Financial Planning | Legislative / Regulatory

SEC: Two steps forward, one step back?

SEC Regulators really seem to be catching that ol' holiday spirit this year, don't they?

First came the spate of pre-Thanksgiving activity at the IRS.

Now, it's the SEC's turn. In a span of just a few hours, we saw two major SEC announcements arrive on the heels of a less-than-flattering independent assessment of the Commission's response to early economic warning signs.

For starters, the SEC has OK'd new rules regarding the information shareholders receive about risk, compensation and governance. Specifically, in the SEC's words, the rules require companies to provide information about:

  • "The relationship of a company's compensation policies and practices to risk management."
  • "The background and qualifications of directors and nominees."
  • "Legal actions involving a company's executive officers, directors and nominees."
  • "The consideration of diversity in the process by which candidates for director are considered for nomination."
  • "Board leadership structure and the board's role in risk oversight."
  • "Stock and option awards to company executives and directors."
  • "Potential conflicts of interests of compensation consultants."

Next came word that the SEC is trying to prevent another Madoff-like investment scheme. Specifically, the SEC has issued new rules that would subject investment advisors to surprise exams and "custody control reviews" that are absent under current rules.

"These advisers often covered up the misuse by distributing false account statements to their clients reflecting assets that didn’t really exist," the SEC stated. "The new rules are intended to help prevent that from happening."

If only such safeguards had been in place from the start.

An investigation by ProPublica and National Public Radio has found that the SEC is still asking some very basic questions about the origins of the financial crisis. I'm quoting here from the NPR story:

In a letter dated Oct. 22, the SEC sent what amounts to a questionnaire to a number of collateral managers — the middlemen between the investment banks that created the complex financial products and the investors who bought them. ... Securities experts say the letter indicates that the agency is still gathering basic information about the CDO market, despite its centrality to the banking crisis.

... "One wonders why this letter, especially given the general nature of it, is just now being sent. And why wasn't it sent several years ago, as the CDO market was exploding?" says Lynn Turner, who was the SEC's chief accountant in the late 1990s. "It makes it look like the SEC is several years behind the markets."

Listen to the NPR report in its entirety:

As my dad used to say, hindsight is 20-20. Blaming people after the fact is easy. The hard part is making sure the same mistakes aren't made twice. I want to believe the agency's new rules will help strengthen our financial system.

Hopefully, we won't need another recession to find out.


Bill Sheridan