From the concluding chapter of Canadian Financial Institution Failures: The Pathologies of Regulatory Inaction, the doctoral dissertation (Schulich School of Business [as it is now known], 1993):
(7)Financial institution regulators will generally view the regulated as being composed of homogeneous management across institutions, with such management being generally amenable to compliance strategies. Searching for and punishing financial institution “bad apples” through deterrence strategies is not regarded as a primary regulatory function, to the extent that it is regarded as a function of financial institution regulators at all.
(8)The longer the period of regulatory inaction, the greater will be the resistance on the part of regulators to taking action. In short, inaction feeds on itself, as a function of time. However, once one regulatory agency has acted decisively, related agencies will follow, irrespective of the redundancy of regulatory action.
Thought about this when coming across an older (2003) story by Brian Milner about then leadership changes (Harvey Pitt to William Donaldson) at the U.S. Securities and Exchange Commission–“Don’t expect radical reform from new boss of SEC” (Globe and Mail, February 24, 2003: B2):
Even the reformers and activists among the 26 men who previously held the job as the top U.S. securities watchdog were rarely able to match deed to rhetoric.
…Harvey Pitt, Mr. Donaldson’s much-maligned predecessor, had become a lightning rod for criticism of the government’s entire bumbling approach to securities regulation, which was laid bare by the shocking failures of Enron, WorldCom and Global Crossing, and by the revelations that several other major companies had simply invented their numbers.
Arthur Levitt, one of the more reform-minded SEC chairmen in years, sounded a warning in the late 1990s about corporations increasingly playing tricks with their accounting, to meet or exceed consensus profit estimates. “Too many corporate managers, auditors and analysts are participating in a game of winks and nods,” he said in one blunt 1998 speech.
Unfortunately, Mr. Levitt didn’t think it was the SEC’s job to fix the problem. And it later came to light that the cash-strapped agency was so chronically short of staff it couldn’t even do one of its most basic jobs of monitoring the reports of publicly traded companies. Under Mr. Levitt’s tenure, the agency made an effort to review annual filings only once every three years, but fell far short of even that modest goal.
As recently as 2001, agency staffers managed to peruse fewer than 2,500 of the 14,000 annual reports. The list of unread documents included all those filed by Enron after 1997.
1993 revisited: need to identify and target “bad apples”. Can’t regulate everything, irrespective of staffing. Focused caution. Too often attracted to the familiar and dazzled, not disturbed, by the flash.