The New SEC

It didn’t take long for the “new SEC” to begin enforcing the law and declaring war on white collar criminals that have preyed on the capital markets. A couple of weeks ago the SEC filed an insider trading civil suit against two former traders over credit default swaps trades using insider information. The SEC made it clear that this is the first of many new suits designed to ensure the integrity of the capital markets.

The SEC has announced that it wants to prevent manipulation of the capital markets but, unlike the “old SEC” lead by former Chairman Chris Cox, the new SEC will back up its words with actions. The SEC’s renewed focus on law enforcement, starting with its credit default swap enforcement action, is a welcome improvement upon its past ridiculous decision to rely upon trader self enforcement and self regulation.

I have been a constant critic of the SEC and its lack of interest in law enforcement. For more than a year I have been asking why the SEC was content to be a bystander as the securities markets were increasingly manipulated by individuals that don’t follow the rules.

The SEC’s enforcement failures under former Chairman Chris Cox are almost too numerous to list. The SEC’s failure to enforce full and fair disclosure (including Sarbanes-Oxley) led to some of the greatest corporate rip offs of all time, culminating in an almost total loss of confidence in some of the largest and bluest chip companies in America.

The SEC’s failure to enforce insider trading and market manipulation laws allowed fraudsters to steal the wealth of legitimate investors by creating self-fulfilling short positions that destroyed generations of accumulated wealth. Of course, no one will soon forget the Madoff scheme and how the SEC wasn’t able to uncover fraud despite whistle blowers providing a detailed road map that a rookie investigator should have been able to follow. The almost endless list of SEC screw-ups include the short selling fiasco, the brokerage firm leverage dust up and one accounting debacle after another. By the time Chris Cox left his position as Chairman of the SEC, the agency was discredited and dispirited.

But, apparently things have changed and the new Chairperson of the SEC, Mary Schapiro, is making quick and apparent improvements. The Agency’s credit default swap enforcement action is an obvious adjustment in SEC attitude and an effort to make sure that the capital markets are fair to all investors and not just a means for a select few on the inside to unjustly enrichment themselves. Enforcement of the short selling rules is another example of a problem that is well on its way to being solved merely by having the SEC do its job. And, the SEC’s prosecution of fund managers that seem to have lied to their investors is yet another good move by the SEC to use common sense regulatory authority.

The SEC’s importance to the integrity of the capital markets should be obvious to everyone. Chairwomen Schapiro is working quickly to fix the culture of the agency and get it back on its historical path as the capital market’s cop. Good regulation requires good regulators and Schapiro’s early results indicate that she is a good regulator who can lead a team of hard working and dedicated professionals. While the single credit default swap enforcement action isn’t enough on its own to harness the tide of lawlessness that has washed over the capital markets, it is a good start and sends a message to other miscreants about the SEC’s intentions and resolve.

Comments

[PastTense]

This just sounds like PR. If there were a "new SEC" why haven't there been any major prosecution efforts against those involved in the banking collapse? What about those "toxic waste" securities?

2009 May 25 03:51 PM

[Between The Numbers]

The SEC is too much a political body, with its decision making compromised by the affiliations of its directors. There is just too little incentive so be an effective regulatory agency. I feel that most of the time the SEC is a rubber stamp for powerful corporate interest because that is what is good for the SEC. There was a day when Eliot Spitzer was a feared man on Wall St, but I don't see anyone afraid of the SEC.

2009 May 26 02:10 AM

[Tom Armistead]

Mark, I am concerned that this article is overly optimistic, "green shoots" on regulation. The lone CDS prosecution is for insider trading occuring in 2006. Company insiders by definition are not big players on Wall Street.

Proof that the SEC has reinvented itself as a law enforcement agency would take the form of a series of prosecutions of sizable Wall Street firms for manipulation using CDS, naked short selling, and the dissemination of unfounded rumors.

Anything less is just a continuation of the old pattern, p/r prosecutions intended to appease the public.

2009 May 26 06:36 AM

[LaVern Isely]

While I'll really thrilled to see that Mary Shapiro, President Obama's SEC Chairman, is finally enforcing the rules concerning the stock market, I'm not too happy about the job that Fed Chm Ben Bernanke, a Bush appointee, and Treasury Secretary Tim Geithner, an Obama appointee, are doing with regard to the bank bailout. How did five banks get 96% of the TOXIC DERIVATIVE market? The figures that I have add up to $193 trillion for the five banks. They can talk about mark to market, then do nothing. They can talk about reinstating the GLASS-STEAGALL ACT and they should, but they do NOTHING. It just shows that the HEDGE FUND DEALERS are running Washington through their large campaign contributions at election times. I wonder if Tim Geithner's visit to China will convince them that we are going to change our ways?
Yours truly, Disgusted Middleclass Taxpayer, Public Citizen and AARP Member, LaVern Isely

2009 May 30 03:52 PM