One practice of smart public-sector managers (and of smart private sector-managers, for that matter) is to measure outcomes rather than inputs. An example of the problem with measuring inputs rather than outcomes is a police department that pats itself on the back because it has made a lot of arrests. A better measure of police success is not an increase in arrests, but a reduction in the crime rate. If the police are really doing a good job, there may be fewer arrests, because there is less crime. That's a context in which to view the August 5 speech by the director of the enforcement division of the Securities and Exchange Commission, Robert Khuzami, before the New York City Bar Association. WSJ.com has a copy of the speech available for download. Here is an excerpt:
Comparing the period from late January to the present to roughly the same period in 2008, the Division has opened 10% more investigations (approximately 525, compared to 475); have been granted 118% more formal orders (which grants us subpoena power) (275, compared to 126); have filed 147% more TROs (52, compared to 21); and have filed nearly 30% more actions (397, compared to 306). These results underscore the fact that the criticism of the SEC that resulted from Madoff – however justified – should not be permitted to obscure the 75-year tradition of vigorous enforcement resulting from the dedicated efforts of thousands of public servants who work tirelessly and with impressive results to protect the investing public.
Mr. Khuzami seems to be patting his agency on the back for all that activity. But what it amounts to is a police chief cheering about all the arrests. There's no indication in the speech about whether the securities industry and its participants are more honest this year than they were in 2008. It's a distinction worth keeping in mind, because the best measure of SEC success isn't necessarily how many actions or investigations the agency conducts. Which would be preferable: a world in which there is a lot of financial crime that gets caught by the SEC, or one in which there is very little financial crime? Cynics will say that there will always be roughly the same amount of financial crime, and all the SEC can do is try to catch the crooks. But the experience with the reduction in the murder rate in New York City under the New York Police Department shows that it is possible to reduce crime. If police departments measured their success by bragging about how they had increased the number of homicide investigations by 10% over the previous year, people would rightfully be skeptical. It's not clear from his speech that Mr. Khuzami grasps how all this applies to securities law enforcement.
