The Dow Jones Industrial Average dropped 25 percent in the span of just four days during the stock market crash of 1929. The ‘29 crash was the worst in U.S. history, destroyed confidence in Wall Street and precipitated the Great Depression. The crash, the resultant financial malaise and shaken public confidence prompted calls for reform, and in 1934, the Securities and Exchange Commission (SEC) was created to restore public trust in capital markets and to oversee the conduct of those markets. Prior to the formation of the SEC, controls on issuing and trading of securities were virtually nonexistent, which allowed stock schemes and frauds to flourish. Rampant unrestricted margin trades and unreported concentrations of controlling interest led to abuses of power and market collapse. In total disregard of any ramifications, businesses, stock issuers and the exchanges essentially colluded and rigged markets to enrich themselves and their associates.
Attempting to restore order amid financial chaos, Congress passed legislation creating the Securities and Exchange Commission. The Securities Act of 1933 required public corporations to register their stock sales and make regular financial disclosures. The Securities Exchange Act of 1934 created the SEC to regulate exchanges, brokers, and over-the-counter markets, and the 1935 Public Utility Holding Company Act banned holding companies that obscured intertwined ownership.
The stated mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Among its many duties, the SEC attempts to prevent market meltdowns by requiring transparency in financial instruments and by regulating stock issuers, brokerage firms and the major stock exchanges. It prohibits certain types of conduct, such as insider trading, and enforces laws that govern the financial industry. When necessary, the SEC enforces securities laws through a variety of means, including fines, referral for criminal prosecution, revocation or suspension of licenses, and injunctions. However, the SEC’s history of fair and equitable enforcement actions has often been called into question.
The Securities and Exchange Commission is a complex independent agency of the federal government which seeks to regulate complex financial instruments and markets. To chair or sit on the commission requires requisite skills and understanding of market complexities. Individuals typically tapped for appointment to the commission have extensive backgrounds, experience and relationships directly or tangentially related to the securities markets.
Herein is the rub… those that seek to regulate the markets and protect the public are cozied up with those that are often the bad actors requiring regulation. Much as during the financial crisis that promulgated the formation of the SEC, the largest market players operate with impunity and reap huge financial rewards. One need look no further than the lack of serious enforcement action (other than fines) after the mortgage shenanigans committed by large banks that led the financial crisis of 2007-2009. The SEC regulators were and still are from the same crowd that they purport to regulate and seem to always have multiple conflicts of interest.
What a conundrum. It requires experience and skill to effectively regulate the markets and its complexities, but those with the skill and experience to effectively regulate come from the very arena that needs oversight and carry luggage crafted from conflicts of interest.
The New York Times explores what the future of enforcement portends http://dtn.fm/40pqH under the latest nominee for chairman of the SEC and the conflicts of interest revealed by his financial disclosure form.