The SEC has been one of the most prominent and well-respected of federal agencies during most of its history. Strict adherence to a focused mission on disclosure in regards to the regulation of financial reporting by public companies has been its trademark.
Having said that, however, the SEC has been far from pristine in implementing a disclosure-only policy. Certain actions could be characterized by some as a form of “merit regulation”—some companies may have been unfairly subject to undue scrutiny, and others may have received an undeserved pass. The SEC has also used its broad powers to make rules requiring added disclosures in some circumstances, and allowing abbreviated disclosures in others. For example, the SEC has added disclosure requirements to the offering documents of “blank check” companies, and also provided disclosure accommodations to smaller and foreign companies.
But, if some were to criticize the SEC for merit regulation, cavils of this sort are on the fringes of SEC activity. And, most important to the criticisms I’m fixin’ to deliver, they all relate to the regulatory activities concerning disclosures by companies to the SEC. But now, an SEC official — the chair, no less — has seen fit to make gratuitous disclosures for certain public companies.
Here’s the situation. Last Tuesday (March 11, 2008), SEC Chair Christopher Cox made the following statement to reporters: “We have a good deal of comfort about the capital cushions that these firms [the five largest investment banks, which included Bear Stearns] have been on.” (http://www.cnbc.com/id/23576630)
At the time, Bear’s stock was at $60, a five-year low, and just the day before, Bear issued a press release denying rumors of liquidity problems. The stock tumbled to $30 early Friday, and over the weekend, JP Morgan struck a deal to buy Bear Stearns for a paltry $2 per share. (For reasons I don’t want to cover here, the current market price as I write this is around $5 per share.)
It’s a serious thing that investors may have relied on false and misleading information issued by Bear Stearns, but it is quite another for the SEC to have issued information for Bear Stearns. (I am trying to making a principled statement here, so the fact that investors who relied on that information got taken to the cleaners is notable, though not the sole basis of my critique.) Heretofore, a company either complies with the disclosure rules, or it doesn’t; the SEC doesn’t make congratulatory announcements for companies it finds to have been exemplary compliers, disclosers, or what have you. But if you fail to comply, then that’s when the SEC will tell the world about you; there are thousands of examples of the consistent implementation of this policy.
I imagine that Cox would defend himself on the basis that the SEC is in a curious position with respect to companies like Bear Stearns. One of the many jobs given to the SEC by Congress is to monitor the “capital adequacy” of broker-dealers. The objective is to provide a form of protection for the assets of clients who have deposited cash and securities with broker-dealers. Thus, the SEC is serving two masters, having very different interests in Bear Stearns: clients and shareholders.
When Cox chose to speak about Bear Stearns last Tuesday, both groups of Bear Stearns stakeholders were listening, and at least some in each group responded with diametrically opposite courses of action:
• Some clients of Bear may have been calmed, but too many disregarded Cox’s assurances, took their money and ran;
• Some investors on the verge of selling their shares had a change of mind — and some may have even bought stock based on his assurances.
Cox should have known that he was unavoidably sending a signal of encouragement to jittery investors who were trying to decide whether or not to buy, hold, or sell shares of Bear Stearns. If SEC history is any guide, it was simply not appropriate for him to have done so. Just as a real estate agent cannot claim to represent parties on both sides of a transaction, the SEC cannot claim to be “the investor’s advocate” at the same moment they are functioning as the public relations spokesperson for the investee. It would have been far better to have left the public relations role to other government officials.
The question of how much SEC credibility has been lost is difficult for me to judge. Assuming this were an isolated instance, it might not be significant. But seen as the latest in a series of questionable actions reflecting the SEC’s stance on investor protection, the Bear Stearns case is just more confirming evidence of an altered SEC culture. I am sad to say that the process of restoring credibility to a once peerless agency cannot begin until there is a new chair.