( SEC = Securities and Exchange Commission )
The >SEC claimed< if it only had more money to spend it would be able to catch bad guys like Bermie Madoff.
But if they get more money will they really hire more hard-working do-gooders or just give themselves bigger bonuses because they are working so hard with limited resources??
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The Securities and Exchange Commission somehow failed to stop the likes of Bernie Madoff before he was accused of fleecing investors out of billions of dollars. But never fear, the SEC staff has divined the problem: not enough warm bodies, taxpayer money and computers.
For this exercise in denial we refer you to the "Study on Enhancing Investment Adviser Examinations" released earlier this month under the Dodd-Frank Act. The SEC was told to review how frequently investment advisers are examined; consider the potential benefits of a self-regulatory organization; and examine the overlap between broker-dealers and investment advisers.
That's sensible enough. The investment advisory business is booming and the SEC has struggled to keep pace. Between 2005 and 2010, the number of advisers the SEC regulates grew to 11,888 from 9,023 and assets under management increased to $38.3 trillion from $27.3 trillion. Most big broker-dealers are also now dual-registered as investment advisers. Meanwhile, the Office of Compliance, Inspections and Examinations staff dedicated to examining registered investment advisers and investment companies fell to 460 last year from 489 in 2005.
The SEC claims this paucity of people is due to lack of funding, but it's hard to see how. After the Enron scandal, Congress more than doubled the SEC's budget. Last year, it reached around $1 billion. So where is all that money going, if not to overseeing the people who sell Americans investment advice?
The short answer is: the Division of Enforcement. As Yale Law's Jonathan Macey has pointed out, the SEC is funded by Congress and its performance is measured by politicians and public opinion. Everyday policing of investment advisers doesn't make headlines, but filing big lawsuits (against the likes of Goldman Sachs and Bank of America) and netting big settlements does. As a result, the SEC inspected only 9% of registered investment advisers in 2010.
According to the SEC, all this would be fixed if the agency had more money, people and technology. We've heard this plea before, as we also have every regulator's preferred solution: "user fees," in this case on investment advisers. The SEC claims such fees would provide "scalable resources" and the ability to train its staff better. Or, to put it another way, a never-ending source of SEC funding, regardless of performance.
The idea of having the industry regulate itself—at its own cost—makes more sense, although it's not a perfect solution. The Financial Industry Regulatory Authority (Finra), which looks after broker dealers, enjoys the force of law and is overseen by the SEC. It too is a bloated bureaucracy, but at least it manages a 55.5% inspection rate of its members. Finra wants to add investment advisers to its umbrella.
The SEC doesn't like this idea. Remarkably, this month's report claims that user fees "may be a less expensive option" although the SEC staff "has not evaluated the potential start-up or operational costs of an SRO [self-regulatory organization]." The report also warns that the SEC may have to devote "substantial resources" to overseeing an SRO and may not always have those resources at hand—another plea for funds.
Lost in this money and power grab is any introspection about why the SEC has failed repeatedly in its core mission to protect investors. Rather than make one more lunge for more money, the agency could profit from first inspecting itself.
This is a classic and common example of how a reasonable sounding idea turns into a all but useless government bureaucracy. It seems reasonable even to small government conservatives that the federal government should have some way to police fraud, theft and fiduciary malfeasance by people in the interstate investment business. I dare say that even many libertarians would view this as a valid function of the federal government.
Then the government does what the government does, and it creates a regulatory framework and a bureaucracy to enforce this framework and add many more layers of regulation to this framework. Of course there is overlap and competition with other bureaucracies with similar mandates like the Federal Reserve (which deserves its own thread for its many huge problems), FDIC, and numerous other banking, futures, insurance, credit union regulators and so forth at the federal level as well as the state level. There are varying degrees of redundancy and turf battles, and the industries being regulated hire compliance experts and lawyers and lobbyists (often from the regulatory agencies themselves) to figure out the most profitable ways to achieve compliance and game the various systems. The regulators and the industries they are regulating tend to develop "close relationships". This pattern repeats itself in every regulatory structure that I am familiar with including the EPA, OSHA, MSHA, and most notoriously the now renamed MMS of the Department of Interior that was literally in bed with the oil industry as well as being responsible both for collecting revenues from federal oil leases and regulating environmental and safety aspects of the same leases. I'm confident that the game tends to work the same way for the USDA, FDA, and numerous other regulatory systems. BATFE is a little odd because it's both a regulatory and law enforcement agency. I'm not sure how to describe the DEA and BATFE functions and bureaucracy besides weird, ineffectual, and ham fisted. The general interaction between local, state, and federal law enforcement is pretty convoluted too.
