SEC Must Prove It Can Be Watchdog
February 16, 2009
Between the Madoff scandal and the financial crisis, the Securities and Exchange Commission has become a favorite target of legislators and the media. "Recently," said commissioner Luis Aguilar, "it has been nearly impossible to turn on a TV or pick up a newspaper without seeing headlines criticizing the SEC and questioning whether the SEC is committed to aggressive and robust enforcement." Harry Markopolos, a fraud examiner who repeatedly warned the SEC about Madoff, on Feb. 4 told lawmakers that the agency's staff is "too slow, too young and too undereducated" and pointed to turf wars between regional offices.
At a North American Securities Administrators Association conference in San Diego last month, Aguilar, who joined the commission in July, said that "the time is now for the SEC to answer its critics by demonstrating its commitment to be the markets watchdog." The former McKenna Long & Aldridge partner and SEC staff attorney pointed to changes--both internal policy moves and Congressional action--that need to be made for the agency to fulfill its purpose. An excerpt of the speech follows.
In the last few years, the enforcement division of the SEC has been coping with less staff and fewer resources. This is clearly not what has been needed in a time of deregulation and clearly not what Congress had in mind when it enacted Sarbanes-Oxley, specifying an increase in SEC resources in 2002 and stating that enforcement was to be strengthened. By 2006, however, staff turnover was at its highest level in five years. Enforcement groups, normally composed of 15 lawyers, often had only seven or eight lawyers during those years and are slowly being built back to the former numbers. The total number of attorneys able to investigate cases has decreased by 10 percent, from 654 in 2005 to just 594 in 2008.
In addition to hiring and staffing at full capacity, the enforcement staff should be fully empowered to aggressively pursue investigations. Approval of formal orders, which are the enforcement division's requests to formalize investigations and issue subpoenas, should be streamlined. Currently, formal orders follow the same approval process as every other type of request to the commission and can often face a logjam due to the time constraints on the members. ...
Cases should also be heard by the commission within appropriate time periods. I understand that, over the past several years, there has been a tendency for cases that are controversial to languish for years. This is unacceptable. The commission should enforce an internal timetable so that staff recommendations will be considered in a timely manner.
I think the commission can do more to fulfill its law enforcement role. I am particularly concerned by the potential drop off in large investigations and by the dramatic decline in the past few years in the amount of penalties the commission seeks and collects. In light of recent events, it is important now more than ever for the commission's enforcement staff to focus resources on cases involving the most egregious behavior with broad market effect and to be able to clearly send a message of deterrence. ...
Regulatory Merger
One suggested reform that has been widely written about is a merger of the SEC and Commodity Futures Trading Commission. This merger makes sense, but only if done in the right way. For many years, market participants and regulators have not been entirely certain about whether products were subject to SEC or CFTC jurisdiction. An SEC-CFTC merger would answer the question of "who" regulates financial services, market participants and products. However, it would not address "how" they are regulated, and this is the key question.
