Security: A certificate or its electronic equivalent that represents ownership of a bond, a stock or another financial construct, such as a future, an option or a deriviative.
The Securities and Exchange Commission (SEC) functions as a sort of watchdog over Wall Street, responsible for protecting investors, maintaining fair, orderly and efficient markets, and facilitating capital formation. The SEC does this by requiring public companies to disclose “meaningful financial and other information to the public,” so that investors can make informed decisions about whether to buy, sell or hold a particular security. The SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisers, and mutual funds. The commission also brings civil enforcement actions against individuals and companies for violating the securities laws, including insider trading, accounting fraud, and providing false or misleading information about securities and companies issuing securities.
The foundations of the SEC were laid in the era before the Great Crash of 1929, when there were few regulations governing the sale of securities in the United States. After World War I, securities trading surged, but little effort was made by federal officials to regulate the industry by requiring financial disclosure of participants.
Investors increasingly moved to invest in risky securities during the 1920s, when credit was easy and rags-to-riches stories dominated the national consciousness. Approximately 20 million large and small shareholders set out to make their fortunes this way, and it is estimated that of the $50 billion in new securities offered during this period, half became worthless.
The stock market crash of October 1929 immediately destroyed consumer confidence in financial markets. Investors lost huge sums of money, and banks quickly failed as the Great Depression took hold. To help the economy recover, Congress held hearings to identify the main problems and help restore the public’s faith in capital markets.
In 1933, during the peak year of the Depression, Congress passed the Securities Act of 1933. Together with the Securities Exchange Act of 1934, which created the SEC, the legislation was designed to help investors feel more comfortable about putting their money back into the stock market. It did this by providing investors with reliable information and clear rules for dealing honestly in the securities markets. Companies offering securities were required to tell the truth about their business, the securities they were selling, and the risks involved in investing. Additionally, the people selling trade securities had to treat investors fairly and honestly, putting their interests first.
President Franklin Roosevelt appointed Joseph P. Kennedy (father of future President John F. Kennedy) as the first chairman of the SEC.
In 1940 the SEC brought actions against nine of the country’s 13 largest public utilities holding companies. Through these actions, the SEC restructured the utilities industry.
In the 1950s the SEC underwent staff reduction due to budget cuts. From 1,200 people in the 1940s, the SEC shrunk to less than 700. This downsizing trend was stopped by President John F. Kennedy, who restored funding for 250 jobs at the commission.
In 1969-1970, the securities industry was rocked by a series of voluntary liquidations, mergers, receiverships and bankruptcies of a substantial number of brokerage houses. The situation caused a downturn in investor confidence and lawmakers worried over a possible “domino effect” involving otherwise solvent brokers that had substantial open transactions with firms that failed. To address the crisis, Congress adopted the Securities Investor Protection Act, which led to the creation of the Securities Investor Protection Corporation (SIPC). Financed through fees from broker-dealers, the SIPC initially provided $50,000 of insurance to brokerage customers in the event a brokerage firm went bankrupt.
During the 1980s, the SEC came under criticism at a time when Wall Street was running amok with acts of insider trading and other illegal or unethical financial maneuvers. The decade was marked by investor scandals involving such figures as Ivan Boesky, Michael Milken, and Dennis Levine, along with the stock market crash of 1987.
In response to the enactment of the Dodd-Frank Act in July 2010, the SEC became responsible for the in-house creation of five new agency offices, 20 new reports, and 100 new regulations—some covering complex derivatives and asset-backed securities. These actions have thus far been delayed due to a lack of funding approval from Congress. Consequently, 800 new staff positions are not being filled while existing SEC departments are taking on the new workload, and funds are being diverted from ongoing agency activity to finance it. As a result, restrictions on travel and the hiring of expert witnesses have been put into effect, thereby weakening case prosecutions.
Also in July 2010, the SEC imposed the largest penalty it’s ever charged to a Wall Street firm—$550 million—on Goldman Sachs for misleading investors at the onset of the housing market collapse. The fraud caused investors to lose a billion dollars. Goldman Sachs acknowledged its culpability and agreed to pay the fine, as well reform its business practices.
