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July 31, 2002

The Witchhunt in Washington

By Junius Peake

Scandal always seeks out villains to blame. Frequently those scapegoats are the people and organizations charged with safeguarding against those selfsame scandals. In 1934, the SEC was created by Congress. The Securities Exchange Act of 1934, "empowers the SEC with broad authority over all aspects of the securities industry." It also, "empowers the SEC to require periodic reporting of information by companies with publicly traded securities."

When the Congress created the so-called "alphabet soup" agencies, which included the FAA, NLRB and many others, its intent was to make the regulators of our economy as independent from the political process as possible. However, the President nominates commissioners, including the chairman. The Senate must confirm them before they take office. There are supposed to be five commissioners at the SEC, with no more than three from the same political party. However for the better part of a year there have been but three: two Republican and one Democrat.

The chairman of the SEC, Harvey L. Pitt, took office about a year ago. Since that time, the horrific events of Sept. 11th, Enron, WorldCom and other financial scandals have rocked both Wall Street and investor confidence. Most recently there has been a coordinated attempt by some politicians, hoping for election victories in November, to "pile on," and name the SEC chairman as a villain.

Chairman Pitt is by far the most highly-qualified individual ever to assume his office. He is a former chief counsel of the commission. He has given up a seven figure annual income to represent his newest clients: American investors and issuers.

If Chairman Pitt were to disappear from the scene, who could take his place? Perhaps his critics, who argue he is unqualified (because he has represented accounting firms and issuers), would prefer the President to stop people on the street, ask them if they knew anything about financial markets, and then appoint the first person who answered: "Nothing."

With only two other commissioners to advise and vote on the enormous issues that confront the commission, Chairman Pitt has to be the most overworked public servant (other than the President) in government today.

From every direction, legislators and lobbyists are sharpening their attacks on the SEC, and especially on Chairman Pitt. However, not only are these attacks misdirected (all of the scandals began well before last August when Pitt took office), but they exacerbate the confusion and concerns of the public which have helped drive stock prices down so dramatically.

The SEC is Congress's creation. Congressional meddling with the regulatory process is often counterproductive. The commission has plenty of statutory authority to propose and make rules to deal with recent glaring improprieties. The Congress should confine itself to making laws that define various types of financial misconduct as crimes, and specify penalties -- including heavy prison sentences -- for the most egregious.

For the Congress to attempt to micromanage the financial markets of the United States is a mistake. Laws do not get repealed or changed very rapidly unless there is a major crisis. Proposed legislation by the Senate creates another layer of regulators, accountants and auditors. New legislation can be implemented and fine-tuned by the SEC through its rulemaking authority.

If self-proclaimed experts on financial markets, who hold congressional and senatorial seats, do not reconsider their vitriol against the commission and Chairman Pitt, we may discover that Lord Keynes, the noted British economist of the 1930s, was right when he stated: "There is no such thing as liquidity for the market as a whole."

The miscreants are but a tiny fraction of the tens of thousands of corporations that daily produce the goods and services that make our nation strong. All politicians should carefully consider their public statements, keeping in mind that the American public's confidence in our financial markets is the crucial element that will determine our economic future.

Junius Peake is Professor of Finance at the Kenneth W. Monfort College of Business, University of Northern Colorado.