In the past, the Securities and Exchange Commission may have appeared to be "the cop on the corner of Wall Street and Broad," but that is not the image the SEC's new chairman wants to project.
"What I'd like to communicate is the things the commission is doing to facilitate capital formation," said John S.R. Shad, his tone slightly plaintive.
On the job since May, the new chairman -- formerly a vice chairman of E. F. Hutton Group Inc., a top fund-raiser for President Reagan in New York and a newcomer to Washington -- is beginning to set an agenda for the commission that regulates the corporate investment industry.
At the top is Shad's concern about pumping money into American business and how the SEC can help.
In many respect, what Shad proposes for the agency is no different from what the SEC has done in the past. Simplification or elimination of paperwork required by the agency -- "simplifying and reducing, essentially deregulating" -- is one agenda item. Another is maintaining investor confidence in the securities markets through supervision and enforcement.
But although it is not an abrupt departure, through a combination of timing and his own inclinations, Shad's chairmanship marks a new era for the SEC.
The 1970s were a sort of super-hero age for the SEC, which emerged as a squeaky-clean unveiler of widespread corporate wrongdoing, including the maintenance of large corporate slush funds by Fortune 500 firms, which used them to pay off public officials here and abroad. The SEC's revelations shook foreign governments and undid years of corporate public relations.
During the chairmanship of Shad's predecessor Harold Williams, the SEC's enforcement activities began abating. But Williams' big issue was corporate governance. To some, Williams' position on that matter seemed squishy soft, but to many in corporate America and the securities industry, it was an unwarranted intrusion into areas in which the SEC did not belong.
With Shad the message is slightly different. The exalted ideal of capital formation should give neither Wall Street nor corporate America nightmares.
"By and large, the vast majority of busienssmen are impeccably honest and want to see those who lie, cheat and steal exposed and prosecuted," he said, and he promises to do so.
For a while, Shad will have to abide with the memory of Stanley Sporkin, enforcement chief of the SEC in what many consider its glory days. Sporkin departed shorted after Shad took over, to become general counsel to the CIA, a job that may prove more interesting than he ever dreamed.
"I have the highest regard for Stanley Sporkin," Shad said, as he has said many times.On the other hand, he indicated, virtue may be found in other people as well. "I'll put John Fedders [the new enforcement chief] against all comers, and I'll put myself against them too."
Shad views the major enforcement targets as organized crime's inroads into the securities business, insiders who profit from advance information, market manipulation and fraud -- antisocial aberrations in a marketplace that is otherwise good, clean and decent. But Shad would really rather talk about capital formation and other issues than continue to repeat testimonials to enforcement.
"We have the best markets the world has ever known," Shad said in an interview earlier this week. "The mobility of capital has been a great factor in the growth of America.
"The SEC is primarily responsible for investor protection and maintenance of fair and orderly markets, and that, if properly administered, facilitates capital formation," said Shad, outlining his positions.
What followed was part civics lesson, part timetable, part Republican linaty and part groping toward positions on issues, including problems with foreign investment and whether the law should be changed to facilitate mergers among troubled securities firms.
"A lot of people don't know what capital formation means," said Shad. "It means, among other things, savings invested in modern equipment, which increases worker productivity. For example, earth-moving equipment instead of a shovel. And of course, the greater a worker's productivity, the greater his pay and the higher his standard of living -- and, in fact, the nation's productivity and growth and standard of living are simply the sum of its citizens. So this is a terribly important activity . . . .
"Within the brief span of a generation, America's tax, fiscal and regulatory policies have become antithetical to capital formation," he said, citing "mounting regulatory burdens, rising inflation, corporate and individual taxes, inadequate depreciation allowances, double taxation of dividends, 70 percent taxes on dividends and interest, and one of the highest effective rates of capital-gains taxation in the industrialized free world" as savings disincentives.
"Instead of saving or investing, many Americans have been forced or induced to eat their seed corn," according to Shad. The bond market is depressed and the Dow Jones index has had the legs knocked out from under it. d"People who have been saving and investing have not done well in this environment," said Shad. As a consequence, savings and investments have declined.
