Like any good son or daughter of Wall Street, John S. R. Shad loves a booming bull market, such as the current one, which has carried the Dow Jones industrial average from 1,300 to the doorstep of 1,800 in the past six months.
The stock market has no more ardent booster than Shad, who was the vice chairman of E. F. Hutton before he became chairman of the Securities and Exchange Commission nearly five years ago.
But he also is the market's chief regulator. If the current buying spree turns into a speculative binge followed by a sharp fall in prices, there will be a lot of casualties among the investing public. And at that point, Shad is likely to find himself again defending the SEC's performance of its regulatory mandate.
The possibility that the market may be vulnerable to a speculative surge was on Shad's mind two weeks ago when he appeared before a congressional subcommittee headed by Rep. Timothy E. Wirth (D-Colo.)
Shad offered no forecast of how long the bull market would last, but when it finally does peak, it may fall sharply, he said. And that may expose some investors to surprising, unpleasant truths about some of the companies whose stock they have bet on -- truths that were concealed or overlooked in the euphoria of soaring stock prices.
"We are moving into . . . [what] some people think is the third stage of a major bull market," Shad told the House Energy and Commerce subcommittee on finance on March 5.
That stage typically produces a surge in bargain-hunting by investors, who dig among the riskier stocks of lesser-known companies because the prices of blue-chip stocks already have been bid up.
"When you get a blowoff, when you get all these hot new issues coming out as we have had in previous bull market tops, and then a break, it can be most dramatic," Shad said.
"And that can bring out all kinds of litigation. Because it is at that point that the securities lawyers and investors go back and pore over these filing documents to see if there was any false or misleading or material omissions in their filings," said Shad, referring to the financial information that companies are required to publish when they issue stock.
"I would say the SEC will be going to the battlements in the fire brigades to respond to the problems that a bear market brings in the marketplace," Shad said.
"I think the first line of defense has got to be a well-informed investing public, and a leery investing public, not a bunch of sheep that move in huge numbers on false and misleading rumors, for instance."
Shad's advice to investors to kick the tires before they buy is common sense. The issue addressed at Wirth's hearing is whether the SEC is doing enough to help investors.
Royce Griffin, president of the North American Securities Administrators Association, contends that the SEC is "woefully lacking" in resources to carry out its investor-protection mission.
While the SEC's budget has remained essentially flat, the amount and complexity of market activity has soared, bringing with it more fraud, more misrepresentation and more investor complaints, Griffin charged.
The SEC is able to review only 20 percent of the annual reports and proxy materials it receives, and last year it inspected less than 10 percent of registered investment advisers, Griffin said.
It brought 269 enforcement actions in 1985 compared with 191 in 1981 and an average of 271 in the following three years. Griffin's conclusion: The SEC can't keep up.
Shad heatedly disputes Griffin's contention, saying that, although market activity has soared, there is no evidence that fraud and misrepresentation is growing apace or that the SEC isn't fulfilling its mission.
"I think it would be a very serious mistake if a public perception came out of these hearings that the markets are rampant with fraud and there is an epidemic out there . . . That is just not true," he said.
The SEC's ability to monitor trading, corporate filings and brokers is increasing steadily thanks to a rapid growth in computer-analysis capability, Shad said.
But as Shad acknowledges, the full extent of fraud or misrepresentation in the market would not be clear until after the market turned down. Then, the companies who have cheated the investing public would be identified by their victims.
"We try to reduce the risk through a variety of actions," Shad said. "But no government agency can eliminate risk."
Wirth and House Energy and Commerce Committee Chairman John D. Dingell (D-Mich.) have pressed Shad to provide more protection to investors before the fact, as opposed to pursuing the crooks after the damage has been done.
Shad responds that often it isn't clear whether a company has made full and accurate disclosure of its financial condition until after it is in trouble. It takes hindsight.
And in a world of severe federal budget restraint, there won't be much more money for SEC enforcement from Wirth, Dingell and the rest of Congress.
That does leave the problem squarely in the investor's lap.