On Regulatory Staffing

An op-ed piece in The New York Times on Friday questioned whether the mission of S.E.C. reform is best served through traditional remedies.  Specifically, "A Foreign Service for Wall Street," while acknowledging that the Commission has already "taken steps" to raise employee pay, enhance training, and employ experts, nonetheless stated, "But as long as the agencies are plagued by high turnover rates, increasing their training budgets will simply result in better-trained former staffers, while the establishment of new departments will only move vacancies around the organizational charts". 

It is encouraging that the revolving door at the S.E.C. is being both noted and critiqued.  Perhaps the manifest urgency to keep the most experienced at the Commission must simultaneously confess the following:

1.  The Need for Budgetary Independence

The Congress of 1934 never anticipated that the agency would be apolitical - Section 4 of the Exchange Act contemplates an ideally bipartisan Commissioner level.  But even the default goal of bipartisanship has resulted over time in the agency becoming subject to the philosophy of the party holding the White House.  Combine this subservience with the annual quest for funding and the S.E.C. most always focus on headlines, a strategy that applauds such specialization as victories in actions centering on insider trading and foreign bribery (as opposed to success in demanding net capital compliance and preventing good old fashioned theft).

If either self-funded or funded by taxes on the industry membership, the Commission would be free to  diversify its training to equally focus upon detection and advisement.  Such a reshuffling would, in turn, dilute the diploma of the most celebrated graduate: The expert S.E.C. litigant. 

Of course, such a re-prioritization of goals and means would also require that all acknowledge the true scope of the Commission's powers.

2.  The Need for Clarification of the Role of Self-Regulatory Organizations 

The stock exchanges (Self Regulatory Organizations, or "SROs" under Section 6 of the Exchange Act) perform myriad duties in the regulatory mosaic.  Indeed, students of the subject are often surprised to see that it is the SRO rulebook that solely caps commissions and day-to-day margin.  In other areas, sovereignty is shared with the S.E.C., who may, of course, at any time supersede more local regulatory efforts.      

A crucial step involves cleaning up those jurisdictional turf wars that have cemented over time. Is an NYSE broker-dealer examination the first line of defense, or is the S.E.C. solely responsible when a firm has "cooked the books"?  Either reporting line might be adequate, but a supervisory system vaguely relying on both wastes resources, forestalls effectiveness, and clouds deterrence.   

3.  The Imposition of a Time Bar on Subsequent Employment

Industry arbitrators are accustomed to limitations on their roles based upon the nature of their employment.  For example, a former brokerage house attorney is classified as "Industry" (as opposed to "Public") for five years after leaving the securities private sector; the result is that such arbitrator, among other things, 1) is subject to a heightened scrutiny during the selection process, and 2) cannot serve as a panel Chair in cases involving customers.  Is such a presumption arbitrary and cumbersome?  Most definitely.  But the arbitrator knows the rules governing his service upon seeking inclusion in the FINRA pool.

Likewise, the countless applicants to the Commission should be subject to such clearly stated limitations.  Leave the Commission Division of Enforcement, and you have to wait three years to represent firms/individuals to represent clients.  Perhaps more young attorneys would stay at the Commission, and the Commission would benefit from a more robust institutional knowledge.

Alternatively, the S.E.C. could reaffirm its storied "3-year commitment," an agreement asked of new hires that weds them to the job for a period exceeding their training.

In sum, the Times op-ed piece represents an enlightened look at a taboo topic.  Unfortunately, like so many other issues clouded by the continuing economic storm, the solution may be staggered and multi-faceted.  When it comes to the thorny problem of S.E.C. staffing, several of those facets will likely involve  compromising with other regulators, addressing political influence, and imposing some awkward but justifiable employment limitations.

---JSC, 3/22/10