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.