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The SEC Has Let Us Down

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The Securities and Exchange Commission's Christopher Cox has been in the limelight lately -- and not in a good way. The recent short-selling ban looked suspiciously interventionist and downright anti-free market to many of us who don't have too much sympathy for those "poor" companies that screwed up. There were plenty of rational reasons for sagging stock prices beyond some conspiracy theory about short sellers. (Meanwhile, the short-selling ban didn't even work.)

However, this isn't the first time you could reasonably suspect that while the SEC, particularly under Cox, may be looking out for somebody, it sure as heck isn't investors.

Past indignations
Almost a year ago, I was outraged that the SEC had passed a ruling that allowed companies to block shareholders from putting their own director nominees on proxy ballots. The SEC got flooded with 34,000 letters commenting on the topic, but the commission's ruling basically sent the message that investors should put up and shut up.

You may not be surprised that corporate interests lobbied for the ruling. They argued that special-interest shareholder groups can hold too much sway over corporate elections, and that costs money. My response at the time was, and I quote, "boo-freakin'-hoo." As I pointed out, poor governance policies at companies can cost shareholders money, too.

I pointed to a number of bank stocks, all of which were in the hot seat and some of which no longer exist -- like Countrywide and Merrill Lynch, which got snapped up by Bank of America (NYSE: BAC  ) , and Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) , which are both under conservatorship. And I said, "Given this climate, it seems like an outlandish time to argue that corporate managements need greater freedom from shareholder action."

I rest my case.  

Not enough good ideas
Many people have been understandably calling for greater regulation; I think the SEC's recent behavior has underlined why regulatory agencies can be dangerously biased and hardly angelic. (I recently commented on what I see as more important: a shift to ethics and responsibility, corporate or otherwise.) Meanwhile, in 2004, the SEC under then-chairman William Donaldson put forth new rules that basically allowed the big investment banks to get what they were begging for -- an exemption from old limits on how much debt they could pile on. Obviously, the SEC didn't see the mounting danger in the time since then, and now we're all paying for the investment banks' ill-conceived follies.   

As far as I can tell, the SEC under Cox has often sided with corporations over shareholders, even though that the agency was formed after the Great Depression to advocate for investors. Some point out that Cox has reduced SEC enforcement against larger companies and shifted to smaller violators. I know I didn't get the memo about the SEC's switching its mission to protect large corporate interests. Did you?   

I guess I should give a few grudging kudos to the SEC -- it is (at long last) working on more technologically advanced ways to distribute company information on its website, and it has also required that companies do a better job of divulging executive-compensation information. Still, though, there are glaring areas in which the SEC has dropped the ball; other recent criticisms include its lack of action in the auction-rate-securities mess.

Governance matters
We are in the midst of a major financial crisis, but what better time is there to contemplate an even more concerted effort for shareholder activism by pushing solid, commonsense corporate-governance principles? The SEC should remember its mission and make it easier, not harder, for shareholders to have a voice in some of their companies' policies.

The recent economic debacle has the "runaway CEO compensation" component, too. Too many executives have already pocketed big bucks for failing, and allowing CEOs to exit with obscene golden parachutes that are guaranteed regardless of their performance with their companies must end.

It's time for shareholders to push for solid policies such as say-on-pay provisions and the idea that pay should mirror performance. Getting these things done isn't impossible; some companies, including Aflac (NYSE: AFL  ) , Verizon (NYSE: VZ  ) , and Blockbuster (NYSE: BBI  ) , have already voluntarily adopted "say-on-pay" policies. H&R Block's (NYSE: HRB  ) new CEO signed a contract that stipulated that should directors cut managers' salaries, he will take a pay cut, too. These are moves that exhibit the proper spirit in a world that's too often run amok these days.

Who works for whom, again?
We need to remember the pride of honest, responsible business dealings and meritocracy, instead of looking the other way as some corporate heads run companies into the ground, therefore robbing shareholders, employees, and -- here lately -- even our society blind, and then get paid for it. The SEC needs to remember that, too.  

Last but not least, maybe it's time for the SEC to either remember its roots, or get the heck out of the way.

Aflac is a Motley Fool Stock Advisor recommendation. Bank of America is a Motley Fool Income Investor pick. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax owns no shares of any of the companies mentioned. The Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (15)

Comments from our Foolish Readers

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  • Report this Comment On October 07, 2008, at 8:51 PM, wjo1948 wrote:

    Great article. However, I wish you had included the failure of the SEC to reinstate the uptick rule. Banning short sales was in fact stupid, and as your say, did not work anyway. Bringing back the uptick rule would have at least slowed down the "shorts" and maybe prevented the "bear raids" on Lehman and other financials.

