Regulatory Disparities: The SEC and Corporate Corruption in America
Introduction
Over the years, the role of regulatory bodies such as the Securities and Exchange Commission (SEC) in curbing corporate corruption has been a topic of much debate. Critics argue that the SEC, despite its mandate to oversee financial markets, has inadvertently contributed to corporate corruption through the enactment of rules and regulations that exempt certain entities from following the same standards as private and public companies. This article delves into how the SEC's regulatory framework has led to these disparities, focusing particularly on entities like Fannie Mae and Freddie Mac, and explores the implications for governance, transparency, and public trust in American financial markets.
Introduction to the SEC
Established in 1934 following the stock market crash of 1929, the SEC is tasked with protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. Over the decades, it has promulgated numerous rules and regulations aimed at ensuring transparency and ethics in corporate practices. However, not all entities are subject to these rules, leading to an uncomfortable disparity in regulatory treatment.
Regulatory Disparities and Corporate Corruption
The largest of the disparities highlighted in this discussion involves entities like Fannie Mae and Freddie Mac, collectively known as government-sponsored enterprises (GSEs). These entities were exempt from many of the regulations that private companies and even other government entities adhered to. This exclusion was justified during times of financial distress as a means to support the housing market and provide stability to the economy.
A major argument surrounding the SEC's role in regulating these GSEs is the exemption from certain financial regulations. For instance, Fannie Mae and Freddie Mac were placed under the supervision of the Federal Housing Finance Agency (FHFA) rather than the SEC. Critics argue that this separation allowed these entities to operate with less stringent scrutiny and regulation, which might have increased the potential for corruption and unethical practices.
Historical Context: The Tangled History of Fannie Mae and Freddie Mac
Fannie Mae, which began as a government entity in 1938, was reorganized into a government-sponsored enterprise in the 1960s, with the primary goals of stabilizing the housing market and providing affordable mortgages. Freddie Mac, established in 1970, operates similarly but is focused on issuing mortgages for the Federal Home Loan Banks. Both these entities have complex relationships with the SEC, the FHFA, and the U.S. government.
The root of the issue can be traced to the fact that Fannie Mae and Freddie Mac were originally created to fill a legislative gap, lacking the corporate accountability and publicly traded status of private companies. This status, while beneficial in certain ways, also led to a lack of regulatory oversight and transparency. The SEC, with its mandate to regulate public companies, did not have the authority to fully supervise these quasi-public entities, causing a significant gap in the regulatory landscape.
The Consequences of Unfair Regulations
The lack of uniformity in regulations has had far-reaching consequences, particularly in the context of corporate corruption. The absence of rigorous oversight has allowed for practices that, if applied to private and public companies, would be considered illegal or unethical.
A notable example is the role of Fannie Mae and Freddie Mac in the 2008 financial crisis. Despite exemptions from certain regulations, these entities were heavily involved in securitizing mortgages and making risky investments, leading to significant losses and contributing to the housing market collapse. Critics argue that had Fannie Mae and Freddie Mac been subject to the same regulatory scrutiny as other financial institutions, the crisis might have been mitigated or avoided.
Criticism and Reforms
Critics of the SEC's role include Bernie Sanders, who has been vocal about the need for comprehensive reforms. Sanders, in a recent plan to raise corporate reliance, highlighted the need for greater accountability and transparency across all financial entities. His proposal includes measures such as strengthening the SEC's mandate to apply the same standards to all financial institutions, regardless of their status.
The discussion around the SEC's oversight of Fannie Mae and Freddie Mac is part of a broader conversation about the need for fair and consistent financial regulations. Critics argue that the current system, which allows for significant disparities, is not only unfair but also weakens public trust in the financial markets.
Conclusion
The SEC, while playing a vital role in ensuring the integrity of financial markets in America, has inadvertently contributed to corporate corruption through regulatory disparities. The exemption of entities like Fannie Mae and Freddie Mac from certain regulations has allowed for practices that, without oversight, may lead to unethical behavior and financial crises. Moving forward, it is crucial to address these disparities and promote a more equitable and transparent regulatory framework.