SEC failed to do its job
Editorial

‘The problem is the actuarial soundness of the
trust funds.’
In the ongoing
Senate investigation into why the pre-need industry is facing imminent collapse,
it is well to draw a distinction between poorly conceived or poorly
implemented business plans and the out-and-out scams perpetrated by con men.
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.
The unavoidable conclusion is that the SEC failed to do its job. Why is what
the Senate investigation has to establish. |