Experts on the Future of the SEC, Part 3

2. Don’t ditch the SEC. It’s not so bad.

The SEC “has been one of the more successful federal agencies in carrying out its statutory mission,” says Thomas Lee Hazen, the Cary C. Boshamer Distinguished Professor of Law at the U. North Carolina at Chapel Hill School of Law.

Alan R. Bromberg, University Distinguished Professor of Law at the SMU Dedman School of Law, singles out the Division of Enforcement for praise: the SEC, he says “deserves to survive as an enforcer.” He offers more qualified support for the agency’s other functions: “It deserves to survive as a regulator, if it can match its skills to those of the market.”

This distinction, between the SEC’s enforcement activities and its regulatory functions, was also highlighted, in recent Congressional testimony, by a former Chairman of the SEC. Any new regulatory body “must be a law enforcement agency” said Arthur Levitt, Jr. “Vigorous enforcement of the rules of the road is a powerful deterrent to bad behavior.”

The SEC’s functions are apportioned among four divisions: Enforcement, Corporation Finance, Investment Management and Trading and Markets. During the present crisis, the SEC’s own Office of Inspector General has singled out the Division of Trading and Markets for criticism. In a pair of reports (On the Consolidated Supervised Entity program and on Broker Dealer Risk Assessment) issued on September 25th, the OIG reiterated a call made six years ago for T&M to better police the risk assumed by investment banks.

However, as John C. Coates, the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School, points out thinking about how T&M should be restructured needs to take into account how little there is left for it to regulate. "Without a significant investment banking industry independent of commercial banks ... the SEC's traditional role in overseeing broker-dealers needs to be rethought." In this new, bank-controlled universe the SEC "may continue" to regulate "smaller, independent broker-dealers ... investment advisers and independent financial analysts."

NEXT: Get in the cellar!