It is apparently still news to some that the Securities and Exchange commission is very deferential to the securities industry. This morning the Wall Street Journal reported that “the agency has been publicly and noisily pressured by a congressman, a union leader and a Democratic presidential candidate, amid increasing consternation the agency is favoring business interests in its decision making.”
The focal point for the attention is a Supreme Court case that will decide on whether shareholders can sue investment banks for the fraudulent activities of their clients. The question is whether the SEC will file a brief with the court supporting the plaintiffs position that investment banks can be held liable. Prominent (some would say, notorious) plaintiff’s lawyer Bill Lerach is lobbying the SEC to take the side arguing that banks can be sued. Merrill Lynch, which is a defendant in a class-action lawsuit filed by lawyers representing former Enron shareholders, asked the SEC to take the opposite side.
Both sides, of course, claim that their position best protects investors. The plaintiff bar claims that holding banks liable will make banks better police their clients and avoid aiding or even looking the other way when companies engage in fraud. The banks see this opening the flood gates to a torrent of lawsuits.
Who’s right? That’s probably entirely besides the point. These things are rarely, if ever, decided on the basis of wise policy.
[After the jump, we pull back the curtains on what really decides these kind of public policy issues. Hint: it's not a great and all-knowing wizard.]
And it is becoming increasingly likely that the SEC’s position might turn on who has the best lobbyists—the trial lawyers or the investment banks. Barney Frank has invited the five SEC commissioners to a hearing next month in which these concerns might be aired, and the Journal inelegantly reports that “the hearing will likely hear concerns expressed by unions and investor groups.”
Earlier today CNBC ran a debate on the question between its reporter Charlie Gasparino and Stephen Moore of the Wall Street Journal editorial board. The discussion bordered on the surreal. Moore took the libertarian position that imposing greater liability for investment banks would damage investors in the long run while enriching trial lawyers. Gasparino pointed out that trial lawyers and investors had done a far better job of uncovering business fraud in public companies than the SEC in recent years. What made the debate surreal is that both men are probably right.
Cranking the machinery behind the veil of this deviate are problems that beset almost any attempt to impose regulatory solutions to problems faced by broad classes of victims such as “investors.” The benefits of any solution are likely to be incremental and small to individual investors, meaning the public will remain largely apathetic and ill-informed about both the problem and the proposed remedy. Those with more immediate and concentrated interests in the issue—the banks, the trial lawyers, the regulators themselves—wind up creating the policy. The only real contest is which group has the most to gain or to lose in the debate.
As a federal appeals judge once told us, “Agencies are not captured by special interests. They are created to serve special interests from the start.” The only question here is which interest will successfully capture the SEC’s attention on this issue.
SEC's Allegiances Are Put to Test [Wall Street Journal]
SEC Favor Business? [CNBC.com]