Assessment of the Acts and the SEC

Opinions regarding the SEC are varied. For the most part, it's pretty obvious that businesses and the securities industry aren't exactly enamored with having the SEC around. The costs of reporting and following SEC regulations, in general, are tremendous. Byron C. Radaker, CEO of Congoleum Corporation, took his company private in the early 1980s, citing that this would save his firm between $6 and $8 million dollars per year in reporting costs. ^[3] Furthermore, what firm would want to be policed? However, while companies may not appreciate the SEC, can investors do without it? In order to consider this, let's first think about the thrust of the acts, which is for corporations to honestly tell the public about themselves .

Many people, especially academics , believe that the stock markets are efficient. What is meant by this? The notion of market efficiency is that current stock prices reflect their correct value. Believe it or not, this concept actually means that stock prices are never wrong. To understand this concept, consider this: We have millions of participants in the stock markets. The average of their beliefs and opinions, based on current and past information, is going to be reflected in the current stock price. For example, if the stock price were too low, at least some people out of the millions would recognize the error in pricing and rush in to buy the stock. Because of the buying, the stock price would get pushed up and not be mispriced for long. Because information is continuously being processed by millions of market participants, which, in turn , makes the markets efficient, do we really need the SEC? Consider the fact that the SEC only requires quarterly and annual reporting. By the time these reports are made public, the information is already old. Are the disclosures therefore useful?

What about SEC regulations that state that firms cannot lie? Again, in the context of market efficiency, if companies do hide facts and/or lie, someone is bound to find out because there are so many people involved! There are brokers , analysts, directors, employees , accountants , creditors, investors, and even state regulators. So the inevitable revelation of fraud will cause the stock price to subsequently plummet. Besides, companies that lie and get caught cannot last for long anyway. We have always had a climate in which consumers and investors have cast a suspicious eye toward big businesses. Again, do we really need the SEC? This question cannot be answered with ease. For one, none of us can recall what life was like before 1933. So we don't know if things have improved.

Some finance scholars have attempted to empirically assess the importance of SEC regulation to our financial markets. In 1964, George Stigler, who would later go on to win the Nobel Prize in economics, published a famous study in which he compared new securities being issued in the 1920s to those issued in the 1950s to determine whether or not the existence of the SEC had improved the securities markets. ^[4] He found no difference, and he contended that SEC regulation did not improve the quality of the securities markets. However, professors Irwin Friend and Edward S. Herman subsequently debunked Stigler's study, citing that there was now less securities fraud because the SEC was around. ^[5] This debate continues today. In 1995, in response to complaints by market participants regarding regulatory costs and excessive regulatory burdens, an SEC committee was formed to study the feasibility of making it less burdensome for established public firms to issue securities. ^[6] In 1998, the SEC issued such a proposal, but it subsequently went nowhere.

Overall, we may never know for sure if the SEC makes our securities markets better. Perhaps markets would still be efficient without the SEC. However, it is also just as possible that the very existence of the SEC contributes to making our markets efficient. Or perhaps the very idea of a securities regulator is a good one, but the current implementation may be ineffective .