The SEC Is Lost in the Political Wilderness. It Is a Good Time to Remember Its Mission

The SEC’s own website could not be more clear:

The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

In a democratic republic like ours, the pendulum of partisan politics swings back and forth, from one political extreme to the other. Usually, the middle proves to be a reasonable place. Administrative agencies like the SEC are staffed by professionals with long tenures, working in a system designed to insulate them from the brunt of partisan politics. Even so, it would be ludicrous to pretend that the people at the top don’t drive policies that percolate through the system. As balanced as the fine words of the SEC’s mission sound, there are very different ways to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”

We are witnessing another swing of the political pendulum at the SEC with regard to enforcement. As the pendulum swings back from the clearly overzealous and probably unconstitutional “no broken windows” enforcement policies of Mary Jo White and Andrew Ceresney,  we should avoid overshooting the reasonable middle place and swinging to the overly lax “let the mice play while the cat’s away” enforcement style that brought us the Great Recession (see How A Theory Of Crime And Policing Was Born, And Went Terribly Wrong for NPR’s take on the original “no broken windows” policy.)

The most rational and effective mission for the SEC would be to return to making sure that all players in the public markets tell the truth in consistent, standard and comprehensible ways. When real crimes are committed by real people against real victims, the agency has no choice but to police “behavior.” However, this doesn’t happen as often as the agency wants you to believe. What is important is that we recognize that primarily policing disclosure, and not behavior, has proven to be a savvy way to balance the costs and benefits of regulatory oversight with the cost and benefits of caveat emptor capitalism.

The skewed and broken justice we have seen from the SEC is a result of a noble but flawed attempt to make the SEC more “prosecutorial” in policing bad behavior. Securities laws can be very vague and virtually impossible to define outside of a “know it when you see it” standard.  In the hands of a prosecutorial (as opposed to justice-seeking) agency, this standard can tip into the kind of kafkaesque witch-trial justice we have seen from the SEC.

We have just come through a period in which the biggest and wealthiest financial firms could turn over billions of dollars of their shareholders’ money in the form of fines to buy off the government, avoiding prosecution of specific individuals in those firms for securities violations or even crimes. Who could blame the CEO of a big financial firm for turning over vast amounts of someone else’s money to save his or her bacon?  The SEC brought in hundreds of billions of dollars this way over the last decade. The agency made lots of money for itself and the U.S. treasury, but it was a judicial abomination. To maintain the “street cred” necessary to scare big finance into turning over vast sums, the SEC went after hundreds of pissant offenders, jamming them into an in-house, self-policing, administrative justice system that had no intention of ever losing a case.

Once the administrative branch and Congress itself came to understand the gravy train this approach represented, the system went into overdrive. Suddenly, every big financial firm around was hit by the enforcement division. Somehow, the individuals within those firms seemed to always dodge the bullet. By dishing out vast amounts of their shareholders’ wealth, the individuals under attack walked away. And small cases were prosecuted to the full extent of the SEC’s impressive power.

Here’s what I fear: America has finally figured out that the SEC was out of control and had become an extortion racket. We have a president who campaigned on a promise to “drain the swamp.” But the opposite of too-prosecutorial has historically been too-lax. And too-lax would be just as much of a disaster, only in the opposite direction.

America’s securities markets and its regulatory bodies used to be the world’s envy. They really did “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” The genius of the agency was the understanding that both innovation and prosperity are frequently messy. Lawyers are not trained to understand finance, and they frequently don’t.  We understood the impossibility of the government winning an arms race with a healthy and innovative financial services industry.  But that requires regulators who like the industry! We need hard-nosed referees, not ass-kicking G-Men, overseeing our financial future. The New York City police department’s “no broken windows” policy ultimately became a humiliation for the city and was dismantled. It was unfair and punished the people least able to defend themselves, innocent or guilty.

Let’s agree to prosecute real crimes done by real people against real victims. Unless we have one of those, let’s stick to the mission: focusing on disclosure, not behavior. This has proven to be a useful way to balance the need for regulation with the dynamism of caveat emptor capitalism.


Author: Eric D. Wanger

Eric has nearly 30 years of experience as a creative and entrepreneurial professional in roles ranging from general management, team leadership and project management to technical rolls in IT, software development financial services and law. He has run business units, managed teams and delivered projects for established global enterprises and as the founder of a number of startups. Over his nearly 30 years at work, his job titles have included Board Member (public, private and non-profit), President, Founder, Chief Operating Officer, Director of Research, Chief Investment Officer, Fund Manager, Software Developer, Securities Analyst, Web Designer, Systems Integrator, Investment Advisor, Fundraiser, Consultant and Attorney. As a software consultant, cloud based, mobile app software as a consultant to one of the world’s leading electronic medical records companies (Cerner). As Chief Investment Officer and Director of Research for a startup financial services firm (Wanger OmniWealth, LLC), he developed a proprietary, risk-based holistic reporting platform for wealthy families and a set of allocation models based on it. He has developed automated trading systems for equity and equity ETF's. Between 2002 and 2013, Eric served as a portfolio manager of the Long Term Opportunity fund (small/micro-cap equities), the Alternative Fixed Income Fund (blend of exchange traded and privately negotiated debt) and as the strategist and founder (with Ralph Wanger) for the Income and Growth Fund (multi-asset class dividend strategy). Eric was a senior investment analyst at Barrington Research Associates (Chicago) covering technology and business services. Prior to that, Eric was a software, communications, and technology analyst for the Edgewater Funds, a private equity/venture capital firm with over $1 billion under management. Before joining Edgewater funds in 2000, Eric worked in Silicon Valley providing consulting, training, and software development to early-¬stage firms. Between 1991 and 1996, Eric was a principal consultant at EDW, Ltd, a firm he founded to provide software development, training in rapid software development techniques (NeXT), and systems interoperability consulting services for large multi-vendor and distributed computer networks. EDW's clients included such companies as Fannie Mae, MCI, Swiss Bank Corp (UBS), Chrysler, Merrill Lynch, Apple Computer, Stanford University, and The Acorn Funds. Eric received his J.D. from Stanford Law School and is a member of the California Bar. He was co-founder and managing editor of the Stanford Technology Law Review. Eric was awarded a National Merit Scholarship in 1981. He holds a B.S. in Mathematics from the University of Illinois at Urbana-¬Champaign and received a Chartered Financial Analyst designation in 2005. Eric lives in Chicago with his three children and a fat English Labrador retriever named Casper. He enjoys classical and jazz piano, hiking and aviation. He is an instrument rated pilot. Eric serves as a trustee for the Acorn Foundation and is active at Chicago’s Museum of Science and Industry.

One thought on “The SEC Is Lost in the Political Wilderness. It Is a Good Time to Remember Its Mission

  1. Eric: It was nice hearing from you. Shame you have been so lazy that you never went to school, got a job or can point to an accomplishment. Will call when I get back in June. Keep well. Eddie Schwartz


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