Corporate Governance

The SEC and Responsibility for the Financial Crisis (Part 4)

By J. Robert Brown

We are discussing the editorial in the NYT ("The End of the Financial World As We Know It") that contends that the SEC is partly to blame for the current turmoil because it has excessively close relations with Wall Street.

So what is the solution? 

• Close the revolving door between the S.E.C. and Wall Street. At every turn we keep coming back to an enormous barrier to reform: Wall Street’s political influence. Its influence over the S.E.C. is further compromised by its ability to enrich the people who work for it. Realistically, there is only so much that can be done to fix the problem, but one measure is obvious: forbid regulators, for some meaningful amount of time after they have left the S.E.C., from accepting high-paying jobs with Wall Street firms.

• But keep the door open the other way. If the S.E.C. is to restore its credibility as an investor protection agency, it should have some experienced, respected investors (which is not the same thing as investment bankers) as commissioners. President-elect Barack Obama should nominate at least one with a notable career investing capital, and another with experience uncovering corporate misconduct. As it happens, the most critical job, chief of enforcement, now has a perfect candidate, a civic-minded former investor with firsthand experience of the S.E.C.’s ineptitude: Harry Markopolos.

Whatever merit exists with an attempt to limit the revolving door phenomena, the editorial gave little evidence that this is a concern.  Only one division director (Walker) joined a bank right after leaving Enforcement.  Cutler waited 18 months, Lynch waited more than a decade.  McLucas has remained with a private law firm.  The solution, however, does not fix a problem supported by the editorial.

As for the composition of the Commission, it's a make weight point.  For one thing, the nomination of Mary Schapiro, the executive director of FINRA, presumably meets the category of commissioners "with experience uncovering corporate misconduct."  As for someone with a notable career "investing capital," there is no reason to believe that this quality, standing alone, will generate any of the needed reforms.  Having said that, it is true that the Commission could use some members who have strong shareholder/investor leanings, the area left most unaddressed by the current regime at the SEC.

Full post as published by The Race to the Bottom on January 05, 2009 (boomark / email).