trillions of times over for this politically inspired budgeting blunder.
Simply throwing money at the problem is not the solution, of course: We need a brand new, zero-based, top-to-bottom rethinking of the SEC budget…that will put most of the money where the real risks, and the real problems are, and that will focus on REAL investor protection measures. We need not just a whole new top-management and middle-management staff, we need an entirely new infrastructure, we say - that focuses most of the SEC’s budget – and most of its brainpower - on inspection and enforcement.
DEVELOP A FORMAL, RIGOROUS AND ONGOING ‘FIELD TRAINING PLAN AND PROGRAM’ FOR ALL STAFF MEMBERS; ONE THAT WILL ASSURE THAT THEY WILL KNOW WHAT THEY REALLY NEED TO KNOW IN THEIR AREA(S) OF FOCUS…AND WON’T BE SO EASILY FLIMFLAMMED: We think this little quote from whistleblower Harry Markopolos - part of an email he sent in April 2008 to Jonathan Sokobin, the SEC’s newly appointed head of the office of risk management on a matter he’d been whistle-blowing to them about since 1999 - pretty much tells it all: “Attached is a submission I’ve made to the S.E.C. three times in Boston. Each time Boston sent this to New York. Megan Cheung, branch chief, in New York actually investigated this but with no result that I’m aware of. In my conversations with her, I did not believe that she had the derivatives or mathematical background to understand the violations.” As we now know, by Bernie Madoff’s own admission to his kids, investors are now out $50 billion…And this despite the fact that, as Chairman Chris Cox recently admitted, “credible and specific allegations”[about Madoff] “were repeatedly brought to the attention of SEC staff”…which ‘investigated’ his operations multiple times, beginning as far back as1999…but which “were never recommended to the Commission for action.”
(Your editor, by the way, has had similar, repeated experiences as a whistle-blower to the SEC, in connection with the abandoned property scams where several prominent transfer agents were clearly skimming-off tens of millions of dollars that rightfully belonged to “lost shareholders” – and creating serious potential liabilities for their corporate clients, to whom they owed a duty – and whom they did not fairly inform, or share the loot with either. Guess who we were emailing initially at the SEC? None other that Eric Swanson - currently Bernie Madoff’s nephew-in-law - though no doubt, it’s a mere coincidence.
But the upshot of the little bit of investigating the Philadelphia office eventually initiated - based on another whistle-blower’s tips - led to a mere slap on the wrist, and a promise not to do this kind of ‘stuff’ anymore…and to the departure of the frustrated SEC agent in charge, when Headquarters basically blew him off too). So on to the next important ingredient…
MAKE SURE THAT SEC INSPECTORS AND ENFORCERS STOP COZYING-UP TO THE FOLKS THEY’RE SUPPOSED TO BE INVESTIGATING: ESTABLISH AND ENFORCE A STRICT THREE-YEAR COOLING-OFF PERIOD BEFORE AN SEC STAFFER LETS WORK TOGETHER TO FIX THE SEC… WHO IS AT A SENIOR ADVISORY OR POLICYMAKING
LEVEL CAN TAKE A PRIVATE SECTOR JOB: At first blush, this might seem like a counter-productive thing to do if the goal is to attract our best and brightest, but we think not: There are lots of smart, public spirited people out there who will be eager, and proud to work for an important agency that represents the highest degree of ethical and professional integrity, witness the SEC’s own former successes.
And right now, with Wall Street layoffs in the tens of thousands, there are a lot of such people with significant real world experience in the securities industry who are desperate for meaningful work, and a reasonable degree of job security…and who know exactly where and how “the bones” can easily be buried by potential fraudsters.
There are lots of older, early-retired folks too – including lots of victims of the current credit crunch, and of Bernie Madoff - who could and would bring a lot to a properly focused and properly revamped SEC – either as full time staff or as paid or honorary consultants and advisors.
Sorry to say it, but there’s only one real explanation for the massive oversights in oversight at the SEC…and the repeated failures to investigate credible allegations of Wrong doing…and that’s the desire to curry favor with the very folks the staff is supposed to be watching…coupled, it seems, with a related, SEC-wide aversion to doing any real work. Instead of trying to show how sweet and smart they are, they need to be bearing - and sometime baring – the fangs they’re supposed to have.
RECOGNIZE THAT A MEANINGFUL AND LASTING FIX OF THE SEC AIN’T ALL THAT COMPLICATED: Jesse James had this figured out decades ago, and most other thieves and fraudsters know this too: Go where the money is! Why the SEC, or the Congress haven’t been able to figure this out is beyond our comprehension… except, maybe, for the fact that doing so requires actual WORK.
ABOVE ALL…WE SHOULD NOT BE TRYING TO MERGE THE CFTC AND THE SEC, NOR SHOULD WE BE PARCELING OUT THE WORK OF ‘PROTECTING INVESTORS’ TO THE TREASURY, OR TO THE FED: At first blush, these might seem to be mighty tempting things to do, given the desire to do something… and to do it fast…Plus there’s the tempting fact that SEC Chair-elect Mary Schapiro was a CFTC Chairperson too, earlier on…and plus… we’re all damned angry at the SEC, as well we should be.
But pork-bellies or grain futures are very different kinds of creatures than “real stocks” and bonds are. Further, there clearly isn’t enough talent to go around at either agency just now, much less to wrestle with the incredibly complex, highly ‘political’ and intrinsically disruptive aspects of a merger.
As we think on it, Chris Cox was right about something here: Credit Default Swaps - and all uncovered options, we say - are actually NOT ‘securities’ as he rightly said. Although, for sure, they need some kind of regulation - as he did, rather wimpily and very belatedly suggest to Congress, to no avail – they, and countless other kinds of “synthetic equities” or prepackaged “synthetic debt instruments” are merely gambling chits, where, basically, the gamblers should, quite literally and quite justifiably, live or die on their own luck. We’re fine with leaving them to the “futures” regulators. But meanwhile, real investors should be protected - or at least loudly forewarned – that instruments like these are NOT stocks or bonds, or other securities covered under the Securities Acts. Nor should they be allowed to be cleverly disguised or marketed as such.
IN SHORT…WHAT WE MOST NEED ARE FREQUENT AND RIGOROUS INSPECTIONS – BY PEOPLE WHO ACTUALLY KNOW WHAT THEY ARE DOING – TO ASSURE THE RULES ARE BEING FOLLOWED AND THAT INVESTORS ARE BEING PROTECTED. WHAT WE NEED LEAST ARE MORE RULES AND REGS.
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