Article about the SEC’s weaknesses

Good morning everyone – I hope that this message finds you well!

The Wall Street Journal has a detailed piece about the Securities and Exchange Commission this morning. The gist of the article is that the SEC is too lawyerly in its approach to regulation. It also lacks a sophisticated ability to conduct its own analyses of markets and trading strategies. Take for example:

“…by many accounts, the agency is outmatched by the traders and market venues with technology that is remaking the trading world.

The former secretary of the SEC with 20 years of experience is quoted in the article as saying:

“You need the quantitative, analytical capacity that the agency has never had. You need to start looking at these issues not only as legal compliance issues, but you need to look at them also as questions of national economic policy: How do the markets truly function?”

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As I have been saying on the blog for almost a year now the financial market regulators need a massive overhaul. They also need budgetary support from an indifferent Congress, an intentionally callous Executive Branch, and an ignorant public. The approach of the SEC is to create rules and then enforce them when they are broken. This legal approach fails to take advantage of modern concepts of a healthy, proactive approach to regulation. Problems should be anticipated a priori and acted upon before they become crises. Unfortunately, this requires the attention and support of elected officials and the public and that support just hasn’t been present. However, the SEC itself has done little to inspire confidence with the resources it does have. The cost of generating new ideas about effective regulation is relatively low, yet the agency seems to lack the creative gusto to actually reinvent itself. Like many bureaucratic institutions it is steeped in musty tradition. Because there is no money to be made by the SEC and other regulators, they are far behind the for-profit entities they regulate in terms of sophistication.

Frankly, I wish that President Obama would turn his attention away from the healthcare debate and refocus on regulatory reform. Both issues are important, but the losses to the economy of an odd convoluted healthcare system take many years to unfold, whereas the losses on the financial markets due to corruption and exploitation take days to unfold.

Be well!

Jason