  • Report this Comment On October 07, 2008, at 9:04 PM, mtr wrote:

    Alice Lomax doesn't know how to write a positive article if she had to. Seriously Alice when people are most afraid that the time you can make lots of $$$$$$s if you can stand the heat.

    What the fed needs to do :

    1) No naked short permantly

    2) Uptick rule implented.

    3) Program trading curbs reimplented.

    4) Recapitalize the banking industry with super low interest rates.

    5) Implentation of prison time for current naked short.

    6) Lower key overnight lending rate to 0.5%

  • Report this Comment On October 07, 2008, at 9:37 PM, GoNuke wrote:

    I agree strongly that the SEC has let us down. It has already been damned by the Senate Finance committee for not implementing or complying with its own rules.

    I think the SEC has been reflecting the neo-con view that regulation is harmful.

    Yet if it weren't for SEC regulations there would be precious few minority shareholders -it wouldn't be safe for us because corporations wouldn't be forced to reveal the data we use to make decisions.

    The Motley Fool business model relies on access to that data.

    The level of regulation currently in place has not been adequate to prevent the massive destruction of wealth we are witnessing right now.

    Cheap money has been blamed for the speculative housing bubble but I would argue that the crisis is more a consequence of inadequate regulation.

    The free market is a myth. Everybody knows our financial markets are regulated and many understand how these regulations contribute to our prosperity and the success of our financial systems.

    Everybody also knows that leverage amplifies the gains and losses of investing. Everybody knows that leverage is a risky way of pumping up short term profit. Given this incentive to behave in a risky fashion it makes sense that leverage should be regulated. Indeed we accept bank lending regulation in the form of capital adequacy rules.

    The financial industry found a way to avoid the regulations through the creation and repackaging of high risk mortgages and the sale of unfunded insurance against the riskiness of these assets. Credit default swaps (CDS's) made the risky mortgage backed securities appear safe.

    Cheap money increased the profitability of leverage but lack of adequate regulation made it possible for the massive destruction of wealth we are witnessing right now.

    It is being exaggerated by the fact that the "insurance" has proven to be unreliable (a polite term for "bogus") the real riskiness of the mortgage backed securities is probably putting financial institutions everywhere in breech of regulations. The feeling is that any bank could fail because most banks probably no longer meet their capital adequacy ratio requirements.

    Cheap money contributed to the calamity but lack of adequate regulation and the successful side-stepping of existing regulation is what made the crisis possible.

    The world accepted Credit Default Swaps as insurance against risky investments yet CDS's are not regulated The seller of this so-called "insurance" does not need to have collateral backing up these so-called "insurance policies".

    When a debt instrument insured with a CDS went bad the seller of the CDS's had to make up the loss. Without being required to have any collateral to back up their insurance liabilities the the issuers of CDS's were able to sell more insurance than they could cover. When mortgaged backed securities proved to be worth less than their face value the issuers of CDS's had a lot of obligation. It appears that many could not meet these obligations.

    The mortgage lenders should not have been allowed to lend money to people who could not repay the loan. They should not have been allowed to lend more than 95% of the purchase price of the house -thus limiting buyers leverage and limiting how high house prices could be bid up.

    The big banks should not have been allowed to repackage these bad loans and sell them as investment grade debt. Other financial institutions should not have been allowed to insure these debts using unregulated CDS's.

    I am almost inclined to suggest that a "truth and reconciliation" process -that all lenders participate in, would be as valuable as a bailout. It would disclose the magnitude of the problem we are going to have to pay for and it would remove the fear of bank failure that is dogging the credit markets.

  • Report this Comment On October 07, 2008, at 11:40 PM, PacificGatePost wrote:



    Isn't it time the system went in for some much needed repair?

    Due diligence and oversight long ago slid out the window. No one was watching.

    Time to do something about it.

    Here's a huge one they all missed.... The dramatic change that swept through all of North America's boardrooms over the past 30 years. It is one of the underlying causes of the headache the economy is now feeling, but more importantly, it has resulted in the general feeling of "disconnect" by most Americans.


  • Report this Comment On October 08, 2008, at 6:25 AM, surfish wrote:

    The short ban is the only good thing the good-for-nothing Cox ever did.

    Shorts have destroyed the market.

    Are you blind?

    Meanwhile, disloyal shorts point fingers at EVERYONE else when they are largely to blame.

    David Einhorn will see justice.

  • Report this Comment On July 27, 2009, at 3:34 PM, DiscoFinance wrote:


    The movie that helped this to happen is now on DVD (for sale only) called: Stock Shock:-The Short Selling of the American Dream. ENTERTAINING AND EDUCATIONAL. Well worth the $. Amazon has Stock Shock.

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