"As a result, America'ss rate of capital formation has plummeted from among the highest to among the lowest in the industrialized nations," which has meant deterioration in productivity and growth, Shad continued. "If we are to maintain the standard of living of all Americans -- the nation's leadership in the competitive world community -- it is essential that these adverse trends be reversed."
Shad mentio;ned several deregulatory steps the SEC will take as part of its effort to do this. Among them:
A review of net capital and other regulations concerning the amount of liquid assets a brokerage firm is required to maintain.
Additional steps, to be announced within 30 days, simplifying and integrating registration and disclosure regulations for public companies.
A review of state regulations to exempt from registration certain securities offerings at both the state and federal level.
A review of prescribed accounting procedures, with a view toward simplifying them, the results to be announced within 30 days. 4tReview of the public utilities holding company act, which requires 13 of the nation's largest utilities to get advance commision approval on financing, merger, acquistion and other major decisions.
A review to see whether a system of self-regulation should be established for investment companies and managers -- a category that would include mutual fund managers and those who publish investment newsletters.
On another front, said Shad, the SEC would like to dissuade "a portion of the SEC bar from the questionabel practice of overkill compliance with disclosure requirements." Shad said he is talking about lawyers, who in their zeal to protect their clients, write "verbose proxies, prospectuses and 10Ks [reports public companies are required to file annually] larded with disclaimers, boiler plates and legalese that obfuscate rather than inform."
Although it may be apocryphal, Shad concedes, he siad he has been told of one 10K report delivered in a wheelbarrow. Lawyers' absurd attempts to write total insurance policies for their clients end up discrediting the firms involved, he said.
Shad said he is reviewing several market-supervision and investor-protection issues, including the SEC's pilot Market Oversight and Surveillance System (MOSS). MOSS is a c onputerized system that would supplement similar systems used by major stock exchanges to detect strange quivers in the market.Shad said he is concerned both that a system be cost-effective and that the SEC or the exchanges' own systems be able to monitor inner-market activity.
For instance, in situations in which a stock and an option to own that stock are traded in two different markets, surveillance needs to be able to follow both.
In general, he said, the SEC hopes to rely more on self-regulation and peer review to keep things honest. Shad also said the SEC would encourage voluntary corporate disclosure by placing less emphasis on enforcement against companies that report errors or inadequate disclosures as soon as company officials discover them.
Shad said another concern is whether the Securities Investor Protection Corporation (SIPC) should be able to require a merger between a troubled securities firm and a more stable one, ad the Federal Deposit Insurance Corp. may do with banks. To grant SIPC that authority would require going back to Congress, which left that authority out of legislation creating SIPC.
"The failure of a major firm could have a drastic snowball effect for the entire securities industry. . . . They're all trading together, and if you had a major firm fail, you would also be in trouble in terms of its open [incomplete] trnsactions with other securities firms, and that could trigger a series of financial problems for a whole host of firms," he said.
SIPC may only liquidate failing securities firms, a solution Shad characterized as "drastic, time-consuming and expensive."
Although Shad wants to reduce the SEC's role in some areas, he sees no need to reduce the agency's size."The SEC is a lean organization" that covers an estimated 60 percent of its costs through various fees it requires, he said. Shad sprinkles almost every public statement with praise for other officials in the agency. "I think the SEC is a jewel of an agency. "I think the SEC is a jewel of an agency. It has a small but highly professional staff," he said.
One issue that has occupied Shad's attention recently is foreign takeovers and how to respond. The SEC has favored one measure that may make such takeovers slightly harder -- a bill that would extend to foreign investors limitations on how much of the purchase price of stock they may borrow. U.S. investors already are under such limitations.
The SEC is in something of a quandary. Shad noted that importing capital can be good for U.S. business, something the SEC encourages through the admission of foreign brokerage firms to U.S. exchanges. The SEC is also reviewing U.S. rules that apply to foreign firms and investors with a view to perhaps easing them, he said.
"The question posed is whether we should facilitate exportation of capital from the U.S. to expand and modernize production facilities in industrialized countried that enjoy higher rates of capital formation, productivity and growth than we do but which do not afford U.S. corporations equal access to their capital markets," he said.