Why regulatory solutions fails

Posted by on November 26, 2009 in Misc.

If you want another reason why a reliance on regulatory solutions alone will not fix what’s wrong with our financial system, take the case of the U.S. Securities and Exchange Commission (SEC). In a stinging rebuke by the Government Accountability Office, a non-partisan audit arm of U.S. Congress, an audit of the SEC foundĀ  the regulatory “struggl[ing] with material weaknesses and significant deficiencies in internal control that we [GAO] have reported at various times since 2004.” Furthermore, the GAO found that SEC measures to fix internal controls issues were not sustainable; initiatives to fix the problems could not, in one case, even last more than one year.

In plain English, arguably the most famous securities regulatory in the world cannot even manage itself. More critically in a climate of regulatory reform, the GAO found that the SEC really had no follow through in its own attempts to reform itself. The reforms always start off with good intentions but whether through cultural indifference, resistance to change or no real incentive for change (regulators have no bottom line and are typically unionized environments), the GAO found that such noble beginnings are followed up with much less enthusiast effort and resources.

Practically speaking, even if you amended the SEC’s powers to be more responsive, the GAO report tends to indicate that, as a corporate culture, the SEC would not embrace the change since it appears to have a pattern of reforming for show but reverting back to the mean- a much criticized mean- over time. Now one understands how the SEC missed Madoff so many times. If it is lax in its own management, it is not exactly looking at every file with a critical eye.

As a comment that has neither positive or negative connotations, the prime motivation for any entity is self-perservation and self-perpetuation. Governments and regulators operate to ensure their own survival which may not necessarily align with the interests of the stakeholders it is mandated to serve.

In a personal finance world awash in taxpayer money, we tend to forget yesteryear’s lessons quickly. Please remember that no one but yourself is responsible for your personal finance fate and relying upon financial literarcy programs funded by government and regulatory reforms to save the average investor is a passive approach which is similar to the same passive approach that lead so many to ruin last year. Those who do not learn from history are bound to repeat it again.

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