Suffice it to say "regulatory capture" seems to be a pretty universal problem, and when combined with the bureaucratic shortcomings of federal government we have numerous federal agencies that we pay billions and billions of tax payer dollars to every year that are almost entirely useless. They also tend to wind up as part of much larger bureaucracies that don't think they are all that important. For example, MSHA and OSHA are part of the Department of Labor which has a budget of around $41,000,000,000 a year, OSHA and MSHA combined have a budget of less than a billion a year (off the top of my head). What does the DoL do with the other $40,000,000,000 a year that is so much more important that mining and work place and construction safety?
Of course every bureaucracy has the same solution for it abysmal failure. "Give us more money, more autonomy, and more power, and we will do a better job."
I have a hard time accepting that response to gross ineffectiveness and mismanagement.
The SEC's utter failure to catch the Madoff fraud is compounded by the fact that other industry professionals basically handed the SEC grounds for further investigation on a silver platter as early as 2000.
Fees, Even Returns and Auditor All Raised Flags
Why the SEC Missed Madoff’s Con
I think it's also telling that the SEC can't even manage itself. Why would anyone think that they can meaningfully regulate a multi-trillion dollar market place of staggering complexity when they can't even control perjury and malfeasance in their own organization?
SEC Report: Employees Browsed Porn, Ran Private Businesses
I don't think the previous administration is blameless in all of this, but I think the trend noted below points out how politicized these bureaucracies can be.
I'm deeply skeptical that the creation of yet another bureaucracy for consumer finances and thousands of pages of new laws that were largely co-written by the financial services lobby are going to do much, if anything, to really protect consumers.
Primer: Six Things Happening Right Now With Financial Regulation
I predict that the CFPB, Dodd Frank in general, and the latest bureaucratic restructuring will be every bit as meaningless and ineffectual as the SEC.
I hope the links are helpful.
I'm bored. Is it flamewar time yet?
Mark your calendar- I agree with BT on this. I feel the SEC should have been gutted and overhauled ages upon ages ago. I'm all for federal oversight of corporations- I'm no fan of corps- but the SEC is a wheezing old rent-a-cop trying to chase down a kid less than half his age on a skateboard the vast majority of the time.
Mark your calendar- I agree with BT on this. I feel the SEC should have been gutted and overhauled ages upon ages ago. I'm all for federal oversight of corporations- I'm no fan of corps- but the SEC is a wheezing old rent-a-cop trying to chase down a kid less than half his age on a skateboard the vast majority of the time.
Wow! ;)
It seems like some of the bureaucratic redundancy could be eliminated through consolidation of most or all of the federal financial regulatory groups and laws, but if DHS, the patriot acts, and the reorganization of law enforcement and intelligence post 9-11 give us an example of how the federal government consolidates and reorganizes its massive and ineffectual bureaucracies then I find it hard to hold out any hope.
Likewise, a reasonable argument could be made that organizations like the SEC or the old MMS were lean on resources, but it's hard to justify more spending on organizations that have such profound systemic failings.
Education seems like a good example of this to me. We spend more and more money on a failing system without making meaningful changes to that system. The end result is that we have an education system that is both very inadequate and very expensive.
Mark your calendar- I agree with BT on this. I feel the SEC should have been gutted and overhauled ages upon ages ago. I'm all for federal oversight of corporations- I'm no fan of corps- but the SEC is a wheezing old rent-a-cop trying to chase down a kid less than half his age on a skateboard the vast majority of the time.Wow! ;)
It seems like some of the bureaucratic redundancy could be eliminated through consolidation of most or all of the federal financial regulatory groups and laws, but if DHS, the patriot acts, and the reorganization of law enforcement and intelligence post 9-11 give us an example of how the federal government consolidates and reorganizes its massive and ineffectual bureaucracies then I find it hard to hold out any hope.
Likewise, a reasonable argument could be made that organizations like the SEC or the old MMS were lean on resources, but it's hard to justify more spending on organizations that have such profound systemic failings.
