Eileen Rominger Heads to the SEC

Stand by for more fuming about the revolving door between regulatory agencies, and those they regulate: Eileen Rominger, who announced this fall that she was leaving Goldman Sachs, has landed as the new Director of the Division of Investment Management at the SEC. It's an interesting appointment, because it's the first time in a long time--maybe ever--that the position has gone to an actual practitioner of investment management, rather than a lawyer who specializes in the relevant law. Rominger was the Chief Investment Officer of the portfolio management businesses in Goldman Sachs Asset Management.

A source who works in securities law says that for all the fuss this is bound to raise, it might be a good thing:"I would think it has a very good chance of being good for the agency. Anyone with her level of experience should be pretty familiar with the regulatory structure aroung investment management, and her level of direct asset-management experience may well be a very fresh and welcome perspective." After a moment, my source added, rather dryly, "I have seen some examples of the upper levels of the SEC being unwilling to recognize that the world contemplated in certain regulatory requirements does not reflect reality."

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Of course, she will also naturally tend to see things through the eyes of an investment professional--which generally means that thinking that what is good for investment professionals, is good. But this is simply an inherent problem with regulating markets. Who knows the most about the markets being regulated? The firms. It would be foolhardy to try to regulate without their input--you'd be very liable to do something that sounded good, but turned out to be disastrous. (This is approximately what the communists in Russia and China did, and no, I am not saying that regulating the stock market is like communism--I'm saying it's not like communism, because we seek input from those we regulate.)

But the natural result of seeking input and information from regulated entities is what historians and political scientists call "regulatory capture"--the regulating agency comes to reflect the interests of the people it regulates. (Often, by, say, helpfully erecting barriers that keep out smaller competitors.) You can control this tendency, but you can't eliminate it. As I've said before, it's like that old Woody Allen joke: "I think my brain's the most important organ--but then, look who's telling me that!" The very act of getting information from the people you regulate will subtly bias your worldview towards theirs, and therefore their interest.

Should we try to control this tendency by keeping them out of our agencies? As my source indicates, this leaves agencies vulnerable to making stupid mistakes. So I don't think there are any very good answers.