Departing SEC Chief Looks Back at Career Policing Securities Industry
Securities and Exchange Commission Chairman John S. R. Shad will be leaving the commission this week to become ambassador to the Netherlands. He discussed his SEC career with Washington Post Staff Writer David A. Vise.
Question: You will be remembered as the SEC chairman who presided over the $100-million case against Ivan F. Boesky. If you were writing the history book, what would you say about your role and the SEC’s role in the Boesky matter?
Answer: I’d say it didn’t begin with Boesky, it began back in 1982 when we started getting better cooperation from abroad and working more closely with the Justice Department. We also proposed the Insider Trading Sanctions Act (with increased penalties for illegal insider trading) in 1982. There have been 125 insider trading cases brought within the last five years, compared to 77 during the preceding 47 years. Boesky is obviously, by far, the most dramatic.
Q: How successful has the SEC been in putting a stop to illegal insider trading?
A: We have not eradicated insider trading, but we certainly have inhibited it. And as a consequence, the multimillions of dollars of profits that had been siphoned off the market by insider traders, by Boesky and others, now are flowing through to the investing public.
I came here in May, 1981, and in 1981 I was reading articles in leading publications that said insider trading was so pervasive nothing could be done about it. A lot of people took those articles as a license to engage in the activity. I made the comment that we were going to come down on that activity with hobnail boots.
Q: How do you know that you have inhibited insider trading?
A: We know it from the people we have sent to jail, first of all. We know that they’re not engaged in the activity. I get it by way of phone calls from the chairmen of companies and senior members of securities firms. They laud the SEC for what we have been doing.
So the markets today are even better than they were yesterday, and yesterday they were by far the best securities markets the world has ever known--the broadest, the most active and efficient, and the fairest.
I’d like to give you a staggering number. Last year, more than $38 trillion in securities changed ownership, nine times the gross national product. Trillions of dollars of these transactions are executed over the telephone, relying solely on the other party’s word. By any reckoning, the level of securities fraud in America is a fraction of 1% of the volume of transactions. People sometimes don’t put these things in perspective.
Q: Some people say the SEC has made the stock market less efficient by inhibiting the flow of information and creating a lot of fear on Wall Street. What do you have to say to those critics?
A: It’s an unsupported opinion. I think in some areas there has been an over-reaction to the SEC’s cases. Rumors and street chatter are not illegal. The fact is that the cases that have been brought don’t relate to that type of activity. They relate to black-and-white securities fraud.
Q: What about ordinary investors who don’t work on Wall Street?
A: A large number of conversations between stockbrokers and their customers begin with the customer saying, “Last night at a cocktail party I heard . . . .” They don’t know whether they’ve got inside information, but they heard a rumor or speculation or guess. So, a lot of people think they’ve got inside information when in fact, it’s certainly not.
Q: Do you favor a statutory definition of illegal insider trading?
A: I’ve always favored specificity over uncertainty in the area of a definition, but the courts have been doing a good job on a case-by-case basis of defining it. It depends on how the Supreme Court comes out on the Winans case as to whether or not Congress ought to go for a definition. (The Supreme Court has indicated that it will rule on an insider trading case involving former Wall Street Journal reporter R. Foster Winans.)
Q: Why are you leaving now in the midst of the most significant investigation in SEC history?
A: I have been here longer than any other chairman, six years, and I think that it’s appropriate for me to think about doing something else. I’ve thoroughly enjoyed it. It’s been challenging and worthy of the effort, but the time has come to move on.
Q: Why is the White House having such a difficult time finding a new SEC chairman?
A: There are an awful lot of outstanding people out there, but I’d say it’s getting difficult to fill a position in government under the new regulations which make it very, very expensive and very difficult--I think unnecessarily so--for people to accept presidential appointments.
Q: When you think about moving to the Netherlands, what do you think you’re going to miss most about the SEC?
A: Stress.
Q: Really?
A: Oh yeah. I’ve grown up on stress. My whole life has been stress. I left home when I was 17 and I went to work as a riveter in an aircraft plant from midnight until eight in the morning. I went to college from 10 to four. And I’ve been sort of doing that ever since. On the other hand, what I’m really looking forward to is a new learning curve. That’s what keeps you young.
Q: Looking back, what have been your other major accomplishments at the SEC?
A: You’ll find if you look back that in terms of what’s been going on here, 1982 was a watershed year. It was in 1982 that I met with the chairmen of the major exchanges and the over-the-counter market to accelerate and implement electronic surveillance systems and transaction audit trails to facilitate the quick identification of questionable transactions.
There also was a 1982 initiative on EDGAR (the SEC electronic filing system for public companies). The entire securities industry couldn’t handle the kind of volume we’re seeing but for telecommunications technology. So we’re playing catch-up.
Probably the most important thing, again in 1982, was the integration of corporate registration and reporting requirements, and the shelf-registration rule for public offerings, which are two of the most important improvements that have occurred in the securities laws since they were enacted in 1933 and 1934. They’re saving corporate issuers, for the benefit of the shareholders, more than $1 billion a year and basically improving public disclosure.
It was also in 1982 that we got the SEC-CFTC (Commodities Futures Trading Commission) accord. These two agencies had been locked in a seven-year turf battle, and it was in 1982, that Phil Johnson and I, the two chairmen, got together and within a matter of a month agreed on a resolution.
Q: What has been your biggest disappointment at the commission?
A: I think there is an awful lot of adversarial debate that goes on here, which I don’t really think is the way to improve the securities laws. It gets politicized when it shouldn’t. This is not a political agency.
Q: So would you say your biggest disappointment is in your relationship with Congress?
A: No. I don’t have a disappointment in that sense. What I think is that the job could be done better with a recognition of our common interests and objectives rather than just the idea of constant criticism.
Q: Will the stock exchanges resolve this controversy over the one-share, one-vote standard on their own?
A: I think the ideal solution would be an agreement among the parties, but they’re in competition with one another.
Q: So will the SEC have to move to adopt new rules?
A: Last week we initiated a rule-making proceeding, so we are heading in that direction.
Q: You’ve requested the largest budget increase in SEC history, from around $111 million to $145 million. Is it enough?
A: One of the problems we’ve got, even with more resources, is the disparity in wage scales between the private and the public sector. Right now we’ve got authorized positions that we haven’t been able to fill. Our budget has been increased 43% since 1981, whereas a lot of the independent agencies have been cut.
Q: You recently made a very large donation to Harvard Business School to promote the study of ethics. How can Harvard help?
A: I’ve been concerned over the rash of insider trading cases that have been brought against graduates of leading business and law schools recently; the cream of the crop, many of whom now are convicted felons serving time in penitentiaries. That’s very disturbing.
Ethics and integrity are their own rewards. They also make good business sense. The Harvard case studies and research are intended to amplify these and related concepts. Harvard case studies and research materials are disseminated to more than 6,000 educational institutions throughout the world.
Ethics is imbued in childhood, but the leading educational institutions have the obligation to certify the ability of their graduates to use the knowledge gained for the benefit of society, rather than the abuse of society.
Q: Do you really think this will encourage ethical behavior?
A: You’ve got to be very sensitive to these issues and my bottom line is if you don’t want to see it published on the front page, don’t do it. That is probably the best test of whether or not something is appropriate.
