If the Securities & Exchange Commission didn't exist, we would have to invent it. So, let's imagine that we're starting from scratch. What should the SEC look like in the wake of the corporate scandals and the bear market that have ravaged the country for months? Would a redesigned, recast SEC oversee Corporate America and Wall Street differently? What powers would it have? Could it prevent another Enron or WorldCom?
There's certainly lots of room for improvement. Yet except for providing more money--up to $766 million, a 66% increase, next year--and more staff, Washington is behaving as though the SEC ain't broke and doesn't need fixing. True, after years of caving to the accounting lobby, Congress and the Administration have finally mandated tougher policing of accountants and auditors. But the reforms are hardly the product of deep, long thought on how to prevent future scandals. For the most part, they're plucked from a dusty grab bag of rejected proposals made by SEC officials over the years.
The remodeled agency's core mission would remain what it has been since its creation in 1934 during the Great Depression: to protect investors and maintain the integrity of the securities markets. But because corporate chicanery has become so much more sophisticated since then, the SEC's tools for combating wrongdoing should be sharper and more effective. Today's corporate crooks make the pre-1929 purveyors of worthless stock look like pikers.
To begin with, the ability to bring criminal proceedings, with the threat of hard time, against financial miscreants would command a lot of attention. Today, the SEC launches only civil cases against wrongdoers, either before in-house administrative law judges or in public court proceedings. Low-level workers are sometimes barred from employment in the securities industry; occasionally, substantial fines are levied on brokerage houses and banks. For example, Credit Suisse First Boston (CSR ) paid $100 million in fines in January to settle allegations, which it didn't admit or deny, that it had received bloated commissions in exchange for allocating shares in hot initial public offerings to some clients. Large as they are, though, the penalties have come to be regarded as part of the cost of doing business in a tough marketplace rather than punishment. That's especially true since most SEC cases, such as CSFB's, are resolved without any admission of wrongdoing.
Even after the latest reforms, the SEC will still have to turn to the Justice Dept. on criminal matters. That cumbersome process can lead to wasteful turf battles. What's more, the tough-as-nails prosecutors at Justice can independently choose to take up corporate cases--sometimes in conflict with the SEC staff--as they did in the prosecution of auditor Arthur Andersen LLP. It would make more sense for a crew of elite SEC prosecutors who have worked up criminal cases to handle them on their own. And in enforcing new mandates for prison time for CEOs who break trust with shareholders, SEC lawyers, schooled in the subtleties of corporate crime, surely would have a leg up on their peers at Justice.
Assembling such a team of bloodhounds at the SEC would offer other pluses. For one, they could use tools now denied to SEC investigators, such as wiretapping and broad (rather than narrowly targeted) searches. Here, it would be as if the SEC borrowed some of the power of the FBI. "If I were to make one change, it would be to give criminal-enforcement power to the SEC," says David S. Ruder, a former commission chairman who teaches law at Northwestern University. "With criminal-enforcement power, you would have much broader investigative power," Ruder adds.
With just four large accounting firms left after the withering of Andersen, the SEC should also have the power to bust up overly concentrated firms in the future. An antitrust-review mechanism, coupled with routine policing, might be just the right amount of power for the recently mandated accounting-oversight board that will work under SEC auspices.
Taking a page from the Internal Revenue Service, the oversight board also should be able to launch random audits of companies and not just their auditors, which the regulatory team can now review under the new board's mandate. "To have a group at the SEC that occasionally goes in and audits the auditors, or does some kind of audit of major public companies, would not be such a bad thing," says Roberta S. Karmel, a professor at Brooklyn Law School who served as an SEC commissioner from 1977 until 1980.
Like any crackerjack police force--and, essentially, the agency is a police force to protect investors--the ideal SEC would not wait for lawbreakers to come to light. Instead, the ideal agency would act more like the one headed by former Chairman Arthur Levitt Jr. In 2000, when he was worried about Wall Street getting information ahead of ordinary investors, for instance, Levitt championed Regulation FD (for "fair disclosure"), forcing companies to stop playing favorites among analysts for news leaks. The result has been extraordinary disclosure, aided by the Internet and its ability to let companies instantly Webcast their news. As current Chairman Harvey L. Pitt now argues, the SEC should champion even more frequent releases of information, scrapping the habit of companies withholding important news until the end of a quarter.
Sure, such far-reaching changes might alarm small-government advocates. Folks whose anti-government views have held sway since the days of President Ronald Reagan would be troubled by an SEC that could work better and move on more fronts. "If government could ever get itself to be more efficient, we'd all be in danger," argues Edward H. Fleischman, a former SEC commissioner appointed by Reagan who now is a senior counsel at the Linklaters law firm. But even Fleischman is weary of constantly seeing fresh scandals in areas where the commission is supposed to be on the case, such as in auditing. "In retrospect, [the SEC] should have been harsher and probed further" into the likes of Andersen, he concedes.
Would a thorough overhaul of the SEC threaten fundamental liberties that businesses now enjoy? No. The laws are already in place for reining in miscreants. What's missing is better policing. With the scandal-a-day environment rapidly turning those now infamous "few bad apples" into a full orchard, a few far-reaching changes would be just the right move.
By Joseph Weber