This article originally appeared in Bloomberg View on March 7th, 2013.
It’s a lousier time than usual to be a lowly member of the investing public looking for protection from the sharks of finance.
Deep-pocketed banks are dominating the process of writing the new financial rules mandated by the Dodd-Frank Act, dwarfing the efforts of investor advocates looking to rein in the banks.
At the Securities and Exchange Commission, which is charged with protecting investors, lawbreakers can cut sweet deals for exemptions from punishments before the ink is dry on their settlement papers.
Efforts to help everyday investors, in the meantime, can wind up taking a back seat. Dodd-Frank, signed into law in July 2010, required the SEC to establish and staff an Office of the Investor Advocate. More than 2 1/2 years later, the project is stuck on the agency’s to-do list.
“There’s a basic resistance to seeing things from the investor point of view,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “It all goes back to the same thing — the degree to which the industry dominates this whole conversation.”
It’s a cultural problem as Roper sees it: Regulators and the regulated operate in a setting where people with the same pedigree move back and forth between government and private-sector jobs and outside views carry little weight. SEC spokesman Kevin Callahan said in an e-mail that investor protection is at the core of all the agency’s actions, and that until an investor advocate is appointed, existing SEC offices are performing the roles required by Dodd-Frank.
Old Acquaintance
A study released last month by the Project on Government Oversight, a nonprofit watchdog group, stirred up a discussion about the revolving door of lawyers who alternate between government and industry, where they defend banks and brokers. Sorting through documents filed by 419 SEC alumni who had recently left the agency, the Project found 2,000 cases in which alumni planned to represent a client or an employer before the SEC between 2001 and 2010.
That’s a lot of meetings among lawyers who used to work down the hall from one another, but who now — officially, anyway — are adversaries. In the view of SEC critics, it is part of the clubby state of affairs that pushes government watchdogs and banks to see things the same way. Callahan said that the U.S. Government Accountability Office studied the revolving-door issue and concluded that the SEC’s controls were as strong as those of other government agencies. What a relief.
The public’s concern that regulators “are on the same team or focused in the same way as the entities they are supposed to be regulating” is a valid one, New York University Law School professor Rachel Barkow said on a panel at the New York City Bar Association last month. If more of an effort were made to have representatives of consumers at agencies, “you might have a more proactive movement right now to break some of the big banks up,” she said.
For now, the banks throw their weight around. To get an idea of just how much access bankers get to regulators, consider the calculations that Duke University law professor Kimberly Krawiec and Duke lecturing fellow Guangya Liu recently completed. Krawiec and Liu tallied up all the meetings that the Treasury Department, the Commodity Futures Trading Commission, the SEC, the Federal Reserve and the Federal Deposit Insurance Corp. had with various constituencies between October 2011 and December 2012 to discuss the Volcker rule.
Industry Outguns
Public interest groups such as Americans for Financial Reform and Better Markets had 64 meetings with the regulators. The financial industry and its representatives: 551.
Those sit-down meetings “are where the real work is taking place,” Krawiec says. “And the meetings were almost completely dominated by financial firms, their trade groups and their law firms.”
Regulators aren’t turning away public-interest groups that ask for meetings. It’s just that the financial industry has such vast resources that it overpowers the conversation. “Despite a significant expansion in the number of foot soldiers out there working in the public interest on these financial issues, we are still completely overwhelmed by the industry lobbyists,” said Dennis Kelleher, chief executive officer of Better Markets.
It won’t make it any easier to push for reform if the stock market keeps hitting new highs, which inevitably will cause memories of the crisis to fade.
NYU’s Barkow suggested that regulators seek out people from different backgrounds to fill consumer-advocate positions that would carry clout in policy disputes.
There actually is a government agency that has gone out of its way to get diverse views. It is reviled by the banking industry and is under attack by politicians who want to diminish its independence and prevent it from carrying out its mandate. The Consumer Financial Protection Bureau has a consumer advisory board that includes 13 female and 12 male members, four of whom are Hispanic. They have backgrounds in public policy, housing, retirement advocacy and academia.
Compare that to the SEC’s investor advisory committee, which does include Roper and other investor-friendly members but also has two hedge-fund officials, a private-equity executive, a venture capital guy and a director from the Bush Institute, a public policy research group founded by former President George W. Bush and his wife, Laura. The board of governors at the Financial Industry Regulatory Authority relegates two of its “public” seats to retired securities industry officials.
You don’t hear any drums beating to shut Finra or to reduce the SEC’s independence. Show me a financial regulator with real independence and input from diverse voices, and I’ll show you a sitting duck for vicious attacks.