More SEC Eyes Than Fangs

As more Americans own stocks, they need to eye the agency that, presumably, watches out for their investments. Even watchdogs need watching. And the Securities and Exchange Commission was certainly asleep as scandals such as Enron arose during the economic bubble of the 1990s.

Since 2002, many of the SEC's weaknesses have been fixed under the leadership of a new chairman, William Donaldson, and by new laws. His resignation this week, however, bespeaks a political turmoil over just how tough the SEC should be without damaging US competitiveness.

Those debates focus mainly on the sweeping SEC rules for business. The danger of overregulation certainly arises often in Washington, and puts a burden on the many for the mistakes of a few. Business backlash against some of Mr. Donaldson's reforms, even by Federal Reserve Chairman Alan Greenspan, indicate some SEC cures may be worse than the problem. But they are done to bring more transparency and accountability to publicly held businesses. If those burdens help investors better influence their companies and prevent scandals, then the tradeoffs are worth it.

But simply issuing more regulations reveals the SEC's real weakness: A shortage of investigators to probe the bad apples of business. A few high-profile convictions can do far more to shape up an industry than reams of rules. New York Attorney General Eliot Spitzer has shown the SEC how some prosecutions can rattle the financial-services industry.

One of Donaldson's notable legacies will be that he persuaded President Bush to boost the SEC budget to provide more staff and higher pay. The budget nearly doubled during his tenure. More SEC investigators than regulators would satisfy investors.