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The Problem With Financial Regulatory Reform

Legislative leaders appear to be on the cusp of passing financial regulatory reform, creating a new consumer financial protection agency and a structure that would break down banks before they became too big to fail.

There's just one problem: For the new law to be effective, it must be enforced. And there's increasing evidence that America's regulatory system has some serious shortcomings that are not fixed by the more than 1,400 pages of financial regulatory reform legislation.

Consider the Securities and Exchange Commission, which has 3,500 employees charged with enforcing the nation's securities laws and keeping the financial markets free of fraud. The 2008 meltdown of the financial system provided plenty of evidence, from Goldman Sachs to Bernie Madoff, to suggest that the agency failed in that mission.

While you can point fingers to the short-comings of past administrations (from both parties) the question is what's being done now? What, for example, has happened to the examiners who let Bernie Madoff slip through their fingers, despite repeated warnings that he was running the biggest Ponzi scheme in history? Are they still employed? Have they been warned, reprimanded, suspended, fired? It's under review, according to SEC spokesman John Nester.

How about the examiners who revealed in internal reports dating back to 1997 that they believed Allen Stanford was running a Ponzi scheme but failed to pursue it before Stanford bilked investors out of some $8 billion? Again, under review. Has the agency sued their former Ft. Worth enforcement chief, who not only protected Stanford from the SEC's investigation, but attempted to go to work for him afterwards? No.

Okay. How about the 33 SEC employees who spent up to eight hours a day viewing pornography instead of chasing down financial crooks? Nester says: "Each of the offending employees has been disciplined or is in the process of being disciplined."

Does that mean fired? Not necessarily. While "some have been dismissed," the SEC's employment policies don't allow the agency to simply fire a worker who participates in outrageous conduct, Nester said. Before an employee can be fired, he or she must be reprimanded and the agency must consider their "career contribution." The bottom line: You may have to participate in a lot of eggregious conduct before getting canned.

To be sure, most employers (government and otherwise) have safeguards ensuring that a supervisor can't simply fire an otherwise good worker on a whim. But when an internal investigation finds that you were "blocked" from porn sites 16,000 times before you found a work-around and downloaded hundreds of explicit photographs onto your work computer, you have a pretty good case for firing that employee "for cause." Fox News reports that the accountant who was blocked 16,000 times received a 14-day suspension.

Before we act as if it's just the SEC, it's worth mentioning that the Federal Reserve (which will house the new Consumer Financial Protection Agency under the pending regulatory reform law) was in charge of enforcing lending disclosure laws as the sub-prime mortgage mess was fomenting. Consumers maintain that these laws were either so antiquated that they did nothing to adequately reveal the risk of new financial products such as "option ARMs" or they were simply ignored without serious consequence to the perpetrators or the regulators who let it happen.

Don't be mislead. Many of the reforms contemplated by the new law are desperately needed. But we also need reforms that hold regulators accountable. Creating consumer protections that aren't enforced only gives investors the illusion of safety. As any Madoff investor can attest, that illusion can be devastatingly costly.

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