Three Key Questions About The Future Of The SEC And Securities Regulation
There is a new administration in Washington and potentially a new chairwoman for the SEC. But where is the agency going? Significant questions are being raised about the future of the SEC and securities regulation as the market crisis continues to unfold and scandals play out. Three key issues which will be resolved over the next few weeks and that will shape the future of the SEC and securities regulation.
Merger — should the SEC merge with other agencies? There have been repeated calls to merge the SEC with other financial regulatory agencies. Potential merger partners include the Commodity Futures Trading Commission and the Federal Reserve. In some ways, merging the financial regulators make sense. There are overlapping functions among the agencies and overlapping area of responsibilities. At the same time, each of these agencies was created with a very different focus. Each agency has regulated over the years in a different manner, but one which is keyed to its central focus.
If the SEC is to be merged with one or more of these agencies, care must be taken to make sure that the new regulator has the correct focus for the markets it will oversee and that it has the proper tools. In assessing this question, it is important that any merger or restructuring is not driven by the scandal of the moment. For example, going forward there will be congressional hearings into the Madoff matter. Those hearings will at least in part focus on why the SEC did not discover this massive fraud earlier. By all accounts the SEC failed in this regard as discussed in part here. While past failures may prove instructive in crafting better supervision in the future, recriminations are not a reason for a merger.
On the other hand, it may make more sense to have the agency remain independent. In that event, it is imperative that Congress review and reassess its authority, mission and tools.
Authority — should the SEC be given new regulatory authority? There have been a number of calls to re-evaluate the authority, mission and tools of the SEC. There seems to be little doubt that the markets have, at least in part, passed by the agency. Significant parts of the markets have, over the years, evolved in a largely unregulated fashion as Wall Street and corporate America remained ever inventive. At the same time, the SEC has in many ways been treading water, not by choice, but as the by-product of a “hands off” and “free market” approach which posited that the markets could self-regulate. Even the recent huge interventions into the markets by the Treasury and Federal Reserve have elements of this trend, as evidenced by the recent debate in Congress over what happened to the initial portion of the bail-out funds which were spent with little oversight or control and essentially in reliance on the market.
All of this suggests that a comprehensive review of the SEC’s regulatory authority in view of the current and projected market trends is in order. In conducting this review, the lessons from the current market crisis may be instructive, but are only one element to be considered. Based on current market events, for example, some have called for new regulation over hedge funds. Others have focused on credit default swaps and investment bank holding companies. These proposals, ripped from the current headlines, may be good ideas. They may not. The point is that all ideas must be carefully assessed in view of the SEC’s current authority and the markets the agency is required to police. At the same time, it is essential that these ideas must be balanced to prevent the kind of excesses reflected in recent events while permitting and encouraging innovation.
Enforcement — how can SEC enforcement be reinvigorated? The SEC’s enforcement authority has long been critical to the mission of the agency. As the scope of its regulatory authority is assessed, the ability of the agency to police the markets must also be carefully reviewed and analyzed. This analysis will no doubt be done in part by Congress in future hearings, in part by the SEC’s inspector general who is currently conducting a review of enforcement procedures and by the Commission and enforcement staff. Again, it will be easy to get lost in recriminations about what did not work in the past. To be sure, there are important lessons to be learned there. But there must be more.
Some have suggested that the key to better enforcement is more resources. That may be, but it is not the complete answer. The SEC has always had fewer resources than those it regulates. It always will. That however, does not mean there cannot be effective enforcement.
What is required is a comprehensive review of the enforcement program from the top down and the bottom up with an eye to the future. From the top, because enforcement begins with the Chairman and the Commissioners. From the bottom, because intake is critical. With an eye to the future, because the markets to be policed are ever innovative. Once this is done, a new and reinvigorated enforcement effort can be crafted in view of the Commission’s historic mission, as well as any new authority it receives from Congress.
The resolution of these three questions, which are important to the SEC and the future of securities regulation, SEC, is critical to investors and the markets. While they may not be answered in the first few days or weeks of the new administration, getting the answers right as soon as possible is key to resolving the current market crisis, protecting investors and the markets, and ensuring against a repetition of the current crisis.