SEC: always playing catch-up

Readable Research | By Raphael Pope-Sussman |

Oct. 12, 2011 — In the wake of the wreckage of the financial crisis, there have been numerous post-mortems of what went wrong, including some that have focused on the role of the Securities and Exchange Commission (SEC). Indeed, the period from 2000 to 2010 was marked by a series of well known crises, including major corporate accounting scandals at Enron and Worldcom and the perpetration and ultimate demise of Bernie Madoff’s $20 billion Ponzi scheme.

putting regulatory failures in context

Our specialty is original reporting. But in this case, we thought that it would be useful to compile previous reporting by others on individual instances of regulatory failure. A picture quickly emerges that is very different from the bogeyman of overregulation: an unmistakable, systemic pattern of under-regulation.

The series began with a look at the strikingly limited extent to which the Food and Drug Administration has regulated the cosmetics industry (read it here). We followed up with a look at OSHA’s record. This week, we chronicle the sad story of the SEC. More agencies will be examined in the weeks ahead.

The series will conclude later this fall with original reporting that explores the key reasons — both internal to agencies and imposed upon them — for the recurring failures.


But questions about the efficacy of SEC enforcement have a much longer history than that. For decades, concerns have been raised that the agency lacks the resources, expertise, or will to regulate the industry it oversees.


February 1977

The SEC receives the highest rating of all agencies in a Senate Government Operations Committee report on the appointment process for regulatory commissioners.[1]

The report, which includes a survey of lawyers on the fitness of federal commissioners for their jobs, gives the SEC “the most favorable ratings of judgment, technical knowledge, impartiality, legal ability, integrity and hard work.”[2]

Evans Witt, Associated Press, 9 February 1977

William H. Jones, “Panel Hits Quality of Nominees to U.S. Regulatory Agencies, Washington Post, 10 February 1977.


January 1981

The inauguration of Ronald Reagan marks a major shift in the direction of the SEC. In January, presidential advisers present a report recommending massive cuts to the SEC. An Associated Press story carried in the New York Times reads: “The report said the S.E.C.’s staff and budget could be cut 30 percent over three years.”[3]


July 1981

SEC Chairman John Shad speaks of a new era, in which industry will play a more active role in policing itself. Shad says he does not want the SEC to be seen as the “cop on the corner of Wall Street and Broad,” but rather as an essential partner in “capital formation,” the Washington Post reports.[4]

Martha M. Hamilton, “John Shad, Marking A New Era For the SEC,” Washington Post, 26 July 1981.

Associated Press Newswire, “Revamp S.E.C., Reagan is Told,” New York Times, 23 January 1981.


October 1981

SEC officials release a study on the potential effects of proposed budget cuts, reports the New York Times. The study says that President Reagan’s proposed 12 percent cut in the agency budget will mean a 20 percent decrease in staff, the closing of several offices, and severely circumscribed regulatory capabilities. The Times also describes the concerns of Shad, who warns in a letter to the White House budget director that the proposed 12 percent cut, on the heels of a 6.5 percent cut for fiscal year 1981, would deprive the agency of 400 staffers.

The agency is ultimately spared a cut to its budget. The number of staffers remains at 2,021.


October 1982

In 1982, a skeptical staffer on the House Commerce subcommittee on oversight and investigations tells the Post, “The quantity may be up, but the quality of enforcement cases is down.”

The SEC reports that enforcement actions are up 42 percent, despite budget cuts that, according to the Post, “Cut staff time devoted to those actions by 12 percent.” A skeptical staffer on the House Commerce subcommittee on oversight and investigations tells the Post, “The quantity may be up, but the quality of enforcement cases is down.”[5]

Nancy L. Ross, “SEC Defends Enforcement Rate,” Washington Post, 20 October 1982.


In a rule change, the SEC reduces capital requirements for brokerage firms. Firms were previously required to hold funds equal to at least 4 percent of customer debt; they now need only hold funds equal to 2 percent of debt. This change is designed to free more capital for investment; it enables brokerages to operate with greater leverage, increasing potential rewards and risks.[6]

Martha M. Hamilton, “Key Brokerage Rules Are Revised by SEC,” Washington Post, 14 January 1981.


March 1983

Rep. Timothy Wirth (D-Colo.), chairman of the House subcommittee on telecommunications, consumer protection, and finance, criticizes Shad’s leadership of the agency, particularly the path he has set concerning the treatment of insider trading. Wirth expresses his frustration with Shad’s “apparent lack of commitment” to securing a larger budget for the SEC in a letter to Shad, which Wirth shares with Washington Post Reporter Stuart Auerbach.[7]

Later in March, four of Shad’s fellow commissioners on the SEC challenge the chairman’s claim that the agency does not need greater staff resources. The Washington Post reports on a letter sent by the commissioners to Wirth, in which they state that “a 4 percent increase in staff positions is necessary.” Shad, the Post notes, had told Congress the agency could make due with 6 percent cut in staffing. The commissioners’ letter expresses their belief that “at the present funding level, we are stretched thin — so thin, in fact, that we have concluded it is the minimum responsible staffing level.”[8] Staffing still sits at 2,021.

Stuart Auerbach, “Wirth Attacks SEC Chairman on Budget Cuts, Insider Trades,” Washington Post, 14 March 14 1983.

Nancy L. Ross, “Four Members Urge Bigger Staff for SEC,” Washington Post, 22 March 1983.


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