Come June of 2024 the Securities and Exchange Commission (SEC) will turn 90 years old. After several losses for the Gensler regime – including the Ripple Labs case and the eventual offering of Bitcoin ETFs – perhaps it’s time to ask if this particular independent federal agency has outlived its purpose and whether new rules, regulations, and even institutions need to replace what we’ve come to know and accept as the norm.
For those uninitiated, the SEC was established in 1934 in the wake of the Great Depression. While the agency is largely known for prosecuting financial criminals and settling for large sums with corporations that commit fraud or manipulate markets, it was originally intended to bring confidence back to investors after US markets plummeted 85% over three years.
In this mission, the SEC largely succeeded. Investors returned to the markets and the Dow Jones Industrial Average regained most of the losses incurred during the Great Depression by 1937.
This is to suggest that when the SEC started it had a clearly defined set of goals, was able to accomplish them, and ultimately saved investors money while keeping corporations in check.
The corporatization of America
It’s difficult to ignore the revolving door the SEC represents these days — from enforcement of actions against billionaires, market manipulators, and fraudsters, to working for them.
Former chair Jay Clayton went on to work for Apollo Global Management and Sullivan & Cromwell, Mary Schapiro and Arthur Levitt both work for Bloomberg, and Mary Jo White, who has likely amassed a fortune far greater than the $16 million she’d already accumulated when nominated to become chair in 2013, has gone back to private practice to defend the kind of companies she once prosecuted.
It’s also worth pointing out that no chairperson in recent history has retained the title for more than a single presidential term, except for Arthur Levitt under Bill Clinton.
Bureaucracy is expensive
While it’s understandable that individuals in charge of protecting financial markets should be well compensated (in the hope that it would lower the need for taking on other work and to disincentivize bribery), it’s also important that the people in charge of these agencies are equally incentivized to pursue important cases that protect investors and stabilize markets.
With the disintegration of FTX and the previous collapses of Ponzi lending schemes such as Celsius and BlockFi, it doesn’t appear as though the SEC has accomplished this as of late.
However, it isn’t simply one case — or one bureaucratic regime for that matter — that has caused the American public to lose trust in the SEC. From Enron in 2001 or Madoff in 2008, to the fact that almost no one of infamy or import was prosecuted in the wake of the Great Recession, the SEC has seemingly made it a priority to not step in and take charge when it’s most necessary. Time and time again it costs consumers and retail investors billions of dollars.
Whittling away trust
There are reasons that agencies like the SEC and Commodities Futures Trading Commission (CFTC) were formed decades ago and those reasons haven’t vanished. While the ways in which information spreads and how trades are made have certainly changed considerably over the past 50 to 90 years, the fact that humans are greedy, markets can be manipulated or cornered, and fraud is a nearly daily occurrence hasn’t.
Markets need regulating and retail investors need protecting.
Of course, there are many traders and politicians who would disagree with the statement that “markets need regulation and retail investors need protecting,” but the public doesn’t despise these concepts.
Instead, the American public is tired of the bureaucracy and lack of tangible results. For seven years, what’s remained a near-constant, regardless of who’s president or whether they’re Republican or Democrat, is that roughly 50% of voters are dissatisfied with governmental regulation of businesses and industries.
It doesn’t help public trust or confidence in government regulators when all of the major financial scandals of the past three decades were courtesy of whistleblowers, activist shortsellers, or the market getting decimated without government intervention.
Even the whistleblower route has been called into question with the investigation and suspension of the CFTC’s longest-serving inspector general, A. Roy Lavik, in 2023 for giving away whistleblower identities. Lavik told investigators he followed “simple ass standards of counting… people and… offices” and that it was important to “not put process over substance,” stating that he viewed himself as the “court of appeals.”
No need to start from scratch
Government is often complex, entrenched, and slower moving, and for good reason: if the government lived by the mantra of “move fast, break things,” economies, political structures, and even society on a national scale could break. It’s in the government’s best interest — and, more often than not, the citizens of that country’s government — to desire a methodical and careful approach to all major changes to any policy.
So, has the SEC outlived its purpose?
Well, no — with a caveat. The SEC, CFTC, and many other regulators need to remember what their purpose is and who they answer to. People working for government regulators shouldn’t be taking these important jobs to hop, skip, and jump their way to powerful positions in private markets or to settle personal grudges.
The responsibility to monitor markets and prosecute financial criminals in America isn’t one that should be taken lightly, and in this respect, it’s important that the American public approves of financial regulators and feels confident that markets are operating efficiently and fairly as opposed to whatever we accept for meaningful regulation today.
If the SEC doesn’t change and evolve with the times, it may not last another 10 years, let alone 90.