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Bevis Longstreth

Bevis Longstreth

Posted: March 3, 2011 03:03 PM

Congress and the SEC's Starvation Diet


Over the past decade, the SEC's lapses in handling its responsibilities to the financial marketplace and the investing public have become common knowledge. One thinks of the damage done by short-falls in regulatory oversight of Enron, Worldcom, Citicorp, AIG, Bear Stearns and Lehman. One recalls the repeated inspections of Madoff, all to no effect. And the SEC's refusal to regulate, or support the CFTC in regulating, derivatives. And the waiver of net capital rules to allow the budge-bracket investment banks to decide for themselves how much leverage was safe and sound. And the creation of an obscenely profitable oligopoly of less than a handful of credit rating agencies, maintained at lavish cost through regulatory mandates compelling their use by financial intermediaries, to the ultimate sorrow of investors.

What isn't common knowledge, however, is the systematic starvation diet that Congress has imposed upon the SEC over decades, all the while expanding its responsibilities, which might best be described as 'unfunded mandates.' This diet, sustained over many years, deeply affected the quality of personnel and the morale of the agency. It was a chief cause of SEC lapses. And, now, with the Dodd-Frank Legislation, a large number of new responsibilities have been assigned to the SEC. And, despite the authorization in Dodd-Frank of additional appropriations, Congress is refusing to appropriate these funds or provide adequately for pre-Dodd-Frank duties, without in any way diminishing the burdens, both new and old, imposed on this beleaguered agency.

Here's how the SEC should deal with this situation. My solution is rooted in a simple principle: It ill serves the public welfare for a governmental entity to pretend to be protecting the public when, in fact, it cannot do so. A horse forced to carry too heavy a load collapses. So too an agency. Far better, in such circumstances, for the public not to be misled, not to be lulled into complacency by reliance on the Government, but rather to be informed that the Government should not be counted on as a source of protection -- in short, to be told that one must fend for one's self.

Beyond the dangerous prospect of misleading the public, trying to do with inadequate resources what one knows one cannot do creates profound problems of morale, followed swiftly by a deteriorating quality in staff. The SEC already suffers from these issues. They must not be allowed to grow larger.

With this sound principle as its guide, the SEC should review all its responsibilities in light of available funds, and decide what it can undertake with sufficient funding to assure success and what it must declare publicly it lacks the funds to undertake. This review should involve a prioritization of its responsibilities, such that its most important functions are preserved with assured funding and its least important functions are abandoned. Thus, for example, the budget for the Enforcement Division should be robust, in recognition that the presence of a hard-driving "cop on the beat" is the SEC's most fundamental duty, functioning as it can, if adequately funded and organized with talented lawyers, as the source of both punishment for and deterrent against wrong-doing. In contrast, for example, the Dodd-Frank mandate for the SEC to regulate the compensation of brokerage firms and investment advisers is a highly questionable, costly, and intrusive step into private ordering, with potential for large unintended consequences hurtful to the public interest.

Agency review of its priorities will uncover many other areas within its statutory responsibilities that pale in importance to others. By taking a principled stand in regard to serving the public interest well, or not at all, the SEC will not only capture the country's attention, a necessary pre-condition to bringing Congress to its senses, but restore in the SEC its former spirit and pride in being among the best agencies in Government.