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Friday, October 9, 2009

Securities and Exchange Commission Issues New Strategic Plan

The Securities and Exchange Commission today issued a new five-year strategic plan for public review and comment.

One of the new goals of the SEC is to have "successfully resolved" 90% of its cases.   "Successfully resolved" is defined as achieving a settlement, judgment on the merits or default judgment.   Of course, the SEC adds that it will seek to "file large, difficult or precedent-setting cases when appropriate, even if success is not assured."   (See page 17 of the plan.)

The SEC must have anticipated the criticism of this benchmark.   Having this type of numerical measure of its efficiency and competence invites -- if not guarantees -- that the SEC will rack up the numbers by, among other things:
  • pursuing the smallest brokerage firms and individual brokers, investment advisers and so on, for they have the least financial wherewithal to afford lawyers to handle investigations (in the pre-charge stage) or fight SEC charges once brought; and
  • bringing those actions which are the easiest to win.
Note that neither of these categories has anything to do with the SEC's prime directive of investor protection.   If investor protection were the primary concern, we would see the following:

"The SEC seeks to pursue cases where the aggregate claimed loss to investors is approximately 90% of the total claimed loss to investors in all matters brought to the SEC's attention"


Under the SEC's new plan, there is going to be a huge temptation to go after "small fry" (say, an individual bad broker where the claimed loss is $25,000) and to go after lots of them, many of whom might not be able to fund a prolonged, vigorous defense, rather than the one powerful and wealthy defendant which can throw lawyers at a case.   

Now add in an additional incentive -- that being the goal of pursuing "precedent-setting" cases has another troubling aspect to it. It suggests that cases will be brought as a form of administrative rule-making. In essence, the SEC would seek to make law.  (Objection:  That is the prerogative of Congress.)

One can see a wave of wrongfully-accused or over-charged financial industry defendants, disproportionately not-well-financed, getting attacked as the SEC's eager young bureaucrat-lawyers will look to show how innovative and creative they are (rights of the wrongfully-accused be damned), all while being able to boost their stats (like a basketball player shooting three-pointers in garbage time) to show how efficient they are, all by taking advantage of the weaklings in the litter.  

This mental masturbation and bureaucratic stat-padding will come at the expense, I fear, of a lot of good people.   The quality of the financial advisory business will suffer and investors will ultimately pay the price.

Just as with wayward publicly-traded companies, the pressure to "hit the numbers" leads to bad things.  The SEC ought to know better!   (Oh but where have we heard that one before?)
A true commitment to investor protection requires the pursuit of these parties.  If the SEC wishes to avoid confrontation with parties which can fight back, then it can issue all the strategic plans it wants; it will just be more "lip service" from the "same-old-same-old" SEC.  
Now if this were the objective, the SEC would have a bigger budget, more manpower and smarter manpower.   Naturally, it would have to go after the biggest targets and the deepest pockets.   These also would be the richest and most influential financial players on the planet.   However, they are the parties which by virtue of their size, tend to do the most damage.  

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