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Wednesday, April 23, 2008

Senator Grassley and the SEC

It’s well known to anyone with experience representing individual investors that the SEC is shamefully ineffective when it comes to regulating the major brokerage firms. To wit: the SEC might have prevented the collapse of the auction rate securities market. The agency knew of extensive wrongdoing in the marketplace as far back as 2006, but instead of mandating a wholesale cleanup and imposing extensive fines, it chose to let Wall Street off with barely a wrist slap.

It also can be argued that the SEC might have prevented the collapse of Bear Stearns. It’s publicly known that the SEC dropped an investigation of Bear’s valuations of collateralized debt obligations just months before the firm collapsed. We now know those valuations weren’t worth the paper they were printed on.

Sen. Charles Grassley, the ranking member of the Senate Finance Committee, admirably and justifiably wants to know why the SEC dropped its Bear investigation. But according to today’s Wall Street Journal, the SEC responded to the Senator as if he was just a reporter.

“The commission does not disclose the existence or nonexistence of an investigation or information generated in any investigation unless made a matter of public record in proceeding before the Commission or the courts,” the SEC responded in a letter.

It doesn’t take a rocket scientist to figure out what’s going on here. The SEC’s decision to close its Bear investigation represents yet another monumental agency failure. The agency knows full well that Congress will be outraged if the truth about its failure to protect investors becomes publicly known. Let’s hope that Senator Grassley is sufficiently outraged by the SEC’s response and continues to aggressively pursue this matter. The findings won’t be pretty, but maybe it will finally lead to some real – and much needed – regulatory reform.

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