Reading the slew of articles in our favourite humungous financial scandal, it seems that the SEC is going for the softball option. (Recaps here [1], [2].) Congress is backing off from legislation, and the SEC's proposals - quick redemptions attract a fee, more independent boards, etc - are being treated with a yawn by some and a grumble by others [3], [4]. Indeed, the recent Fortune article (sorry, no URL) suggests that the techniques behind the scandal were discussed in a book as early as 1992 [5].
What to make of all this? First we saw the excitement of AG Elliot Spitzer's billion dollar assault on the fund managers, and now we see the regulators lack lustre response - almost as if they didn't want to do it [6].
Jim Nesfield's comment adds light [4]:
' While most analysts like the SEC's plan against late-trading, James Nesfield, a key informant in the scandal involving disgraced hedge fund Canary Capital Partners, says it fails to address structural problems in the industry. '
' "My answer to you is that they [SEC officials] are doing everything they possibly can with what they have," said Nesfield, ... [The] systems, Nesfield says, remain vulnerable to manipulation by unscrupulous traders. And none of the regulations implemented so far directly address the problem. "They need to address the way trades are processed and settled ... As long as there's a human being that can slip an order in a batch after 4 p.m., you could have late trading." '
Which is where we are: The SEC (and Congress, and the NASD, and ...) are faced with several choices. 1. create raft of legislation to "solve the problem;" 2. fix the structural problems at source. 3. wait for someone to fix them. 4. do nothing.
The issue here may be that the cost of Sarbanes-Oxley / Basle II has woken people up to the lack of success of heavy weight regulatory options [7]. Even the regulators must have wondered when the run of scandals was going to end, and wasn't the last cleanup supposed to do it?
So, 1. is out of favour - no big regulatory package this time. 2. seems obvious. If we can identify the flaws, why not fix them? Structural problems abound, and we know where they are. Further, in these pages we know all about them because we've solved them already. And in that very solution lies the trap.
The SEC cannot fix the structural problems if it is a commercial responsibility. The mere fact that this could be a purchased solution from a solution provider means that the SEC is somewhat constrained by non-interventionist policies.
Which leaves 3., waiting for someone to fix them. Which is uncommonly like 4., do nothing. Hence the desire to slap on a few bandaids and hope that we (industrially, collectively) get our transactional act together.
[1] Nesfield and Grigg, "Mutual Funds and Financial Flaws," testimony before U.S. Senate Finance Committee, 27th January 2004. http://iang.org/papers/mutual_funds.html
[2] "Governance or Regulation - You Pick?"
http://www.financialcryptography.com/mt/archives/000027.html
[3] "Jury's out on mutual fund reform,"
http://www.tdn.com/articles/2004/05/12/biz/news03.txt
[4] "SEC fund reform: Is it stalling?"
http://www.baltimoresun.com/business/bal-bz.reform11may11,0,459903.story?coll=bal-business-headlines
[5] The New Market Wizards, 1992,
in one chapter profiles the "Gil Blakes" strategy.
[6] "Mutual funds face minimal scrutiny,"
http://www.sunherald.com/mld/sunherald/business/8678286.htm
[7] "Sarbanes assails bid to dilute reforms,"
http://www.baltimoresun.com/business/investing/bal-bz.sarbanes14may14,0,1090342.story?coll=bal-investing-headlines