Various controversies have plagued the SEC since 2009, including the 2011 revelation that it allegedly broke the law by destroying files, over a 20-year period, pertaining to 9,000 investigations, including those involving the Bernie Madoff scandal and investment banks linked to the 2008 financial crisis. Questions have also arisen about alleged discussions at the SEC of a cover-up of the documents disposal. The National Archives had contacted the SEC in 2010 expressing concern that an unauthorized destruction of federal records had occurred at the agency. The SEC claimed that it did nothing illegal.
The SEC is responsible for protecting U.S. investors from potential loss of income by maintaining fair and orderly practices to encourage capital markets. The commission requires businesses to disclose meaningful information about securities they sell, so that investors can make informed decisions.
The SEC also oversees participants in the securities world, including exchanges, brokers and dealers, financial advisers and mutual funds, and can bring civil suits against individuals or companies that break the securities laws. The commission is charged with interpreting federal securities laws, issuing new rules and amending existing rules, overseeing the inspection of securities firms, brokers, investment advisors and ratings agencies, maintaining private regulatory organizations in the securities, accounting and auditing fields, and coordinating U.S. securities regulation with federal, state, and foreign authorities.
The SEC consists of five commissioners, appointed by the President, who serve staggered five-year terms. One commissioner is designated (by the President) as chairman of the commission, and no more than three of the commissions may belong to the same political party.
Division of Enforcement handles the SEC’s law enforcement function by recommending the investigations of securities law violations and that the commission bring civil actions in federal court or before an administrative law judge, and by prosecuting these cases on behalf of the commission. As an adjunct to the SEC’s civil enforcement authority, the division works closely with law enforcement agencies in the U.S. and around the world.
Common violations that may lead to SEC investigations include: misrepresentation or omission of important information about securities; manipulating the market prices of securities; stealing customer funds or securities; violating broker-dealers’ responsibility to treat customers fairly; insider trading (violating a trust relationship by trading on material, non-public information about a security); and selling unregistered securities.
Division of Corporation Finance oversees corporate disclosure of important information to the investing public. Corporations are required to comply with regulations pertaining to disclosure that must be made when stock is initially sold and then on a continuing and periodic basis. The division’s staff routinely reviews the disclosure documents filed by companies. The staff also provides companies with assistance in interpreting the commission’s rules and recommends to the SEC new rules for adoption.
The Division of Corporation Finance provides administrative interpretations of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Trust Indenture Act of 1939, and recommends regulations to implement these statutes. Working with the Office of the Chief Accountant, the division monitors the activities of the accounting profession, particularly the Financial Accounting Standards Board (FASB), that result in the formulation of generally accepted accounting principles (GAAP). Increasingly, the division monitors the use by U.S. registrants of International Financial Reporting Standards (IFRS) promulgated by the International Accounting Standards Board.
Division of Investment Management takes care of investor protection and promoting capital formation through oversight and regulation of America’s $26 trillion investment management industry. This important part of U.S. capital markets includes mutual funds and the professional fund managers who advise them; analysts who research individual assets and asset classes; and investment advisers to individual customers. Because of the high concentration of individual investors in the mutual funds, exchange-traded funds, and other investments that fall within the division’s purview, the Division of Investment Management is focused on ensuring that disclosures about these investments are useful to retail customers, and that the regulatory costs which consumers must bear are not excessive.
The division’s additional responsibilities include assisting the SEC in interpreting laws and regulations for the public and helping SEC inspection and enforcement staff. It also responds to no-action requests and requests for exemptive relief, reviews investment company and investment adviser filings, assists the commission in enforcement matters involving investment companies and advisers, and advises the commission in adapting SEC rules to new circumstances.
Division of Trading and Markets provides day-to-day oversight of the major securities market participants: the securities exchanges; securities firms; self-regulatory organizations (SROs) including the Financial Industry Regulatory Authority (FInRA), the Municipal Securities Rulemaking Board (MSRB), clearing agencies that help facilitate trade settlement; transfer agents (parties that maintain records of securities owners); securities information processors; and credit rating agencies.
The division also oversees the Securities Investor Protection Corporation (SIPC), a private, non-profit corporation that insures the securities and cash in the customer accounts of member brokerage firms against the failure of those firms. SIPC insurance does not cover investor losses arising from market declines or fraud.
