Financial Investing and Securities Regulation: Investing in Stocks – Education (1998)

The SEC has been criticized “for being too ‘tentative and fearful’ in confronting wrongdoing on Wall Street”, and for doing “an especially poor job of holding executives accountable.”

Christopher Cox, the former SEC chairman, has recognized the organization’s multiple failures in relation to the Bernard Madoff fraud.[29] Starting with an investigation in 1992 into a Madoff feeder fund that only invested with Madoff, and which, according to the SEC, promised “curiously steady” returns, the SEC did not investigate indications that something was amiss in Madoff’s investment firm.[30] The SEC has been accused of missing numerous red flags and ignoring tips on Madoff’s alleged fraud.[31]

As a result, Cox said that an investigation would ensue into “all staff contact and relationships with the Madoff family and firm, and their impact, if any, on decisions by staff regarding the firm”.[32] SEC Assistant Director of the Office of Compliance Investigations Eric Swanson had met Madoff’s niece, Shana Madoff, when Swanson was conducting an SEC examination of whether Bernard Madoff was running a Ponzi scheme because she was the firm’s compliance attorney. The investigation was closed, and Swanson subsequently left the SEC, and married Shana Madoff.[33]

Approximately 45 per cent of institutional investors thought that better oversight by the SEC could have prevented the Madoff fraud.[34] Harry Markopolos complained to the SEC’s Boston office in 2000, telling the SEC staff they should investigate Madoff because it was impossible to legally make the profits Madoff claimed using the investment strategies that he said he used.[35]

A similar failure occurred in the case of Allen Stanford, who sold fake certificates of deposit to tens of thousands of people, many of them working-class retirees. In 1997, the SEC’s own examiners spotted the fraud and warned about it. But the Enforcement division would not pursue Stanford, despite repeated warnings by SEC examiners over the years.[36] After the Madoff fraud emerged, the SEC finally took action against Stanford in 2009.

In June 2010, the SEC settled a wrongful termination lawsuit with former SEC enforcement lawyer Gary J. Aguirre, who was terminated in September 2005 following his attempt to subpoena Wall Street figure John J. Mack in an insider trading case involving hedge fund Pequot Capital Management;[37] Mary Jo White, who was at the time representing Morgan Stanley later nominated as chair of the SEC, was involved in this case.[38] While the insider case was dropped at the time, a month prior to the SEC’s settlement with Aguirre the SEC filed charges against Pequot.[37] The Senate released a report in August 2007 detailing the issue and calling for reform of the SEC.[39]

Others have criticized the SEC for taking an overly rule-based and enforcement-focused approach to regulation, rather than an approach that emphasizes industry-wide safety and learning and thus ensures the reliability of the national securities trading system.

Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system. This may be handled by either a government or non-government organization. Financial regulation has also influenced the structure of banking sectors, by decreasing borrowing costs and increasing the variety of financial products available.

In most cases, financial regulatory authorities regulate all financial activities. But in some cases, there are specific authorities to regulate each sector of the finance industry, mainly banking, securities, insurance and pensions markets, but in some cases also commodities, futures, forwards, etc. For example, in Australia, the Australian Prudential Regulation Authority (APRA) supervises banks and insurers, while the Australian Securities and Investments Commission (ASIC) is responsible for enforcing financial services and corporations laws.

Sometimes more than one institution regulates and supervises the banking market, normally because, apart from regulatory authorities, central banks also regulate the banking industry. For example, in the USA banking is regulated by a lot of regulators, such as the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the National Credit Union Administration, the Office of Thrift Supervision, as well as regulators at the state level.