I am on the ground in Palo Alto this week at the annual Stanford Law School Directors’ College, where the opening speaker on Sunday night was SEC Commissioner Troy Paredes, whose presentation was in the form of a dialog with Stanford Law Professor and former SEC Commissioner Joseph Grundfest. The format lent itself to give and take and produced some interesting comments from both Paredes and Grundfest.


Much of the discussion was devoted to issues surrounding the Dodd-Frank whistleblower provisions. Paredes explained that he had voted against the adoption of the recently release SEC whistleblower rules (about which refer here) because of his “central concern” about “what the rules would do for internal compliance processes.” Because of the rules’ incentives, “when faced with a choice,” the whistleblower’s “rational financial interest will lead him to bypass the internal process.” (Parades’s comments in this respect echo the formal statement he made at the time he voted against the adoption of the rules. His statement can be found here.)


But Paredes added, now that we have the rules, rather than “throwing our hands up,” we should do what we can to “increase the chances that the whistleblower will report the information to the company,” which can best be accomplished by establishing a culture where “individuals feel it will be meaningful if you report problems to the company.” Of course, businesses can do the most by “reducing the chances that there will be something to blow the whistle about.”


Parades acknowledge that the likely influx of whistleblower reports to the agency will put pressure on the agency to “make sure that we have the people, processes and technology” so that when the information comes in, we “put it to good use.” He expressed his concern that if the agency falls short, it could “erode” the agency’s “legitimacy” and its “credibility.”


The challenge of course is that the SEC must accomplish this in the context of all of its other responsibilities, and at a time when the government generally is facing budget pressure, and while the agency is accommodating other increased responsibilities under the Dodd Frank Act.


In response to a question from the audience about what reforms he would have preferred in order to address the problems that came to light in the wake of the financial crisis, Paredes said that “to the extent the cause of the crisis was inadequate capital and liquidity….that’s where the change should have taken place.”


Grundfest had his own comments on the reform that followed the financial crisis. He said that many of the reforms presume that the problems arose because the regulators” lacked authority,” which Grundfest said is “false.” The problem is not one of authority but of “competence.” The real problem is that in many instances the regulators didn’t know what to do with the information available to them. The SEC’s specific problem is that it has “too many lawyers” and what the agency needs is a different “skill mix” to be able to process the information it receives.


In commenting on the government’s general competence issues, Grundfest added that the problem is that the U.S. government is “the world’s largest insurance company with the world’s largest military,” and the U.S.’s government insurance systems “have nothing to do with the way a rational insurance company would run its business.”


More notes about the conference will follow tomorrow. I must say that, Stanford University is a truly beautiful, impressive place.