Like the public's
trust and confidence in Wall Street, faith in the Securities and Exchange Commission was shattered as a result of the 2008 financial meltdown. The failure of the SEC's own investigators to detect the
Ponzi scheme perpetrated by former Nasdaq chairman Bernard Madoff would have been damaging enough. But its smug unwillingness to heed the warnings of Madoff whistleblower Harry Markopolos — as well as the SEC's blindness to the lax practices of the quasi-official credit-rating agencies it oversees and its virtual irrelevance in the collapse of The Bear Stearns Cos. and Lehman Brothers Holdings Inc. — revealed the SEC to be ignorant, inept and incapable of carrying out its duties as policeman of the markets.
At the time Mary Schapiro took over as chairman a year ago, many of the betting people in Washington were willing to wager that the SEC was destined to be subsumed under the Federal Reserve.
Now, a year later, the SEC's continued existence no longer remains a question, thanks to the recovery of the financial markets, the public's short attention span and her congressional-relations savvy and bureaucratic skills.
But with its survival assured and the political climate ripe for the SEC to receive the nearly $1.3 billion requested by the president (a 12% increase over its current budget), the commission faces a new challenge: redefining its mission and then delivering.
Assuring that the individual investor doesn't get trampled by institutions and market insiders remains a priority, of course. However, with near-total institutional dominance of the securities markets, the SEC also must redefine what investor protection means.
Beefing up enforcement under Robert Khuzami has been a good first step. The enforcement unit has established teams to look into structured products and securitization, municipal securities, asset management, foreign cases and market abuses, including insider trading.
According to published reports, the SEC now wants to expand its hiring pool beyond attorneys in order to attract those with experience in the financial products that Wall Street is creating and the technology it uses.
The SEC staff now also has the authority to negotiate settlements with companies accused of violating securities laws, instead of first having to receive full commission approval.
In another sign of a new emphasis on protecting individual investors' rights, the SEC eliminated broker discretionary voting in director elections for meetings held on or after Jan. 1. Previously, brokerage firms were permitted to vote uninstructed shares in uncontested director elections, which were classified as “routine” under NYSE Rule 452.
Although this may make corporate-director elections more cumbersome, it will tend to reduce the rubber-stamping of management's board selections.
But as Americans become increasingly responsible for their own retirement security — albeit through individual retirement accounts, 401(k) plans and other institutionally managed mechanisms — the SEC should look at market and securities regulation in a new light.
Although financial markets have always provided the means by which Americans fund their retirements, market and investment risks were borne largely by corporations and other organizations that sponsored the defined-benefit pension plans providing a secure retirement for many individuals.
As DB plans disappear, individuals are assuming greater risk. Given this shift, the mission of the SEC should be clear: to regulate the markets and securities issuers for the primary benefit of the market's end-users, not financial intermediaries.
Although banks, broker-dealers and other financial intermediaries must earn a profit in order for a market mechanism to exist and function, the markets themselves don't exist to serve the intermediaries, nor should they be so regulated.
For the sake of Americans whose future rests on public financial markets, let's hope that the SEC's recent chastening has focused its attention on its core job.
