SEC failed to do its job

The case, for example, of the failed companies which solicited placements in return for guaranteed payment in the future of college tuition properly belongs to the first category. While some might have diverted their trust funds into questionable businesses, many placed their money into legitimate investment outlets. It just happened that there was no way the latter’s commitments could be met given the mismatch of returns and runaway increases in the cost of education.

Here is where remedial legislation is needed. The problem is the actuarial soundness of the trust funds. In this case, there is no need to re-invent the wheel. The insurance industry has long solved this problem. It is just a matter of applying the same principles with their accompanying regulatory framework to the pre-need industry.

A good case could be made for transferring supervision of the industry to the Insurance Commission although a re-engineered Securities and Exchange Commission could conceivably perform the same function. "Re-engineered" is the word because the SEC has been a dismal failure in protecting investors even from patently fraudulent schemes. If the SEC could not adequately fulfill its basic law enforcement function, it would be wishful to believe it could play the role of a nurturer of legitimate but sophisticated investment practices.

The double-your-money schemes which surfaced during yesterday’s opening of the Senate investigation are an example. Rural banks were used as fronts to solicit placements but the money raised was not booked as deposits to skirt central bank regulations. The placements were booked in the name of pre-need sister-companies which in turn simply issued post-dated checks to skirt SEC requirements that investment instruments sold to 19 or more persons be registered with it.

The con artists exploited what they saw as a crack in the interface of the regulatory areas supervised by the Bangko Sentral and the SEC, and drove a Ponzi train through the hole.

SEC lawyers have passed the buck to the justice department, saying they had filed cases against the swindlers but prosecutors ruled there was no prima facie evidence of violations of the Securities Act. We have no reason to doubt the SEC lawyers’ claim, but we are skeptical about the unspoken corollary that they had already done their best.

Our reading is that SEC failed to do its homework. The SEC has a whole armory of administrative weapons to put con men out of business. There is no need to lecture its lawyers on the commission’s broad and awesome – if unexercised – powers. Defiance of SEC orders is a criminal offense, a separate and distinct offense from actual solicitation via unregistered investment instruments.