Reforming the SEC

Walter B. Schubert is CEO of The Schubert Group and founding member and Chairman of the Board of Directors of the National Gay and Lesbian Chamber of Commerce. He is a third generation member of the New York Stock Exchange with more than 20 years of experience on the trading floor of the Exchange.

First, it was "Reform Wall Street." Then it was "Reform the Financial Services Industry." And all the while, where were the voices shouting for a closer look at the regulators? More than the laws, the industry, or the pavement of Wall Street, the real institution that needs to be reformed is the U.S. Securities and Exchange Commission. When I was asked by a senior member of the House Committee on Financial Services about Mary L. Shapiro’s appointment to the chairmanship of the SEC, I simply said that she was the sergeant at the donut shop while Bernard "Bernie" L. Madoff absconded with old ladies’ pensions. She’s another card in an old deck of the dysfunctional world of financial regulatory oversight. If I sound cynical, it’s because I have been around Wall Street and the financial-services business for over 35 years. And nothing ever changes!

The SEC is the front line in efforts to defend those old ladies from the Madoffs of Wall Street. As an enforcer of the Federal Securities Laws, a reformed and effective SEC would be apolitical and better able to respond in a 21st century manner to regulatory infractions, while addressing and changing outdated rules that hurt America’s competitiveness. Today’s regulatory regime must be replaced. It is ineffective in policing the market and holding people accountable. It must institute common-sense rules, conscious of a rapidly changing landscape that would put America, and our financial marketplace, back in a competitive position within the global markets.

History has shown that nearly every attempt by the SEC to change or introduce an important new rule has been politically and emotionally charged thanks to entrenched SEC staff members who have been asleep at the switch for years, or commission members who are beholden to political interests. Sadly, as a result, many a needed reform takes years to move forward and go into effect—if at all.

The SEC has always been ruled by commissioners appointed by the president. There are four commissioners, two Republicans and two Democrats, and a chairperson. The incoming president chooses two commissioners from his or her party. Once the commission is formed, the inevitable political bickering begins, with nary a beneficial outcome to Wall Street or Main Street.

To those who deny that there are serious flaws with the current procedures for determining commission members, I ask that they seriously consider that the majority of important commission votes have ended up strictly along party lines—three-to-two or two-to-three. Most recently, the vote to bring suit against what President Obama has implied as the center of all evil on Wall Street—Goldman Sachs—broke down to a vote of three Democrats against two Republicans. It was blatantly obvious to everyone that the SEC was politically motivated to bring this suit now so as to move the financial reform bill forward in the Congress. Whether true or not, that’s the perception—and we all know that people buy and sell stocks all the time based on perception and rarely on the reality. On the New York Stock Exchange we’d say, "Buy the rumor, and sell the news." The perception that Goldman Sachs and many, if not all, of the investment banks on Wall Street are crowded with evil, greedy people fuels a perception that leads to a cancerous cynicism and the erosion of confidence. The American capital markets, which are based upon trust and confidence, hang in the balance. Standing on their own, laws don’t instill trust and confidence. Laws with competent and fair enforcement do engender market vitality, confidence, and trust.

Today’s SEC is too political and a fiendish meritocracy. Underpaid and undereducated, the SEC staff and enforcement personnel must bring home the bacon to headquarters, or their jobs are on the line. (Was Shapiro’s deciding vote against Goldman intended to make up for her sin of oversight with Madoff?) The SEC staff, like the traffic cop at the end of the month, must meet a quota for writing tickets—or, in effect, they must find some dirt on the companies they examine, whether it’s there or not.

There was a time when the regulated worked with the regulators as partners, in the spirit of assisting the regulated to operate within the rules and more effectively. In those days, a first infraction merited a warning, a second infraction for the same offense got you a ticket and maybe a fine, and a third infraction led to stiff fines and much more serious consequences.

The above is not the case in today’s enforcement practices on Wall Street. Today, an SEC examiner comes to do an audit with a preconceived notion that there is something illegal happening. Then he or she finds something that isn’t illegal, forms the perception that it is illegal, and ties up the firms and the SEC’s legal apparatus for years. The only people getting rich here are the lawyers.

Our elected officials and regulators would have us believe that we can regulate the greed out of the markets. I promise you that it’s never going to happen. But what we can have is a shift to a corporate culture in which employees at any firm who see dishonorable behavior known to be illegal or not in the best interest of the firm are encouraged, if not rewarded, to bring their concerns to the compliance department or the company’s office of legal council. This is critically important to restore a code of honor and ethical behavior in these companies where the temptation to succumb to greed is all too great.

Beyond this, America needs an SEC that is independent and not politically motivated, with a staff that is well-educated and knowledgeable about the Securities Laws. Accepting this, I believe we have a chance at building an enforcement and rule-making regime that gives America the best chance to compete in the global capital markets of the 21st century.