‘Self Funding’ the SEC
Wall Street’s chief cop has done an awful job policing its charges. This was due to a combination of incompetence, structural deficiencies and malignant (not benign) Congressional neglect.
Ann Woolner has a fascinating, counter-intuitive idea to reform the SEC. Give the agency more to do and freer rein. Oh, and let it fund itself.
“The Senate version of the optimistically named Restoring American Financial Stability Act would let the agency fund itself with the fees it collects from registrations and transactions. It’s an idea that SEC Chairman Mary Schapiro advocates and Senator Charles Schumer, a New York Democrat, has pushed.
The downside is that it would remove leverage that Congress and the president have over the SEC by keeping them away from the agency’s purse strings. As with the Federal Reserve, SEC budgets would still be submitted to Congress, but lawmakers couldn’t cut them.
If the agency is ever going to have the resources to catch up with the growing size and evolving sophistication of the financial markets, it has to have more money and a way to protect itself from the ever-swinging political pendulum.”
I like the idea. I also like the idea of paying SEC staff bonuses based on the fraud they uncover, monies recovered for investors, and fines. But there needs to be a balance so that investigators aren’t only pursuing the home run cases.
There would also need to be some sort of mechanism to counter-balance the SEC if it ever became a runaway freight train of unjust fines — but we can cross that bridge when we get to it.
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Previously:
SEC: Defective by Design? (March 18th, 2010)
http://www.ritholtz.com/blog/2010/03/sec-defective-by-design/
SEC: Regulatory Capture Hard at Work (March 18th, 2010)
http://www.ritholtz.com/blog/2010/03/sec-regulatory-capture-hard-at-work/
Source:
Go Fund Yourself, Congress Ought to Tell the SEC
Ann Woolner
Bloomberg June 16 2010
http://www.bloomberg.com/apps/news?pid=20601039&sid=a9C_zQpvH1Qs
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June 16th, 2010 at 9:55 am
One of the criticisms of the Minerals Management
Service, the regulator overseeing BP’s activities in
the Gulf, was that it collected revenues from the industry
it was charged with overseeing at the same time it was
responsible for overseeing that industry. And that’s why
these functions are now being broken up. If the SEC
self-funds, won’t we have the very same problem? Be careful
what you wish for.
June 16th, 2010 at 9:58 am
BR, you have nothing to worry about vis a vis the SEC going “runaway.” The SEC is and always will be like the US Army Rangers in Mogadishu–a brave cohort of 100 soldiers fighting for their lives against a city of 2 million armed terrorists (Wall Street/bankers/stock market traders).
If you don’t believe me, just look at the financial regulatory reform bill. The army of bank lobbyists descended on Washington, and, as expected, every few hours we are treated to another announcement that another element of regulation has been weakened to meet the banking industry’s demands.
June 16th, 2010 at 10:08 am
Bad idea. Unconstitutional. Congress should TAX financial transactions and use some of that revenue to adequately fund and oversee the SEC. The balance of the revenue raised by the transaction tax can go to deficit reduction and/or other pressing budgetary needs.
June 16th, 2010 at 10:09 am
@franklin411 – what could possibly be the risk with allowing the SEC to be a “runaway freight train” to collect fines? it will still take place in the rule of law won’t it?
they should add one more item – prison time for fraud. how is it a 15 year old black kid who robs a store with a gun on his first offense and steals, say, $500 and he gets 10+ years and a “white collar” criminal gets a slap on the wrist for stealing millions?
June 16th, 2010 at 10:10 am
@franklin411 – forgot to say i agree… and that your point of the financial reform being watered down – the SEC should be allowed to “error” on the site of becoming a runaway freight train.
June 16th, 2010 at 10:21 am
When SEC get “bonuses” on the fraud they uncover, who decides? Much of dealings defy understanding for their complexity. What jury would believe a prosecutor who personally benefits with Large Money Payoffs for a conviction. Wall Street chief executive’s behavior show that people will do anything, including destroying their own corporations and the society they live in, if the bonuses are big enough. There are plenty of people who will do honest work for honest pay, if the government would hire them and support them in doing their jobs. The Bushies and their ilk never intended anyone at the SEC to do anything, and that is the regulatory behavior that we got.
June 16th, 2010 at 10:36 am
@solanic
I watched a Western yesterday afternoon where the townspeople hired a new marshal. The pay was $200 a month plus $2 per arrest. My first thought was “I’d arrest pretty much anyone for anything so I could maximize my $2 a head!”
So that’s the danger of a runaway train. But in order for that danger to be even remotely realistic, the marshal would have to have more power than the townspeople. In the SEC vs Wall Street case, it’s Wall Street that has more power. So while I understand BR’s theoretical concern about a runaway train, I don’t see it as being in any way a practical concern.
June 16th, 2010 at 10:42 am
If the SEC funds itself based on registrations and transactions wouldn’t that give the agency a big incentive to become like a combination of the new American Stock Exchange (“The Scamex”) by encouraging companies to register and file and a broker out to churn your account since the agency would want increased volumes on all markets?
