Monday, March 23, 2015

Wrong Remedy: Follow Up to “ Poorly Chosen Words by an SEC Regulator”

Wrong Remedy: Follow Up to “ Poorly Chosen Words by an SEC Regulator”

After Yves Smith of Naked Capitalism posted a video of Andrew Bowden, the SEC’s director of examinations, making inappropriate comments extolling the virtues of private equity, a number of other commentators and columnists picked up the story.[1]   While I agree that Mr. Bowden’s comments should be publicized, I disagree with Ms. Smith’s suggestion that Mr. Bowden ought to be fired.[2]  Mr. Bowden’s comments are a symptom, rather than a cause of regulatory capture.  Terminating Mr. Bowden will make us feel better for a few days, and may even increase blog traffic at Naked Capitalism and even this blog.  However, firing an SEC official will not bring us any closer to addressing the problems of weak or ineffective financial regulation.

For starters, poorly chosen words at a private equity conference aren’t grounds for dismissal.   Mr. Bowden’s transgression deserves a reprimand.  If I were SEC chairman, I would tell Mr. Bowden to cancel his appearances at industry conferences and focus on examinations.  The investment community doesn’t need to hear soothing words from its regulators or rub shoulders with public officials.

In fact, Chairwoman White ought to restrict her own appearances and those of other senior members of the SEC at industry conferences.  There is no reason for the SEC to drop hints about pending investigations or rulemakings other than through official statements by the Commission.  Recently, Chairwoman White spoke at the Tulane University Law School 27th Annual Corporate Law Institute about shareholder activism.  While her words were more carefully chosen than Mr. Bowden’s, she unnecessarily expressed a measure of support toward hedge fund activists.[3] 

Mr. Bowden and Andrew Ceresney, director of the SEC Division of Enforcement, appeared at the Investment Company Institute’s annual conference to assuage concerns in the mutual fund industry about the results of a pending SEC’s investigation.  For the past two years, the SEC has been trying to determine whether mutual funds have been inducing brokers to use their funds by burying extra payments inside administrative and record-keeping fees.[4]  From the public’s perspective, there’s no reason why the powerful mutual fund industry needs to be assured in advance that the SEC’s investigation won’t result in a series of enforcement actions or rulemakings.  However, given the way our political system works, it should come as little surprise that SEC officials go to conferences and make soothing comments.

The real problem with regulatory capture lies with a corrupt political system in which the financial services industry controls Congress and helps to finance most major political races.  As a result, agencies like the SEC are chronically underfunded, and their regulatory and enforcement efforts are systematically questioned and undermined by Congress and lobbyists.  In that environment, it is no small wonder that SEC officials go to industry conferences and make friendly noises.  If they actually went before the industry as defenders of the public interest, they’d either be hauled before Congressional committees or see their budgets slashed even further.   

Swatting away Mr. Bowden would eliminate one carrier of regulatory capture disease.  The disease, however, will continue to thrive in the swamp that is our nation’s capital.


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