Corporate Governance

Former SEC Chairmen Weigh In on Paulson?s Plan

By Susan Weiswasser

Much has been written over the past month including on these very pages about Treasury Secretary Hank Paulson?s plan to ?reform? the U.S. financial services regulatory system. Among the critics of the plan are three former chairmen of the SEC who have weighed in on the proposals ? particularly the effect they will have on the Commission --  in interviews and in a NY Times OpEd piece available here. Those chairmen, William Donaldson, Arthur Levitt, Jr. and David Ruder rightly believe that a more measured response to the current financial crisis than Paulson proposes is in order.

One of the concerns expressed by the former chairmen regards the plan to move the SEC to a system of principles- rather than rules-based regulation. Proponents tout the former approach as being more suited to the dynamic nature of markets in the modern age, enabling a more flexible system of enforcement. But it must be recognized that many components of Paulson?s plan were formulated before the current crisis when markets were strong and regulation was more widely believed to hinder growth. Such proposed changes ignore and, if adopted, might worsen the present-day state of affairs.

Even given the SEC?s considerable failure to meet its current mandate, moving away from a rules-based approach is still not the solution investors could hope for. While the former chairmen may have more faith than we do in the SEC?s ability going forward to police the markets, there is no question that the weakening of the enforcement structure overseen by SEC Chairman Cox, including a reduction in funding and diminution of the independence of staff lawyers who negotiate settlements with companies, has had a negative impact yet to be thoroughly quantified. Strengthening the rules and improving enforcement capabilities would be the appropriate response.

Real reform is necessary. But such drastic restructuring, without a thorough examination of the actual roles various regulatory agencies played in the current crisis, will only increase the likelihood of problems in the future. This view comports with that of many groups involved in investor protection, including the North American Securities Administrators Association ? whose members are state and provincial regulatory agencies that would lose some of their powers under the proposal because of federal preemption. In its reaction to Paulson?s plan, the NASAA argued against the wholesale restructuring as ultimately benefiting Wall Street stating that ?what [investors] need is a willingness on the part of all regulators to carry out their investor protection mandate.? We couldn?t agree more.

Full post as published by PomTalk on April 30, 2008 (boomark / email).