Education seems like a good example of this to me. We spend more and more money on a failing system without making meaningful changes to that system. The end result is that we have an education system that is both very inadequate and very expensive.
I do think that the SEC was running lean on people, if not money. I would only give them more money if this was going to result in new hires that would help them fix their personnel problem.
I do think that the SEC was running lean on people, if not money. I would only give them more money if this was going to result in new hires that would help them fix their personnel problem.Mark your calendar- I agree with BT on this. I feel the SEC should have been gutted and overhauled ages upon ages ago. I'm all for federal oversight of corporations- I'm no fan of corps- but the SEC is a wheezing old rent-a-cop trying to chase down a kid less than half his age on a skateboard the vast majority of the time.Wow! ;)
It seems like some of the bureaucratic redundancy could be eliminated through consolidation of most or all of the federal financial regulatory groups and laws, but if DHS, the patriot acts, and the reorganization of law enforcement and intelligence post 9-11 give us an example of how the federal government consolidates and reorganizes its massive and ineffectual bureaucracies then I find it hard to hold out any hope.
Likewise, a reasonable argument could be made that organizations like the SEC or the old MMS were lean on resources, but it's hard to justify more spending on organizations that have such profound systemic failings.
Education seems like a good example of this to me. We spend more and more money on a failing system without making meaningful changes to that system. The end result is that we have an education system that is both very inadequate and very expensive.
I think the problems are deeply systemic, and I think the legislatures unwillingness or inability to make meaningful changes is the core failure for many of these bureaucracies. Dodd Frank added ~ 2300 pages of law and created yet another somewhat redundant bureaucracy and an unknown (but presumably massive) amount of regulation originating with that new bureaucracy. Frankly I don't think that legislators and their staffs understand the staggeringly complex web of financial law and regulation. I just don't see people on either side of the aisle who can wrap their minds around the enormity of these issues as well as the vast minutia of the specifics. This is further complicated by the long term vacillations caused by major shifts in regulatory methodology of appointees of various administrations. The wildly shifting approaches are often litigated and become part of case law. The legislative (or black letter) laws, the case laws, and the huge shifting bodies of regulations evolve into a more increasingly bizarre morass of rules with every passing year. It really is a compliance nightmare, but the huge firms don't really fight to simplify the system of law and regulation because they have the resources for lobbyists, lawyers and costly compliance divisions that smaller competitors can't match. IMO this gives the "too big to fail" outfits a huge competitive advantage in their ability to game the system and discourage competition. I think this is a deeply unhealthy situation. When this situation is combined with the precedents of bailouts and massive public and private debt I think it's a recipe for a truly global disaster.
I think the problems are deeply systemic, and I think the legislatures unwillingness or inability to make meaningful changes is the core failure for many of these bureaucracies. Dodd Frank added ~ 2300 pages of law and created yet another somewhat redundant bureaucracy and an unknown (but presumably massive) amount of regulation originating with that new bureaucracy. Frankly I don't think that legislators and their staffs understand the staggeringly complex web of financial law and regulation. I just don't see people...I do think that the SEC was running lean on people, if not money. I would only give them more money if this was going to result in new hires that would help them fix their personnel problem.Mark your calendar- I agree with BT on this. I feel the SEC should have been gutted and overhauled ages upon ages ago. I'm all for federal oversight of corporations- I'm no fan of corps- but the SEC is a wheezing old rent-a-cop trying to chase down a kid less than half his age on a skateboard the vast majority of the time.Wow! ;)
It seems like some of the bureaucratic redundancy could be eliminated through consolidation of most or all of the federal financial regulatory groups and laws, but if DHS, the patriot acts, and the reorganization of law enforcement and intelligence post 9-11 give us an example of how the federal government consolidates and reorganizes its massive and ineffectual bureaucracies then I find it hard to hold out any hope.
Likewise, a reasonable argument could be made that organizations like the SEC or the old MMS were lean on resources, but it's hard to justify more spending on organizations that have such profound systemic failings.
Education seems like a good example of this to me. We spend more and more money on a failing system without making meaningful changes to that system. The end result is that we have an education system that is both very inadequate and very expensive.
Not to get conspiracy theorist or anything, but I do think corporations have been headhunting in the SEC for quite some time now- taking the wheat and leaving the chaff, as it were. It could be why the organization is so poorly run.
