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August 02, 2012 at 06:14 AM
There are two excellent comments to my July 25 blog on AdvisorOne: The Penalty Box, and while they both take issue with what I wrote, I find myself in the surprising position of agreeing with each of them: They both correctly identify the real problem with SEC to be its focus on regulating compliance with the letter of its rules, rather than trying to catch the bad guys.
In the first, Mr. or Ms. Dissent wrote: “You are wrong. Until the SEC revises its priorities away from picayune tasks, more funding is unlikely to do much good.” Let me just say upfront, it’s hard for me to take issue with anyone who uses the word “picayune” in a comment. With that said, it’s also hard to disagree with the sentiment that the SEC appears to spend too much of its time on said “picayune” tasks. We’ve all heard (and many of you have experienced) the stories of SEC examiners who focus on extremely minor violations, and maybe even the odd savvy RIA who actually creates a minor omission or two just to make the examiners happy. I agree that more funding won’t solve the problem, but my only point is that this bureaucratic mentality isn’t likely to get better with stiffer penalties (as was my point in that July 25 blog), or less funding, for that matter.
Cindi wrote a more lengthy comment, in which she detailed some of the aforementioned “picayune tasks” such as “reams of paper detailing your policies and procedures for preventing problems” and “the search and punishment for poorly written policy when no wrongdoing is evident.” And then she summed up the problem nicely, using the SEC’s own description of its task: “In those meetings that the SEC conducted around the country for a few years, they stated over and over that it was not the ‘wrong-doing’ that they were searching for. Instead, it was how well written the polices and procedures were.”
Seems to me the SEC often does indeed fall into the pattern of government regulators everywhere: Avoiding the harder-to-catch serious violators, while justifying its existence by cracking down on minor violations by folks who are earnestly trying to comply. As we all are now very well aware, the SEC “investigated” Bernie Madoff some five separate times, finding his firm to be in compliance each time, while the examiners “found no evidence of fraud.”
