Corporate Governance

Senators Call for Examination of SEC?s Enforcement Division

By Jim Hodgson

Democratic Senators Christopher Dodd and Jack Reed recently asked the Government Accountability Office to initiate an examination of the SEC?s Enforcement Division.  Specifically, Dodd (the Banking Committee Chairman) and Reed (the Securities Subcommittee Chairman) are focused on whether the SEC has fundamentally altered its enforcement policy.  ?There has been less emphasis on investor protection and more on this issue of the competitiveness of markets,? according to Reed.

This is the second time in 18 months that a member of Congress has called for an investigation into the ways the SEC is doing business.  And no wonder.  The Senators cite the fact that the SEC reduced by 50% last year the penalties it required firms and individuals to pay in connection with enforcement actions.  They also note that the Commission lowered by over one-half the amount of corporate disgorgements that it ordered.  No doubt the Senators feel that the SEC has grown lax, considering that in 2007, investors on their own recovered approximately $6 billion in fraud-related losses in private litigation -- according to yesterday?s PomTalk post, ?The Power of Myth.?

In fact, the SEC seems to be ?bending over backward to not discomfit the banks and firms it regulates,? according to a New York Times commentator (in an editorial accessible here).  We would point out that there have been a number of distressing changes made at the Commission by former Republican Congressman Christopher Cox -- now Chairman of the SEC.  For one thing, since taking the helm in 2005, Chairman Cox has given his commissioners increased authority over enforcement penalties -- taking that authority away from SEC staff attorneys.

Indeed, SEC lawyers have begun complaining about the commissioners? exercise of this authority -- and the concomitant reduction of fines and penalties levied on wrongdoers.  One particular instance, discussed by the Times in an earlier article (accessible here), involved the commissioners? reduction of a settlement reached with JPMorgan Chase.  The bank had already agreed to pay a $25 million settlement when the commissioners voted to reduce that amount by over 90% -- to $2 million.

Chairman Cox defended the new policy earlier this month, saying that it ensures that enforcement staff have the ?full backing of the commission? when they ?seek to obtain the best possible results for America?s investors.?  One must wonder, though, how ?America?s investors? feel about the whole thing.  For it was their SEC that recovered a mere one-twelfth of what they were able to recover in their own private litigation efforts last year.

Full post as published by PomTalk on April 18, 2008 (boomark / email).