Madoff got away with it for so long partially due to his connections with SEC commissioners over the years. He was the Chairman of the Board of the NASD so it was pretty obvious they weren't going to look too closely at his dealings either.
SEC chiefs are made up of insiders in the industry as are most of the commissioners in any Federal administration. I would not be surprised if low level SEC employees were curious about his dealing and any investigations into his dealing were quashed by higher ups.
The basic problem with the way all of the Federal regulatory agencies are structured is that the commissioners who run them have more to gain than to lose by coming after private industry, after all these are the same people who will one day employ them. Many of them go back and forth between private industry and government positions.
Look at the gulf oil spill you will see the same malfeasance on the part of the Minerals Management Service. There have been dozens of reported stories about the way the Fed mishandled the Financial Crisis. Keep looking and you will see it in all of the agencies designed to "protect the public". It is a systemic problem.
Also, this.
Not to get conspiracy theorist or anything, but I do think corporations have been headhunting in the SEC for quite some time now- taking the wheat and leaving the chaff, as it were. It could be why the organization is so poorly run.
That's part of the "close relationship" I mentioned in my first post. I think there is a bigger disparity in SEC salaries and the very significant compensation available to compliance managers in upper levels of financial services.
So much about these various government agencies is run with such staggering incompetence, corruption, stupidity, graft, laziness, and waste that it's hard to know where to begin. We aren't just talking about a few bad apples in most of these outfits either. There is usually a culture of waste, laziness, and corruption deeply ingrained at every level of the organization. I'm sure there are folks who try to do some good in these organizations, but organizational change is very difficult to achieve in organizations that constantly resist accountability and improvement.
The corruption and brutality in many law enforcement agencies is a good example of how difficult organizational change is to achieve.
I seriously doubt that Detroit's police department has gotten much better after the Ayiesha Jones shooting was swept under the rug.
If it's that hard to reform an organization the size of the Detroit PD, imagine what it would be like trying to fix the DEA or OSHA or the USDA.
These organizations fail on such a massive scale it's hard to know where and how to start fixing them piecemeal, and it's not just a couple of these organizations that are utter failures either, and it's not just federal regulatory agencies that replicate these patterns of failure and corruption. This goes on at all levels of government that I have seen from local utilities and education contracting and zoning to military contracting and USAID. The culture of failure and corruption is pervasive.
Ah, it is time to savor the irony.
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If a company’s financial reporting were so bad that its auditor had pointed out significant weaknesses in its accounting for seven years running, the Securities and Exchange Commission would most likely be all over it.But what if the company were the S.E.C. itself?
Since the commission began producing audited statements in 2004, the Government Accountability Office has faulted its reporting almost every year. Last November, the G.A.O. said that the commission’s books were in such disarray that it had failed at some of the agency’s most fundamental tasks: accurately tracking income from fines, filing fees and the return of ill-gotten profits.
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Sadly predictable, I would have been shocked if it were any different. Of course these idiots don't get fired or prosecuted, they just get raises, promotions, and build up seniority.
I think it's tragic that millions of Americans are naive enough to think that their billions in tax dollars provide them with some protection.
I wonder how much worse Obama's shockingly stupid new set of laws bureaucracies will make the whole situation.
Well I certianly agree that tinkering with such a fundamentally broken system is inherently useless. The problems with the regulators that oversee the financial system is completely systemic.
Possibly starting again from scratch might work - or it might not - but in reality the organizations are pawns of the people and corporations they are meant to oversee because of the culture at the root of the system itself. The American people need to have a fundamental shift in their view of the value of regulation in the first place before there will be any will to put in place regulators that actually want to do their job and that shift would need to be quite strong because there are powerful corporations that have a vested interest in keeping the system in place - so the voters would have to overcome the fact that the politicians like the kick backs that corps pay them and they sure like the money they donate to their coffers. Meanwhile the industry lobby groups would be filling the airwaves with...'A vote for regulation is a vote for communism'.
The corporations themselves are the major beneficiaries of the current system. No corporation can guarantee that all its members are going to manage to avoid some major blow up - but, when that happens, all the other players in the industry can say 'don't blame us for that naughty bad company's failure. It was the regulators failed to do their job...its not the fault of the corporations in our industry - its the governments fault'. At this point regulation is basically an insurance product for corporations. To weak to actually effect their behavior but the perfect scape goat when something does go wrong.
I still think this will end badly.