The S.E.C. Through a Glass Darkly

Abstract

IN A recent article in this Journal,' Professor George J. Stigler attacks both the recent Report of the Special Study of the Securities Markets2 and the United States Securities and Exchange Commission itself, the first on grounds of ineptitude, the second on grounds of ineffectiveness. As we shall spell out in some detail, we find his arguments almost entirely devoid of merit. We question his selective approach, his theory, his statistics, the inferences he draws from his data, and his neglect of the relevant literature in this field. This does not mean that we do not have any reservations of our own as regards the Special Study or the activities of the S.E.C., but as should become clear we do not share Stigler's reservations. Unlike Stigler, we consider the Report competent and useful document and the S.E.C. valuable and effective agency. This paper, however, is concerned primarily with Stigler's analysis of securities regulation, and only secondarily with substantive justification of such regulation. Our over-all reaction to Stigler's paper is that it represents triumph of ideology over scholarship. Stigler is so convinced that the Report, the S.E.C., and government regulation of securities markets are unsound that any evidence to the contrary is either overlooked or explained away. We feel that he is much more guilty than the authors of the Report of the charge he levies against them, namely, of having produced a promiscuous collection of conventional beliefs and personal prejudices (p. 120). There are four parts to Stigler's paper: first, an examination of certain of the Report's findings and policy proposals; second, test of the effectiveness of previous regulation of new issues by the S.E.C.; third, an appraisal of the criteria of market efficiency implicit in the Report's analysis of trading by specialists and floor traders; and fourth, brief concluding section. Although we shall take up in turn the major arguments in each of these sections, our principal concern has been with Stigler's test of previous regulation (Section II) and his discussion of market efficiency (Section III).

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