June 16th, 2010 at 10:53 am
@franklin411 Sometimes I wonder if English is my first language. :-)
Thanks to what looks like a lack of real financial reform – let the new marshal go crazy and then reign him in.
Put the risk on the evil side of Wall Street instead of the risk on our side.
June 16th, 2010 at 10:55 am
counter-balance the SEC if it ever became a runaway freight train of unjust fines — but we can cross that bridge when we get to it.
Heh heh.
I’ll go one bettter and suggest that SEC also be allowed to participate in the proceeds of property auctions involving criminal RICO like other federal law enforcement agencies.
See e.g., USDOJ Asset Forfeiture Program:
http://www.justice.gov/jmd/afp/index.html
If SEC commits resources to investigate criminal RICO matters why shouldn’t they get a cut? In FY08 the AFP was sitting on $3+ billion in seized assets.
June 16th, 2010 at 11:01 am
Enforcement agents who get paid according to their busts are no better than gangsters. Think about what you really want – what you really want is an absence of criminal activity, NOT that it pays to bust crime, cos that would just lead to…. more “crimes”.
The only real area where such a thing works is parking enforcement in the city, where officers are now paid bonuses according to tickets they issue… becos violations are numerous and ongoing every day, they just cannot be stopped… would you want the financial industry to follow that model where financial wrongdoing happens everyday and cannot be stopped?
Instead, if you know of a way to remunerate regulatory and enforcement agencies according to how WELL the rules are complied with, then you’ve gotten the genie out of the bottle. That’s the subject of numerous courses on economic development on how to get the market and state to work better together.
June 16th, 2010 at 11:25 am
That makes a little sense but causes a huge moral hazard. Case and point, 14k from “seized” funds (check out Transor’s link above) to pay for a cop friend of mine’s bicycle training in Hawaii.
Our “protectors” do funny things when the coffers start running low.
http://blog.motorists.org/6-cities-that-were-caught-shortening-yellow-light-times-for-profit/
June 16th, 2010 at 11:30 am
Depends how they are “self funded”, the ratings agencies where also “self funded”, they had no problems turning a blind eye to the well paying hands that fed them.
June 16th, 2010 at 12:41 pm
@GabrielN
think of it like the War on Wall Street.
ya know how the War on Drugs – a bunch ‘o enforcement agencies get to auction the booty and keep the dough to self fund?
[note: there is all kind of sarcasm buried in there]
on the other hand – maybe it would even out the regulatory salaries vs the wall street bonuses so the revolving door is pushed closed a little bit.
June 16th, 2010 at 1:27 pm
Does the SEC have any blue windbreakers with big yellow letters “SEC’ on the back? They should have some. If one thing’s for certain, we need to add more alphabet-soup storm troopers to our meager legions wearing “FBI”, “DEA”, “ATF”, “FEMA”, etc.
I’t hard to believe anyone thinks the way to make the SEC effective is to give its dysfunctional self more power.
June 16th, 2010 at 2:00 pm
@TC:
And sunglasses. Gotta have sunglasses.
June 16th, 2010 at 2:48 pm
BR wrote:
I also like the idea of paying SEC staff bonuses based on the fraud they uncover, monies recovered for investors, and fines.
Barry, don’t you even watch the videos you post?
http://www.ritholtz.com/blog/2010/05/the-surprising-truth-about-what-motivates-us/
June 16th, 2010 at 5:58 pm
so the only solution is a financial transaction tax?
June 16th, 2010 at 9:55 pm
I’m torn on this one.
The potential negatives outweigh the positives.
No one is complaining because the SEC costs too much, they are pissed because they are ineffective and captured and have managed zilch throughout the Meltdown.
Except for managing to indict Madoff AFTER his fund went to zero and they were mailed 9 different letters, went to his offices 3 times, saw that his brother in law was in charge of accounting, has no traders, fake trades with no counterparty, charged only a small fee for 20+ years of 8% returns, and wrote massive risk reversals (allegedly) that left NO footprint at all in the listed options market, went to cash every DEC 31 which would be impossible for a firm his size, and about 50 other red flags to numerous to mention.
All this while watching porn all day.
How many people have been fired from SEC?
Can anyone be fired from any Govt post?
Lets get them semi-functional before we deputize them and send them into the wilderness like a vigilante Peruvian Narco team.
Like the motivation of the idea, but how about firing 50% of them, and shaking up the trees?
Then explain to the remaining few that our entire populace has lost faith in our Capital Markets (hyperbole) and that the success of American free markets depends on them turning of porntube.com and doing their fucking jobs.
Apply same strategy to MMS, FBI, IRS and they multitude of inefficient bureaucracies.
They need to be like the NFL commish who started suspending everyone who was getting arrested like Plaxico and Pac-Man jones and show some fucking teeth. Clean up the league dog!!!
The budget ain’t the problem!!!!!!!!!!!!!!
RANT OFF.
June 17th, 2010 at 1:29 am
Tobin tax
Kills HFT
Funds SEC