The SEC’s Danger of Regulatory Capture

How the “cozying up” at the SEC is just another example of regulatory capture.

David Sirota

In a report by the Project on Government Oversight in 2013, more than 400 SEC alumni said they filed roughly 2,000 disclosures forms on behalf of another client rather than the SEC. (D. Ramey Logan / Wikimedia Commons)

The phrase reg­u­la­to­ry cap­ture” shrouds a seri­ous prob­lem in vague­ly aca­d­e­m­ic jar­gon, mak­ing it seem like unim­por­tant eso­ter­i­ca rather than any­thing note­wor­thy. But the phe­nom­e­non that the euphemism rep­re­sents is, indeed, sig­nif­i­cant: When a gov­ern­ment agency is effec­tive­ly cap­tured by — and sub­servient to — the indus­try that agency is sup­posed to be objec­tive­ly reg­u­lat­ing, it is a big deal.

Such "cozying up" is the definition of regulatory capture. We can at least thank the SEC for providing such an easy-to-understand illustration of how it operates.

A per­fect exam­ple of reg­u­la­to­ry cap­ture came ear­li­er this month from the Secu­ri­ties and Exchange Com­mis­sion — the law enforce­ment agency that is sup­posed to be over­see­ing the finan­cial industry. 

As part of that respon­si­bil­i­ty, the agen­cy’s top finan­cial exam­in­er, Andrew Bow­den, warned last year of ram­pant fraud, cor­rup­tion and abuse in the pri­vate equi­ty indus­try, which today man­ages tens of bil­lions of dol­lars of pub­lic pen­sion mon­ey for states and cities across the country.

When we have exam­ined how fees and expens­es are han­dled by advis­ers to pri­vate equi­ty funds, we have iden­ti­fied what we believe are vio­la­tions of law or mate­r­i­al weak­ness­es in con­trols over 50 per­cent of the time,” Bow­den said in that 2014 speech.

That, unto itself, does­n’t sound like reg­u­la­to­ry cap­ture — in fact, it sounds like quite the oppo­site. But that’s just the pre­lude to the real story.

Less than a year after rais­ing those red flags, Bow­den appeared at a Stan­ford Law School con­fer­ence that the school said was designed to encour­age dia­logue among the SEC; aca­d­e­mics (and) mem­bers of the pri­vate equi­ty and ven­ture cap­i­tal indus­tries.” At the March event, Bow­den was caught on film express­ing his deep affin­i­ty for the same indus­try he had only months before said was plagued by ram­pant corruption.

This is the great­est busi­ness you could pos­si­bly be in — you’re help­ing your clients,” he said. The peo­ple in pri­vate equi­ty, they’re the great­est, they’re actu­al­ly adding val­ue to their clients, they’re get­ting paid real­ly real­ly well.” Bow­den then added: I have a teenaged son, I tell him, Cole, you want to be in pri­vate equi­ty. That’s where to go, that’s a great busi­ness, that’s a real­ly good busi­ness. That’ll be good for you.” That aside was met with an audi­ence mem­ber telling Bow­den: I’d love to hire your son.” 

Upon see­ing the video, for­mer bank reg­u­la­tor William Black wrote: I would have asked for the res­ig­na­tion of any of my staff who made remarks even remote­ly like Bowden’s remarks. As finan­cial reg­u­la­tors, par­tic­u­lar­ly if we have the dis­ad­van­tage of com­ing from the indus­try, we main­tain at all times a pro­fes­sion­al dis­tance from those we reg­u­late. The remarks about his son are so beyond the pale that they demon­strate he is inca­pable of even pre­tend­ing to main­tain such a pro­fes­sion­al dis­tance. His cheer­leader nature is on full display.”

In 2013, the non­par­ti­san Project on Gov­ern­ment Over­sight pub­lished a study show­ing that more than 400 SEC alum­ni filed almost 2,000 dis­clo­sure forms say­ing they planned to rep­re­sent an employ­er or client before the agency.” In light of that, finan­cial expert Yves Smith, who first flagged the Stan­ford video at her web­site Naked Cap­i­tal­ism, said Bow­den’s com­ments spot­light a deep­er prob­lem at the agency. 

Bowden’s most attrac­tive career option, assum­ing he does not move into a more senior role at the SEC first, would be to join a pri­vate equi­ty firm as a chief com­pli­ance offi­cer,” she wrote. The fact that Bow­den made such an unabashed state­ment of his real loy­al­ties, to his future meal tick­ets, is a strong and trou­bling sign that this sort of cozy­ing up is a non-issue at (the) SEC.”

Such cozy­ing up” is the def­i­n­i­tion of reg­u­la­to­ry cap­ture. We can at least thank the SEC for pro­vid­ing such an easy-to-under­stand illus­tra­tion of how it operates.

David Siro­ta is an award­win­ning inves­tiga­tive jour­nal­ist and an In These Times senior edi­tor. He served as speech writer for Bernie Sanders’ 2020 cam­paign. Fol­low him on Twit­ter @davidsirota.
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