When Christopher Cox took over the Securities and Exchange Commission (SEC) in June 2005, George Bush praised him as “a champion of the free-enterprise system” who understood that it was “built on trust”. These days unfettered capitalism is under siege and trust is in short supply — not least trust in the SEC itself. As Mr. Cox prepares to step down, the SEC is fighting to justify its existence. It is unlikely to be unscathed by the planned regulatory overhaul under Barack Obama.
The SEC’s mission is to protect investors, maintain orderly and efficient markets and make capital formation easier. All but the most extreme libertarians would concede that government has a role to play in each, but the commission has been found wanting in the first two. Most shockingly, it failed to act on repeated allegations about Bernard Madoff’s Ponzi scheme, a lapse that the SEC’s inspector-general is probing. What is the point of all the enforcement actions — a near-record 671 last year — if the whoppers slip through the net?
On efficient markets, the blot on Mr Cox’s copybook is the ban on short-selling financial shares late last year. Not only did this prove ineffective, but it caused havoc with legitimate hedging strategies, pushing up losses for banks and hedge funds. Mr. Cox was queasy about the ban but gave in to pressure from the Treasury, which saw it as essential to prevent a systemic collapse. “Knowing what we now do, I imagine it’s not a step we would take again,” he says.
And then there are the investment banks that fell under the SEC’s purview. It failed to appreciate the inadequacy of standards designed for commercial banks when applied to securities firms. True, Congress had hobbled the commission by giving it only limited authority — of the 200 or so subsidiaries of Lehman Brothers’ holding company, for instance, it had statutory power over just seven. But Mr. Cox was slow to ring the alarm.
He is on firmer ground when it comes to accusations of passivity at key points in the crisis, such as Bear Stearns’s takeover by JPMorgan Chase. The SEC was never designed to lead bail-outs. Still, some staffers feel he did too little to counter the perception that the commission was being sidelined in the rescue efforts.
This has cast a shadow over progress in other areas. Mr. Cox’s SEC has led the push for greater global regulatory co-operation and for American firms to adopt international accounting standards. It has democratised disclosure of company accounts using interactive databases. Mr. Cox has also forced more transparency on executive pay, belying his pre-SEC reputation as a friend of Big Business.
All in all, however, the crisis has exposed the SEC as a cracked piston in a sputtering regulatory engine that dates back to the 1930s. Agencies regulate firms “according to what they were born as, not what they do today,” complains Harvey Pitt, a former SEC chairman. An example is the nonsensical separation of oversight for securities, performed by the SEC, and derivatives, done by the Commodity Futures Trading Commission (CFTC).
Mr. Obama has talked about the need for regulatory consolidation. Mary Schapiro, who is due to succeed Mr Cox later this month, pending Senate approval, has publicly advocated merging the two agencies. This would require a doctrinal ruling, since the CFTC’s approach is far more principles-based than that of the SEC, which cleaves to hard rules. It would also call for some deft politics, since they are overseen by separate congressional committees, for whose members disbandment would mean an end to juicy campaign contributions from financial firms.
Bigger changes may be afoot. Regulation will probably be extended to new areas, such as credit-default swaps, which may fall to the SEC. But, under one proposal, the SEC would be replaced by a new business-conduct regulator, with some of its present activities going to other agencies; it has already lost some powers to the Federal Reserve, which is carving out a role as a systemic-risk watchdog. Although a career gamekeeper, Ms. Schapiro is said to be more concerned with redrawing the regulatory architecture than protecting turf. That may be just as well.