REGULATION BY PROSECUTION: The Securities and Exchange Commission vs. Corporate America

Securities lawyer Karmel was a member of the Securities and Exchange Commission from September 1977 to February 1980--a period of transition in the national temper from consumerism (in SEC terms, investor protection) to antiregulationism. To Karmel, new SEC chairman Harold Williams--generally regarded as a mild regulator--was insufficiently reformist; and she frequently dissented from commission decisions. But the case she makes here--for a non-adversarial SEC geared explicitly to ""capital formation""--has itself been overtaken by events. This was precisely the recommendation of a Reagan transition team in early 1981, and it is the course the SEC has since followed in relaxing its regulatory grip. Only at the close of her long book (mostly written ""during the last six months of 1980"") does Karmel express some qualms about ""the current revolt against regulation""; only then, too, does she cease speaking routinely of ""the continuation of a free-market economy,"" and write: ""We are much too advanced as an industrial society and as a democracy to return to a free-market economy."" So the book, centered on Karmel's dissenter status, falls in two crucial respects: it does not fully or accurately reflect recent SEC history; much of what it propounds does not address current circumstances. And, the Reagan victory notwithstanding one might well challenge her basic contention that the SEC, set up as a watchdog after the Crash, should now assume a ""promotional"" role--on the basis that the 1980s require investor confidence in the securities markets. Nonetheless, she raises worthwhile issues of a general and a specific nature. Should the government ""have the power to prosecute citizens for behavior that has not been declared illegal by the legislature?"" Should the SEC have the power to discipline attorneys ""for entities that it substantially regulates?"" To what extent should the SEC concern itself with ""corporate morality""--as against ""economic materiality?"" And whatever one thinks of Karmel's conclusions (that the SEC's corporate-governance and foreign-bribery programs were out-of-order), an interesting and unusual aspect of the book is the extent to which she puts her own background and reactions into the picture. ""Owning stock reinforced my father's belief in the American dream,"" she writes. ""When I was a government official, I used to think that if I could engender that sort of wholesome confidence in American business. . . [its] productivity would necessarily improve."" But whether this purpose is advanced by muzzling the SEC is another matter--which one hopes Karmel herself will reconsider.