Next steps for the SEC: the path it should take to restore its original mission and regain investor confidence.

• Author: Ferrara, Ralph
• Position: REGULATORY OVERSIGHT

FOR THE PAST TWO YEARS we have issued a report card that evaluated the Securities and Exchange Commission's record for the previous year. Our negative marks and remarks may have raised some eyebrows, but the past year's events have garnered national recognition for the significant failures of the SEC. In light of current events, it is pointless to grade the SEC's performance--the agency has clearly tailed to fulfill the purpose for which it was created: to protect investors and maintain fair and orderly securities markets.

Congress created the SEC because it believed, following the frenzy of 1929 and the chaos that followed, that it is in the national public interest to regulate transactions in securities--such transactions being all too often susceptible to manipulation and control, excessive speculation, and sudden and unreasonable price fluctuations. It is profoundly ironic that, three-quarters of a century after its creation, the SEC is facing a foundational crisis similar to the one that led to its creation in the first place.

Unfortunately, since its creation, the SEC has seemed to be chasing the ball with respect to regulating the market. It missed Enron. It missed Madoff. And, most catastrophically, it missed the looming credit and financial crisis. To be effective, the SEC must not only address the concrete issues that the current financial crisis has exposed, but must also reexamine its objectives and return to the limited--but critical--original mission. Here are the four steps the SEC should take immediately in order to function more effectively and restore public confidence.

1. Back to basics: Restore the original mission

   The Securities and Exchange Commission, historically, defined itself by representing the interests of those who are otherwise not represented by Wall Street law firms and securities market professionals--namely, small investors. At its origin, the Commission sat at the intersection of Wall Street and Main Street. It was not tasked nor did it seek to promote capital formation, fiscal policy, or monetary policy. Rather, it focused entirely on preventing inequitable and unfair practices in securities markets; whether it was proceeding by regulation or litigation, the SEC, at core, is a law enforcement agency. This is a mission that the Commission must regain.

   Of course, times have changed and the SEC must be redefined to accommodate the market dynamics of the 21st century. In the past, government has regulated...