The division’s additional responsibilities include carrying out the SEC’s financial integrity program for broker-dealers, reviewing (and in some cases approving, under authority delegated from the commission) proposed new rules and proposed changes to existing rules filed by the SROs, assisting the commission in establishing rules and issuing interpretations on matters affecting the operation of the securities markets, and monitoring the markets.
The Division of Risk, Strategy, and Financial Innovation (RiskFin) is considered the agency’s “think tank,” and provides interdisciplinary analysis to help inform the Commission’s policymaking, rulemaking, enforcement, and examinations. Its staff has expertise in disciplines including economics, risk analysis, finance, law, mathematics, and statistics. The division encompasses the former Office of Economic Analysis, which advised the commission and its staff on the economic aspects of all SEC regulatory initiatives. It also includes these two offices:
The Office of Interactive Disclosure makes financial disclosure accessible through simplified use of interactive data. The office designs the technological processes being used, and researches new uses for interactive data.
The Office of Risk Assessment (ORA) helps the SEC anticipate, identify, and manage risks, focusing on early identification of new or resurgent forms of fraud and illegal or questionable activities. The ORA focuses on risk issues across the corporate and financial sector, including issues relevant to corporate disclosure, market operation, sales practices, new product innovation, and other activities of financial market participants. It analyzes information from a variety of sources, such as external experts, domestic and foreign agencies, industry and financial services, empirical data and other market data.
Office of Acquisitions has the responsibility for overseeing SEC contracts and advises as to requests for contract information.
Office of the Chief Operating Officer oversees agency management policies, including formulating budget policy, allocation and utilization of agency resources, promoting management controls and financial integrity, managing the administrative support offices, and overseeing the agency's information technology capital planning process.
Office of Compliance Inspections and Examinations administers the SEC’s nationwide examination and inspection program for registered self-regulatory organizations, broker-dealers, transfer agents, clearing agencies, investment companies and investment advisers. The office conducts inspections to foster compliance with the securities laws to detect violations of the law and to keep the commission informed of developments in the regulated community. Among the more important goals of the examination program is the quick and informal correction of compliance problems. When the office finds deficiencies, it issues a “deficiency letter” identifying the problems that need to be rectified and monitors the situation until compliance is achieved. Violations that appear too serious for informal correction are referred to the Division of Enforcement.
The Office of Ethics Counsel advises all SEC employees and members on such issues as conflicts of interest, securities holdings and transactions of SEC employees and their immediate families, gifts, seeking and negotiating other employment, outside activities, financial disclosure, and post-employment restrictions and clearances. Former SEC employees seeking assistance may call the Ethics Officer of the Day at 202-551-5170.
The Office of the Chief Operating Officer formulates budget and authorization strategies, supervises the allocation and use of SEC resources, promotes management controls and financial integrity, manages the administrative support offices, and oversees the development and implementation of the SEC’s automated information systems. The office has three main areas:
Office of FOIA, Records Management, and Security is responsible for handling requests under the Freedom of Information and Privacy Acts, the management of all agency records in accordance with the Federal Records Act, and maintaining the security and safety of all SEC facilities. The office has three sub-divisions:
Office of the General Counsel assumes overall responsibility for the establishment of agency policy on legal matters. The General Counsel serves as the chief legal adviser to the SEC chairman regarding all legal matters and services performed within, or involving, the commission, and provides legal advice to the commissioners, the divisions, the offices, and other SEC components.
Office of Information Technology has overall management responsibility for the commission’s IT program including application development, infrastructure operations and engineering, user support, IT program management, capital planning, security, and enterprise architecture. The Office operates the Electronic Data Gathering Analysis and Retrieval (EDGAR) system, which electronically receives, processes, and disseminates more than 500,000 financial statements every year.
Office of Investor Education and Advocacy serves individual investors by seeing to it that their problems and concerns are known throughout the SEC and considered the first priority whenever the agency takes action. The office has these main functional areas:
Office of the Chief Accountant is the principal adviser to the commission on accounting and auditing matters. The Office of the Chief Accountant assists the commission in executing its responsibility under the securities laws to establish accounting principles and for overseeing the private sector standards-setting process. The office works closely with the Financial Accounting Standards Board, to which the SEC has delegated authority for setting accounting standards, as well as the International Accounting Standards Board and the American Institute of Certified Public Accountants.
