SEC Needs Tools to Overcome Limitations, Says Former Chair
Harvey Pitt wants to level the playing field for regulators and financial firms
May 4, 2009
The Securities and Exchange Commission has been heavily criticized for its failure to detect Bernard Madoff's Ponzi scheme and its performance leading up to the financial crisis, but the agency's problems are hardly new. The critical question, says former SEC chairman Harvey Pitt, is "how do we neutralize the enormous advantages of the private sector?"
With its limited budget and staffing, the SEC has long been at a technological disadvantage to the industry it oversees, notes Pitt, who was chairman from August 2001 to November 2002. The commission, he says, also moves very slowly--once a problem has been unearthed, it can take more than five years to investigate and bring an action.
For that reason, Pitt introduced an initiative called "real-time enforcement" during his tenure as SEC head. The approach was designed to speed up the enforcement process, allowing staff to respond quickly to ongoing violations by publicly identifying them and providing investors with interim relief.
However, a series of controversies dogged Pitt and he stepped down abruptly. In a resignation letter sent to President Bush, he stated that "the turmoil surrounding my chairmanship and the agency makes it very difficult for the commissioners and dedicated SEC staffers to perform their critical assignments."
Pitt, founder and CEO of Washington, D.C.-based consultancy Kalorama Partners, rose through the ranks at the SEC, working as a staff attorney from 1968 to 1975, then general counsel until 1978. After spending more than two decades as senior corporate partner in law firm Fried Frank Harris Shriver & Jacobson, he rejoined the commission in the top spot. Securities Industry News recently caught up with Pitt to discuss reforming the SEC.
Explain the idea of real-time enforcement.
The concept was that it didn't help investors for the SEC to investigate a case for five to six years and then bring an action-by that time it was old news. The goal was to get the SEC into court quickly, put a stop to ongoing fraud, put a freeze on the money and do the very necessary cleanup work. The notion was to get people alerted to the fact that wrongful conduct had occurred.
Are there examples where this approach worked?
The best example is the WorldCom case. We learned about misconduct and within 24 hours we were in court. It was the way real-time enforcement was intended to work.
Are there other benefits to real-time enforcement?
It would have created more resources at the SEC's disposal. The issue is, how do you maximize the SEC's scope of coverage? Real-time enforcement was intended to do that. The notion was that this was a way to get the SEC to be even more effective.
Why did the SEC fail to detect Bernard Madoff's fraudulent activity?
If somebody sets out to commit deliberate fraud and maintain multiple sets of books, it can be very difficult to detect. However, that does not explain the Madoff situation. The SEC had a road map, provided by [fraud examiner Harry Markopolos]. He was not an employee; he was an outsider. The fact that the SEC didn't [listen] has to be attributed to human failure. There are a number of inquiries going on as to why this occurred. The folks who got tips were not capable of having them lead to some form of government action.
