In Case You Missed It

The Need for Fundamental S.E.C. Reform

Washington, August 26, 2011 -

By David Hirschmann

Earlier this month, former S.E.C Chairman Arthur Levitt published an Op-Ed piece in The New York Times, entitled “Don’t Gut the S.E.C.”  Mr. Levitt sees only two approaches to regulatory reform when it comes to his former agency: on the one hand, retaining the status quo, or, on the other hand, in his words, “gutting” or “eviscerating” the agency. 

We are saddened that his debate about regulatory reform has become one more example of a black and white view of governmental reform.  In reality, we agree with Mr. Levitt on what is clearly the most important point:  the clear need for an effective S.E.C.

We strongly disagree; however, that the S.E.C. is somehow exempt from the basic need to adapt to changing times, or that more of the same is the right answer.  Effective modern regulators need to have the operational structure, staff skills, and technology to supervise today’s markets.  They need to be capable of quickly and efficiently detecting, and fairly punishing, fraudulent conduct.  They need to craft new regulations in an intelligent and informed manner, including analyzing and explaining the associated costs and benefits. If the problems are structural or the result of antiquated thinking, simply providing more money will not provide a solution.

Any American business that fails to adapt and modernize its operations and product lines is destined for a painful series of business reversals, followed ultimately by extinction.  The context is different, but the same principle applies to a regulatory agency.  A failure to evolve leads inescapably to ineffective regulation, scandal, and courtroom reversals.  A debate ultimately ensues about its abolishment.

It is a fact of history that great institutions often miss their cue and don’t change when it is best, but rather only when compelled to do so, if at all.  Current legislative initiatives to reform the S.E.C., including Representative Bachus’ initiative, are themselves a natural consequence of the S.E.C.’s failure to evolve under its own power.  

Scandal after scandal has proven that that the S.E.C., despite having many dedicated employees, is incapable of carrying out its mission, let alone the expanded mandates expected of it under the Dodd-Frank Act.  Indeed, one of the major flaws in the Dodd-Frank Act is its failure to fundamentally reform the S.E.C.  Simply throwing more money at the agency as a way of avoiding rather than facing the hard questions of reform is wasteful and pointless. 

Conducting an honest and thorough cost-benefit analysis as part of the rule-making process is a fundamental part of the responsible management of any organization, public or private. To suggest, as Mr. Levitt does, that requiring the S.E.C. to look at the costs of a new rule somewhat undermines its independence is illogical.  By establishing the S.E.C. as an “independent” agency, it was never intended that it would thus operate independently of responsible and effective management, and of the laws that govern operations of all other government agencies. 

This is not a criticism of Mr. Levitt and other officials that have guided the S.E.C. in the recent past.  The agency’s problems are institutional, and they transcend the individual leadership of its past Chairmen and senior staff.  We urge Mr. Levitt, and other former S.E.C. officials, to join in the difficult task of restoring this agency, with a distinguished and admirable history, to the government jewel that it once was.

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