WHEN THE STOCK markets go through a long unbroken rise, experience warns, loose practices proliferate in the flow of quick money. As the policeman on that beat, the Securities and Exchange Commission has the arduous job of enforcing the safety rules. David S. Ruder, the Northwestern University law professor now nominated to be the next chairman of the SEC, is about to step into an office that is likely to become increasingly demanding wherever the market goes.
Enforcing the safety rules is going to be only half the job, for some of those rules are now badly out of date and need to be rewritten. Congress is already at work revising the definition of insider trading, and legislation on corporate takeovers is likely. The next chairman of the SEC is going to spend many days -- and some nights -- working with congressional committees as they rewrite the securities laws.
Financial ingenuity in recent years has developed many new instruments, and new markets, that have never been tested by a severe downturn in prices. The present financial boom has been running for nearly five years. In that time the Dow-Jones average of industrial stock prices has tripled. Money generated by this surge is going into a great variety of esoteric securities and trading strategies that have never been through even a mild slump. It isn't simple to protect the public while the market is going up, as the Boesky case suggests. It's even more difficult, and hardly less essential, to think ahead to the downturn that everybody knows lies somewhere ahead. What are the protections that will be needed then?
Mr. Ruder, who brings a fine reputation to this office, says he will continue to enforce the laws against insider trading with the same vigor that the outgoing chairman, John Shad, and the SEC staff have devoted to it. But Congress will want to know his views on a wide range of questions about financial deregulation.
The case for deregulation is efficiency; the case against it is stability. Congress and the SEC try to balance the two, and the ideal balancing point shifts with time and circumstance. There's been a lot of deregulation, much of it useful, over the past decade. But currently, with stock prices high and speculative fever ditto, it's time for regulators to lean back in the direction of stability.