Those of you familiar with my published work know that I am no fan of the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA). I view those Wall Street regulators as failed institutions that are pursuing failed policies and are overburdened with many inept and incompetent managers. Despite the SEC's horrendous track record of failed oversight and compromised enforcement, the federal regulator has its staunch supporters and protectors. In the end, Napoleon's admonition has become the SEC's Gospel: If you wish to be a success in the world, promise everything, deliver nothing.
Our lives are regrettably filled with tales of the old car that we should have junked, and which broke down at the worst time possible. Then there was that relic of a boiler that finally gave up the ghost in the middle of the worst winter on record, and despite all your kicks, curses, and turns of the wrench, you froze in the house for nearly a week before the new boiler was installed. Face it -- sometimes you have to cut your losses, toss the damn thing in the garbage, and buy a brand new model. The trick is to make the change on your terms, not in response to a crisis, panic, or emergency.
The SEC is a gas-guzzling dinosaur of a vehicle whose engine warning-light went on years ago. It is a wheezing, dyspeptic boiler in our basement. Nothing good will come of this.
Senator Grassley Wants Answers
In a June 14, 2010 letter to SEC Inspector General David Kotz, Sen. Charles Grassley (R., Iowa) (the “Grassley Letter” athttp://grassley.senate.gov/about/upload/SEC-6-14-10-CEG-letter-to-Kotz-about-revolving-door.pdf ), the ranking minority member on the Senate Finance Committee, notes that
In recent reports you have highlighted problems associated with the revolving door between working at the Securities and Exchange Commission (SEC) and working in the securities industry, which the SEC is charged with regulating.
The Grassley Letter raises a number of concerns. For example, the Senator states that Kotz:
[R]ecently found that the head of the SEC’s Fort Worth Regional Office Enforcement Division played a significant role in delaying and limiting the scope of investigations that could have detected R. Allen Stanford’s $8 billion ponzi scheme. Your report found he then left the SEC and attempted on three separate occasions to switch sides and defend Stanford. In another review, your work revealed that an SEC enforcement attorney pursued an unwarranted investigation at the request of Allied Capital and later left the SEC to become a lobbyist for Allied Capital.
After citing several other reported “revolving-door” cases, Grassley then calls Kotz’ attention to the following, more recent, example:
In a more recent situation, Trading and Markets Division Associate Director Elizabeth King recently left the SEC to work for a leading high frequency trading firm, Getco, LLC. Given her former position at the SEC, this raises a number of questions about:
(1) the extent to which Ms. King was personally involved in the SEC’s review of last month’s “flash crash” and related rulemaking activities on high frequency trading,
(2) when she first had contact with Getco, LLC about the possibility of employment there and whether she recused herself from matters related to the SEC’s inquiry and rulemaking after that point, and
(3) the extent to which SEC and government-wide ethic rules will limit her communications with her former colleagues at the SEC on behalf of Getco, LLC going forward.
Accordingly, could you please (a) provide a summary of the matters your office has reviewed that raise similar revolving door issues, and (b) conduct a review of the circumstances surrounding Ms. King’s departure from the SEC and disclose the results so that Congress and the public can more accurately assess the integrity of the SEC’s operations?
Enough Is Enough
In 1997, the United Kingdom established its Financial Services Authority (FSA), which, for lack of a better comparison, is sort of the UK’s version of the United States’ SEC. The SEC was established in 1934. During the recent UK elections, the Conservative Party promised to abolish the regulatory system that was created by the Labour Party’s Prime Minister Gordon Brown: the UK’s financial markets were regulated by a tripartite system of the Bank of London, the FSA and Treasury.
The Conservatives accused Labour of enabling a regulatory system that failed to prevent that nation’s worst financial crisis since World War II – which has now burdened UK taxpayers with over $2 trillion in liabilities. Newly elected Conservative Prime Minister David Cameron described Labour's tripartite regulatory approach as "a system in which no one was looking at the big picture, no one had responsibility and authority to act and no one was effectively in charge." Even former Labour Chancellor of the Exchequer Alistair Darling criticized the “quality, skills and judgment” of the individuals charged with regulating.
The new Chancellor of the Exchequer, Conservative Party member George Osborne, has announced that he will follow through on the Conservative pledge to abolish the FSA and will replace the failed regulator with a Prudential Regulatory Authority; a Financial Policy Committee; and a Consumer Protection and Markets Agency. Initial reports are that the Bank of England will emerge with the lion’s share of powers being re-distributed from the FSA. Ultimately, the UK has thrown the baby out with the bathwater -- the FSA is destined for the dustbin of history.
Bill Singer’s Comment: There is a lesson to be learned from the UK’s abolition of its FSA, a regulatory institution that was created 63 years after our SEC but lasted only 13 years. The UK has decided that renovation of the FSA is not an option. The Conservatives have opted for demolition and new construction.
As the Grassley Letter painfully sets forth, all has not been (and still is not) well at the SEC. Wall Street's federal cop has long proven itself to be a system in which no one looks at the big picture, no one has responsibility and authority to act, and no one is effectively in charge. Time and time again, the SEC has failed the investing public because of a lack of quality, skills and judgment necessary to effectively regulate. The engine is seizing and smoking. The pipes are stone cold. It is time for post-mortems and not renovation.
Failure and folly do not deserve permanence.
This column first appeared on BrokeAndBroker.com. Bill Singer is the publisher of RRBDLAW.com and BrokeAndBroker.com, and a columnist for this magazine.
