Giving the SEC Teeth

The problems at the SEC were decades in the making.

The agency is supposed to be an investor’s advocate, the chief law enforcement agency for the markets. But that has hardly been how they have been managed, funded and operated run in recent years.

Essentially the largest prosecutor’s office in the country, the SEC has been undercut at every turn: Their staffing was far too small to handle their jurisdiction — Wall Street and public Corporations. Their budgets have been sliced, and they were unable to keep up with the explosion in corporate criminality. Many key positions were left unfilled, and morale was severely damaged. A series of disastrous SEC chairs were appointed — to be “kinder and gentler.” Not only did they fail to maintain SEC funding (via fines), but they allowed the worst corporate offenders to go unpunished.

Gee, go figure that under those circumstances, they sucked at their jobs.

How hard was it for the Inspector General of the U.S. Securities and Exchange Commission (SEC), H. David Kotz to find items to critique? I am sure the two reports outlining 58 steps to improve the agency’s enforcement and inspections units are perfectly adequate. But the question I want to pose is this: Do they address a decade of neglect? Let’s start with looking at adequate levels of funding and staffing . . .

Yes, we need to overhaul how investigators scrutinize tips, plan probes, tap expertise, verify information and train employees, etc. None of these various recommendations are groundbreaking (giving examiners access to industry publications and databases? Establishing protocol for how to analyze this outside information?)

The bottom line of the SEC is this: If we are serious about corporate fraud, about violations of the SEC laws, about a level playing field, then we fund the agency adequately, hire enough lawyers to prosecute the crimes, and prevent Congress critters from interfering with the SEC doing its job.

To be blunt: So far, there is no evidence we are sincere about making the SEC a serious watchdog with teeth.

Congress sure hasn’t been. Staffing levels have been ignored, budgeting has been cut over the years. And its the sort of administrative issue that does not lend itself to bumper sticker aphorisms or tea party slogans.

The SEC doing its job correctly is about good government — like picking up the trash, having the trains run on time, or hiring quality teachers. Its not sexy, its not fun, its administrative policy wonk junk. This is something we have become increasingly lousy at doing as a society as we have become ideologically polarized. And as the government has gotten demonized, it becomes even less likely for departments to get proper funding, or to accomplish their basic goals.

Give me a good pragmatic technocrat any day . . .

Fee Collections and Spending Authority


graphic via SEC

Sources: Testimony Before the U.S. Senate Committee on Banking, Housing and Urban Affairs by H. David Kotz Inspector General U.S. Securities and Exchange Commission September 10, 2009

Written Testimony of H. David Kotz Inspector General of the SEC PDF

Originally published at The Big Picture and reproduced here with the author’s permission.

One Response to "Giving the SEC Teeth"

  1. Guest   October 2, 2009 at 8:32 am

    The only thing wrong with this analysis is that it understates the problem. Underfunding of the SEC began in the 1980s, when the agency’s budget was kept essentially flat while the securities markets grew exponentially and, with them, the agency’s workload. When, by the mid-90s, the agency’s fee income had dramatically outstripped its funding, the response in Congress was not to boost the SEC’s budget but to cut the fees. Even after Enron, when the agency did get a significant funding increase, no one took the time to look carefully at what we were asking the agency to do and what funding level was needed to fulfill those responsibilities efficiently and effectively. Inadequate funding is not the agency’s only problem, but it is part of the problem, and it is long past time we fixed it.