Big Challenges ahead for the S.E.C.

With the meltdown of the financial markets, we are seeing more and more headlines where it appears that the industry regulator has failed us. Whether it’s the Bernard Madoff ponzi scheme or credit rating agencies that failed to adequately rate financial products to identify the true risks of those products- the same result of failure seems to be pervasive.

Mary Schapiro, the newly appointed head of the SEC, has inherited a mess of massive proportions. As a Wall Street insider, I have worked with colleagues that have worked for Mary at the NASD (a former regulatory agency that has now been re-named FINRA). The consensus is that Mary is very much the traditional bureaucrat. I am rarely one to want to place someone in a box and typecast them- so I am hoping that my colleagues are wrong, and Mary can do a terrific job revamping our regulatory system.

I have personally been involved with creating training programs around much of the securities industry regulatory environment and I see a great deal of weaknesses. With that said, there are a few key points that I need to stress with the upcoming changes.

The first aspect that I feel is important to stress is that new regulations will not entirely change natural human behavior. Back in the 1600’s in Holland, there was a new type of flower introduced to the nation from Asia- the Tulip. Much like our internet or housing bubbles, they had their Tulip bulb craze. Before the bubble had burst a single tulip bulb might have been worth more than a house. We have seen these mania’s before, and no amount of regulation will stop it from reoccurring.

Another aspect I feel that needs to be addressed is that investing has crossed asset classes so much easier than any other time in history. As a result we need to start integrating our regulatory agency to realize that audits must be conducted of all asset classes by one regulatory body. Right now we have CFTC, MSRB and FINRA all handling their own specialized areas.

Even the internal definitions used within these agencies must be adapted to the way they are used in real life. I recognized how much FINRA lived in their own little world when I called them about specifics regarding securities licensing exams that I was creating (the Series 7 exam in this case). The regulators insisted that the proper term was qualification exams. Well I had worked in the industry for more than a decade and was amply qualified considering I was creating the study materials- but did not posses the actual license because I didn’t work in a role that allowed me to sit for the exam. Had I been able to sit for the exam, I would have passed and been deemed “qualified”… but it doesn’t stop there, I still would not be able to do the tasks of the job until all the appropriate paperwork was completed- so is this really a qualification exam- or a licensing exam? In practice, I would not be able to do the tasks of the job until I received the license. This highlights how out of touch they really are to the real world.

My final point that needs to be considered about any revamp of the SEC is that the bulk of our regulations originate from 1933 and 1934- The Great Depression era. Sure there are regular updates, but the core framework is still original from more than 70 years ago. Even keeping track of all the updates are difficult. We live in an information world, and a renenwed securities regulatory agency should be able to make finding the information much easier, and preventing at least some of the same problems from reoccurring.