SEC the Mandate of the Thesis

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The move essentially confirmed that the market's valuation is not rational. Moreover, it allowed financial institutions to escape some degree of punishment by investors by recording values for bad assets that are unrealistic. This could be viewed as contributing to stronger short-term stock prices, but also to longer-term problems as companies continue to record higher asset levels than they actually possess.

Overall, the SEC has accomplished little thus far in terms of the financial crisis. The outcome of the agency's work on improving governance and board member standards for financial institutions will be the final determinant of the agency's performance with regards to the crisis. During the leadup to the crisis and its initial impacts, there was little that the SEC could have done within its mandate and with the tools supplied to it by Congress to prevent the crisis or to curtail its impacts. By defending against short-selling and market manipulation, the SEC performed well and controlled some of the irrational market behavior. This reduced some of the damage that could have occurred, as stock prices fell more slowly than they otherwise would have during the fall of 2008.

There are changes that the SEC can make, however, to position itself better to deal with future crises. The agency took significant criticism, including a famous rebuke by then-Presidential candidate John McCain. This left the SEC in the position of having to defend itself for not taking action that, in fact, it has little power to take. Thus the first change recommended to the SEC is that the agency petition Congress for more powers to deal with boards that allow institutions, especially financial institutions, to carry too much risk. The SEC may have power to deal with the issue after the fact, but it needs to gain the power to address the issue beforehand.

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The second recommendation for the SEC is that the agency takes a proactive approach to explaining its mandate. The agency comes under such fire because the public knows little about the scope of its mandate. That the SEC has a specific, limited mandate and limited powers to enforce that mandate is not well-known among the general public.

The third recommendation for the SEC is that it strengthen its rules with respect to board competence and composition packages. Shareholder rights are still at relatively low levels, despite the increasing prevalence of institutional shareholders with strong financial knowledge. The SEC should improve the role of the shareholders in the governance process, as they can be expected to act in a more proactive manner than the SEC itself is able to.

The financial crisis was not the SEC's fault. The agency's mandate is written to sound proactive but the tools the SEC has at its disposal are largely punitive measures to be taken after an investigation finds a firm guilty of impropriety. If the SEC wants to have a more proactive impact, it needs to petition Congress for better tools. With the tools the SEC has at its disposal, it performed well during the crisis. The stock market was going to fall sharply no matter what the SEC did, but by curtailing the impacts of investors seeking to profit from market panic, the agency reduced the intensity of the stock market slide and allowed it to stabilize more quickly.

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