The ERM Current™

Former SEC Commissioner Arthur Levitt recently testified before the Senate Banking Committee and offered his perspective on how to strengthen the regulatory oversight system in dire need of repair.  

“As we move forward in the process, we must make sure that there is an agency that is independent of the White House, dedicated to mandating transparency with robust law enforcement powers, with the wherewithal and knowledge to oversee and if necessary guide risk management, and built around one mission: protecting the interests of investors.  If we do, investors will know that they have someone in their corner, that the markets will be free and fair, and that they will invest with confidence.”

As Mr. Levitt suggests, the key to stabilizing the financial markets is by restoring trust and one of the critical elements to restoring trust is effective regulatory oversight and risk management.

Earlier this week, Lynn Turner provided extensive testimony to the US House Committee on Oversight and Government Reform on the many ills of our current corporate and regulatory governance regime.  He had many great points, but one that stood out was his commentary on the demise of the Securities and Exchange Commission (“SEC”).  The following is an excerpt from Mr. Turner’s testimony.

“Regulation also failed to keep pace. At the Securities and Exchange Commission (“SEC”), the Office of Risk Management had been reduced to an office of one by February of this year. From 2005, the number of SEC enforcement division personnel was cut by 146 from 1338 to 1192 in 2007. In 2004, the SEC reduced the capital requirements for the largest Wall Street investment banks.”

As he points out, the SEC mirrored what many companies were doing themselves – cutting back in areas that were meant to prevent future catastrophe.  During good times, few concern themselves with growing risks or possible downturns.  However, the SEC took “putting your head in the sand” to a new level by reducing their office of risk management to one person.

Mr. Turner offered the following recommendations to Congress and the SEC.

“The SEC also needs to take actions to shore up confidence in the agency which I believe has been seriously eroded as a result of the current crisis. For example, the Office of Risk Management should be adequately staffed to allow the agency on a proactive basis to identify risks in the market place such as those created by excessive leverage, or new financial instruments that carry significant system risks such as credit derivatives. Once identified, a plan for promptly and appropriately addressing regulatory and public policy issues should be formulated and an action plan established on a proactive basis before, not after, the train wreck has occurred.”

Several years ago, the US Army ditched their slogan “An Army of One” for obvious reasons.  I think the SEC may need to do the same.  Your thoughts?

Click here to read more of Lynn Turner’s testimony to Congress.