Header graphic for print
Securities Compliance Sentinel Analysis of cutting-edge securities industry issues

Recent Legislative Initiatives. . . Yes, We Have Reached the Silly Season

Posted in SEC Organization, SEC Structure, Securities Legislation

Despite the fact people are still unemployed, the drought rages and farmers suffer, and the deficit continues to grow, Congress seems to float absurd legislation across the partisan divide to regulate the regulators and the market.

In particular, the House passed a bill that would tighten the cost-benefit analysis for both the SEC and CFTC rule process.  This proposed legistlation would require the consideration of certain mandatory factors in these agencies’ cost-benefit analysis of promulgated rules.  This legislation merely generates sadness from my perspective.  Why, you ask?  Well, it shows a glaring failure of those representatives in Congress to understand the regulation process in the securities industry.  You think after almost 80 years, someone in Congress would get it!!

Securities regulation is not simply a dollars and sense proposal, any ability to place such a cap as passed by the House misses the point.  In fact, if you follow through on this ridiculous proposition, no regulation would ever be imposed and the market would be allowed to freely do whatever it wants, including, among other things, allowing fraudulent practices to occur continuously.  Please keep in mind that all regulations require costs, and it is not a simple business proposition.  For example, if you follow the House’s proposal and applied it to the SEC’s work, the SEC may propose a rule to stop certain fraudulent activity, requiring market participants to implement certain controls and procedures.  Of course, the preparation and implementation of these procedures would cost market participants money.  However, given that the activity may only effect part of the market, the House legislation would require the SEC to drop the rule because it would “cost” too much money for the market participants to implement.  As a result, investors could lose money (that could have been avoided if the proposed rule had been implemented), but, according to the House legislation, those individuals and their potential losses are not important enough to require the enactment of the rule given the House’s proposed cost-benefit analysis.  Essentially, under the House legislation, one could argue that Exchange Act Rule 10b-5– the lynchpin of criminal and civil securities fraud enforcement– would not have been enacted today because it would cost the industry too much money!!!  Truly, the silly season is upon us!!   

Equally silly is the bill introduced in the Senate that would significantly enhance the penalties that the SEC may seek.  In typical legislative fashion, it is believed that the more you raise fines or prison sentences, it will somehow deter people’s conduct.  Unfortunately, time and time again, such approaches have failed.  Despite the fact that criminal penalties and civil sanctions have been increased exponentially over time, people continue to commit securities fraud.  If this legislation were to pass, it would only engender more unpaid fines that the government already does not collect.  Interestingly, this piece of legislation, unlike the House legislation, actually has bipartisan support and has a chance of passage.  I suppose everyone wants to pile on, and make themselves look tough on fraud.  However, such actions are merely an act of rushing to the bottom.

In short, neither position espoused by either party seems to make much sense or have the ability to improve our securities and capital markets.