Political pressures Look who gets chosen for the important job of SEC commissioner. Not those with established records for fighting on behalf of investors. Rather, the post routinely goes to insiders, especially those who have devoted their careers to representing financial services firms. Former SEC chairman William Donaldson, cofounder of investment bank Donaldson, Lufkin & Jenrette, is one prominent example. Below the commissioner level, directors of divisions within the agency, such as market regulation and investment management, are also chosen according to how chummy they are with Wall Street's big guys.
The speed with which SEC managers find comfortable quarters within the industry after their period of government service is powerful evidence of how seldom these professionals seriously oppose the institutions they are supposed to regulate. Paul Roye, for example, worked as a lawyer representing the fund business before becoming its chief overseer at the SEC. Meanwhile, one of his former law firm superiors, Paul Haaga, became the industry's chief lobbyist. After the fund business stumbled into the biggest scandal in its history under this duo a few years ago, Roye rejoined Haaga at mutual fund giant Capital Research.
Reliance on self-regulation The commission is ever more willing to allow the brokerage industry to self-insure, self-adjudicate (through mandatory arbitration) and even control public access to the brokerage industry's criminal and disciplinary histories. Self-regulation involves an insurmountable conflict of interest and results in thousands of instances of avoidable fraud each year.
One almost laughable example of lame self-regulation: the BrokerCheck Program, run by the National Association of Securities Dealers, the brokerage industry's self-regulator. The NASD says it "should be your first resource to learn about the professional background, registration/license statuses and conduct of NASD-registered firms and their registered brokers." Would you believe that the program does not permit a broker or firm to respond "yes" to the question of whether the broker or firm has any disciplinary matters in his or its past? Only two answers are permitted: "no" and, get this, "maybe." That's what we call industry-friendly. For all of $5,000, I put together a disciplinary database a few years ago that showed the NASD underreports brokerage industry misbehavior by about 85%. Since the NASD blocked me in court from publishing it, investors remain perilously uninformed.
Transparency The SEC has allowed the financial industry to control the content and timeliness of disclosures to the public. For example, most of the SEC's money manager investigations uncover "deficiencies," some of them involving serious misbehavior. But the commission refuses to make its findings available.
Follow-through In May 2005 the SEC staff issued a report on conflicts of interest in the pension consulting industry. The staff concluded that the industry was subject to rampant conflicts and disclosure was abysmal. Were pension sponsors who may have suffered harm ever privy to the financial information the pension consulting industry provided to the SEC? Nope. Instead the SEC issued a vague warning to pension sponsors to more carefully scrutinize the investment consultants they hire.
This agency spends $888 million a year. If it were subject to disclosure laws the SEC would have to admit it could get a lot more bang for taxpayers' buck were it not so compromised by conflict of interest.
Edward Siedle, a former SEC Attorney and the President of Benchmark Financial Services.