The Thankless Jobs of the SEC and Hockey Refs! But We Need Them!

Before any of you start talking about socialism, and market intervention lets set some ground rules shall we.

The purpose of the SEC is to provide disclosure and oversee a market.

The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. 

Think hard about this people. The SEC is there to make sure that we have an orderly market. The SEC does not regulate the companies, does not regulate the lending of mortgages. The SEC regulates the market.

But before I continue writing about the SEC let illustrate a counterpart to the SEC, namely a hockey ref. I used to be a hockey ref and hence can personally relate to the SEC. The hockey ref is the idiot who cannot see the broad side of a barn. The hockey ref is nobody’s friend and is the one who does not understand the game.

The reality is that the hockey ref understands the game extremely well better than everybody actually because they enforce the rules. The hockey ref knows that rules of the game are not there to tilt the odds in the favor of any one particular party. The rules are there to keep the game enjoyable and fair so that the winner is an earned winner.

Though sometimes in hockey the rules have to change. Do you remember the Bertuzzi event in the NHL? Remember that violent cross check, which took the career of a hockey player? That was not funny, and it happened. The NHL took action and things have changed.

Now let’s get back to the market and the SEC. Many think that the SEC cannot see the broad side of the barn and has no clue of what the market is about. In fact the opposite is true. The SEC has been doing things that the market and many in the media seem to ignore. In specific the SEC has done the following:

• adopted a number of measures to strengthen investor protections against naked short selling, including rules requiring a hard T+3 close-out, eliminating the options market maker exception of Regulation SHO and expressly targeting fraud in short selling transactions.
• issued an emergency order to enhance protections against naked short selling in the securities of primary dealers, Fannie Mae, and Freddie Mac.
• announced emergency plans for a rule to ensure public disclosure of short selling positions of hedge funds and other institutional money managers.
• undertook sweeping enforcement measures against market manipulation.
  provided guidance to banks about how to account for credit support of money market funds.
• written rules to strengthen the regulation of credit rating agencies, and performed examinations that have led to new rules to reduce rating agency conflicts-of-interest.
• brought a landmark enforcement action against a trader who spread false rumors designed to drive down the price of stock.
• initiated exams of the effectiveness of broker-dealers’ controls to prevent the spread of false information intended to manipulate securities prices.
• announced what will be the largest settlements in the history of the SEC for investors in auction rate securities who bought auction rate securities from Merrill Lynch, Wachovia, UBS and Citigroup.
• entered into a Memorandum of Understanding with the Federal Reserve, to make sure key federal financial regulators share information and coordinate regulatory activities in important areas of common interest.

What about shorting and the attack on shorters? Well, the shorters are at fault! Anybody who is saying the shorters are keeping the market efficient should please explain the REG SHO list. This list is a failure to deliver shorted stocks list. And you can make the argument that those failing to deliver over a period of weeks and months are committing fraud! So it is good that the SEC will clamp down.

Is banning shorting bad? Remember this is a timeout, not a complete ban. If I may use the hockey metaphor one more time. Remember the Montreal Canadian – Quebec Nordique game?

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That was the hockey game of shame! It caused one ref to retire and to stop the fighting they had to turn off the lights so that the players could not see each other. They imposed drastic measures to bring some sanity to the game.

So while this short selling ban sounds drastic sometimes it has to be done to make the playing field fair again. You will be able to short sell again, once the market stabilizes. Then short selling does keep the market efficient.

Remember like hockey the idea of the refs or the SEC is not to tilt the game in anybody’s favour, but to keep the game fair for ALL participants!