The SEC, Deregulation, and the Harm of Deregulation

In a relatively frank statement, the Chairman of the SEC, Christopher Cox, confessed that deregulation was at least in part responsible for the current financial crisis.  In a press release issued by Chairman Cox, he noted:

• The last six months have made it abundantly clear that voluntary regulation does not work. When Congress passed the Gramm-Leach-Bliley Act, it created a significant regulatory gap by failing to give to the SEC or any agency the authority to regulate large investment bank holding companies, like Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns.

It was a frank admission.  According to the NYT: "The retreat on investment bank supervision is a heavy blow to a once-proud agency that has seen its influence over Wall Street steadily erode as the financial crisis has exploded over the last year."  While Cox was addressing the voluntary program for overseeing large investment banking firms, there are other areas where the regulatory structure is not adequately enforced.

Stock exchanges impose meaningful corporate governance standards but there are substantial concerns with enforcement, something we have noted on this Blog. Congress tried to address this concern in the creation of the PCAOB by providing that the SEC can remove board members for cause and defining cause as the failure to enforce their own rules. In other words, it gives the SEC a sanction where the SRO like organization doesn't enforce its rules.