As the Senate continues debating legislation to reform the financial regulatory system, House Oversight and Government Reform Committee Ranking Member Darrell Issa (R-CA) has issued a new report examining a wide range of regulatory and management failures at the Securities and Exchange Commission (SEC), and offering recommendations for reform that are currently lacking in the Senate’s bill.
The SEC has come under intense criticism of late, especially with the release of reports by the Office of Inspector General (OIG) finding that the Commission failed to act on overwhelming evidence of the massive Ponzi schemes orchestrated by Bernie Madoff and R. Allen Stanford. Rep. Issa’s report connects these and other recent scandals to a host of systemic problems that are hindering the SEC’s regulatory effectiveness. For example:
- Outdated disclosure technology:
“The Commission’s securities disclosure processes are technologically backward. It reviews corporate filings manually, using printouts, pencils, and calculators. It has never developed the ability to perform large-scale quantitative analysis to find fraud. Commission staff use Google Finance, Yahoo! Finance, and other commercially-available resources to analyze corporate filings. If the Commission had a robust database of the financial information filed by its registrants, it could automatically prioritize the thousands of tips and complaints it receives. But no such database has ever been constructed.”
- High-profile fraud uncovered mostly by outsiders:
“Auditors, journalists, and academics – not Commission investigators – have led the pursuit of the highest-profile frauds, including Enron and Worldcom....Despite conspicuous advantages – its law enforcement powers, its investigative resources, its nationwide vantage point, and its mandate to scrutinize detailed filings by public companies, broker-dealers, and other players in the financial industry – the Commission seems unable to match these efforts.” (For more on this, check out POGO’s recent blog post on the key role whistleblowers play in uncovering corporate fraud.)
- Failure to implement reforms or hold wrongdoers accountable:
The report cites an investigation by POGO which revealed that the SEC has failed to act on hundreds of recommendations made by the OIG in recent years. It also mentions the fact that the SEC has declined to fire any of the 33 employees and contractors who were caught viewing pornography on agency-issued computers.
- Lack of collaboration between offices:
“The Commission suffers from an acute 'silo problem,' which has been admitted by former Chairmen, current and former commissioners, senior staff, and the SEC Inspector General. The Commission is divided into five operating divisions and sixteen independent offices – all but three reporting directly to the Chairman. The Commission’s fragmentation into operational silos has devastating effects on collaboration, encourages uninformed rulemaking, prevents effective IT investment, and generates bureaucratic rivalries.”
- Too many lawyers, not enough management and finance experts:
“The Commission’s lawyer-heavy approach to regulation and enforcement has discouraged creativity, devalued management skills, and damaged its expertise in the financial products and industry that it regulates.”
The report offers a number of suggestions for what Congress can do to address the systemic failures at the SEC: simplify the Commission’s structure; insist that Chairman Schapiro appoint a chief operating officer to oversee day-to-day operations; conduct investigations and hold hearings to examine the Commission’s internal culture, staff incentives, and processes for hiring and firing employees; require the Commission to overhaul, update, and simplify its securities disclosure rules and forms; and mandate an independent study of the Commission’s mission, organization, and workforce.
We applaud Rep. Issa for honing in on the systemic problems that are hindering the SEC’s ability to ensure market integrity and protect investors from securities fraud, and we hope the Senate has a chance to review the report’s important findings before passing its legislation to overhaul the financial regulatory system.
At the same time, we strongly urge Congress to focus its efforts on making reforms within the SEC, rather than giving any additional authority to private self-regulators such as the Financial Industry Regulatory Authority (FINRA). POGO believes that FINRA suffers from a basic lack of transparency and accountability, and shouldn’t be trusted with protecting the investing public given its incestuous relationship with the industry it is supposed to be regulating.
Stay tuned in the weeks ahead, as POGO will be offering further evidence of the problems identified in Rep. Issa’s report.
-- Michael Smallberg