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Change: The Election's Effect on Securities Regulation
Traders Magazine Online News, November 6, 2008
The SEC's Chairman, Christopher Cox, typically describes the SEC as a "law enforcement agency." The election of Barack Obama and a House and Senate dominated by the Democratic Party will likely change this job description.
Under the US Constitution, law enforcement is the duty of our executive branch of government. Chairman Cox's statement shows that he thinks the SEC is part of the executive branch, a view shared by the Security Traders Association and many other industry participants. The SEC's primary duty, under this theory, is to catch bad guys.
To give credit where it is due, under Chairman Cox's leadership, the SEC has devoted considerable enforcement resources to rooting out fraudsters, particularly the low budget scammers. The SEC has been particularly effective in recent years dealing with micro-cap and small hedge fund frauds. I receive many fewer emails inviting me to buy some obscure stock because of great news about its issuer. My impression is that the racketeers who made a living selling worthless securities through market quotes on the Bulletin Board have pretty much been driven out of business. This is good work, and Chairman Cox deserves credit for chasing these people away from the nation's securities markets.
Nonetheless, the SEC is not primarily a law enforcement agency. Instead, Congress organized the SEC as an independent agency, which means it is not part of the executive, legislative or judicial branches of the Federal Government. Independent agencies belong to all three branches. So, in addition to law enforcement powers, Congress endowed the SEC with rule-making authority. This means that it has the power to make laws. Congress also ordained that the SEC would have judicial power. It has the authority to interpret the rules it makes.
Constitutional literalists have always struggled with the idea of "independent agencies." The Constitution says there shall be three branches of government. Independent agencies would appear to belong to a fourth branch. And placing executive, legislative and judicial powers inside one agency appears to violate the separation of powers doctrine, believed by the founders to be an important protection against tyranny.
Congress created several independent federal agencies as part of President Roosevelt's "New Deal." In some famous cases, the Supreme Court ruled in favor of their creation, provided that certain safeguards existed. So, for example, federal agencies cannot make rules without soliciting comments from the public and considering public views. Judicial hearings must allow defendants notice and an opportunity to be heard. This includes the right to representation by counsel.
In recent years, the SEC has been discouraged from making rules governing the issuers of securities, markets and market participants. In many cases, such as swaps, the SEC was forbidden by Congress from making rules governing their issuance. In addition, over the last few years, securities that were regulated have been permitted to escape the regulatory structure. So, for example, the rules governing Exchange Act registration now effectively require the registration of securities issued only by larger issuers. Registration of the securities of smaller public companies generally is voluntary. The securities of foreign issuers can trade in US markets without their issuers even providing notice to the SEC of their existence. No one reasonably expects the SEC to look for them.
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