If you merely looked at the SEC’s record on enforcement, you’d conclude that it suffered from a Keystone Kops-like inability to get out of its own way. The question remains whether that outcome is the result of unmotivated leadership (ex in the safe realm of insider trading cases) and long-term budget starvation leading to serious skills atrophy, or whether the SEC really, truly, is so deeply intellectually captured by the financial services industry that it thinks industry members don’t engage in fraud, they only make “mistakes”?
It’s sure looking like the latter. We’ve railed repeatedly on the refusal of the SEC to use an obvious tool, Sarbanes Oxley, to pursue not only the massive failings of these firms to install adequate risk controls during the crisis, but also to go after obvious recent cases, namely, the JP Morgan CIO losses and the MF Global collapse.
Further confirmation comes today in the form of investor abuse and repudiation of Dodd Frank requirements that the SEC hopes to slip next week when hopefully no one will notice.
We and numerous others have railed about how absolutely awful the JOBS Act is. It’s going to do perilous little to help small businesses raise dough; in fact, the number of frauds that will arise will almost certainly raise the cost of capital for small ventures over time. The JOBS Act was a wet dream for bucket shop operators.
And the SEC seems determined to make a bad situation worse. The Consumer Federation of America, along with a number of distinguished co-singers, has written the SEC objecting to its plan to circumvention of the public comment process for issuing rules under the JOBS Act. Specifically, it plans to end a long-standing ban on widespread solicitation and advertising in private offerings (yours truly is well aware of these rules: there are restrictions, for instance, on the number of parties that can be presented a possible deal when it is not registered with the SEC). As the CFA notes via e-mail:
In the 1990s, a previous experiment with lifting the general solicitation and advertising ban led to an immediate upsurge in fraud, causing the Commission to reinstate the restriction…The JOBS Act itself requires the SEC to issue rules affecting how solicitation can be conducted and it does nothing to eliminate the agency’s existing responsibility to ensure that investors are adequately protected in private offerings
What is depressing, if you read the letter below, is that the SEC clever ruse to avoid public comment is violation of the Administrative Procedures Act. And worse, the CFA contends that the SEC is putting its finger on the weighing machine when it makes a cost-benefits assessment as mandated by Dodd Frank, ascribing far too much importance to industry compliance costs, and too little to the risks to the public.
Please read the letter in full. This section is telling:
The Commission cannot apply a less rigorous approach when analyzing the potential harm to investors and the markets from weakening investor protections, as this regulation would do, than it applies when considering the cost of regulations to strengthen investor and market protections, such as those required under the Dodd-Frank Act. On the contrary, protecting investors and promoting market integrity remain the primary responsibilities of the agency.
Actions speak louder than words. If you believe the SEC is serious about “protecting investors and promoting market integrity,” I have a bridge I’d like to sell you. And if the SEC gets its way next week, I might actually be able to pull it off.
This post was originally published at Naked Capitalism and is reproduced here with permission.