Office of the Secretary houses the Secretary of the Commission, who is appointed by the chairman, and is responsible for the procedural administration of commission meetings, rulemaking, practice, and procedure.
Office of International Affairs promotes cooperation among national securities regulatory agencies and encourages the maintenance of high regulatory standards worldwide. The office assists the chairman and the commission in the development and implementation of the SEC’s international regulatory and enforcement initiatives. The office negotiates bilateral and multilateral agreements for commission approval on such subjects as regulatory cooperation and enforcement assistance and oversees the implementation of such arrangements. It is also responsible for advancing the commission’s agenda in international meetings and organizations. The office conducts a technical assistance program for countries with emerging securities markets that includes training both in the United States and in the requesting country. More than 100 countries currently participate in this program.
Office of Administrative Law Judges consists of independent judicial officers who conduct hearings and rule on allegations of securities law violations in cases initiated by the commission. When the commission initiates a public administrative proceeding, it refers the cases to the office, where it is assigned to an individual Administrative Law Judge (ALJ). The ALJ then conducts a public hearing that is similar to a non-jury trial in the federal courts. Just as a federal judge can do, an ALJ issues subpoenas, rules on motions, and rules on the admissibility of evidence. At the conclusion of the hearing, the parties submit proposed findings of fact and conclusions of law. The ALJ prepares an initial decision that includes factual findings and legal conclusions that are matters of public record. Parties may appeal an initial decision to the commission, which can affirm, reverse, modify, set aside, or remand for further proceedings. Appeals from commission action are sent to a United States Court of Appeals.
Office of Equal Employment Opportunity works to ensure that members of the agency’s professional staff come from diverse backgrounds that reflect the diversity of the investing public. To maintain neutrality in resolving disputes, the EEO Office is independent of any other SEC office. The EEO director reports to the chairman. The primary mission of the EEO Office is to prevent employment discrimination, including discriminatory harassment, so that all SEC employees have the working environment to support them in their efforts to protect investors, maintain healthy markets, and promote capital formation.
Office of the Inspector General conducts internal audits and investigations of SEC programs and operations. Through these audits and investigations, the Inspector General seeks to identify and mitigate operational risks, enhance government integrity, and improve the efficiency and effectiveness of SEC programs.
The Office of Public Affairs coordinates the agency’s relations with the media and the general public. The office also assists in the enforcement of the commission’s policy concerning the confidentiality of law enforcement and investigative information, which is designed to protect the privacy rights of American citizens. The office reviews and distributes within the agency press coverage of the SEC and of commission-related issues, including the securities industry and the financial markets. It also provides limited research where policy and public affairs goals overlap.
The Office of Legislative and Intergovernmental Affairs serves as the SEC’s formal liaison with Congress, other Executive Branch agencies, and state and local governments. The staff monitors ongoing legislative activities and initiatives on Capitol Hill that affect the commission and its mission. Through regular communication and consultation with House and Senate members and staff, the office communicates legislators’ goals to the agency and communicates the SEC’s own regulatory and management initiatives to Congress. The office is also responsible for responding to congressional requests for testimony of SEC officials, as well as requests for documents, technical assistance, and other information. In addition, the office monitors legislative and oversight hearings that pertain to the securities markets and the protection of investors.
The SEC FY 2012 Budget Justification (pdf) reported that the agency was establishing five new offices by requirement of the Dodd-Frank Act: Office of Credit Ratings; Office of the Investor Advocate; Office of Minority and Women Inclusion; Office of Municipal Securities; and Office of Whistleblower Protection (to be a department within the Division of Enforcement). These offices necessitated the creation of 33 new employee positions in FY 2012. Existing departments were assigned to handle the new workload and funds were diverted from market oversight and enforcement operations to pay for it.
From the SEC Web Site
Enforcement Statistics (pdf)
The SEC spent more than $1.2 billion on 7,724 contractor transactions during the past decade. According to USASpending.gov, the SEC paid for a variety of services, from automatic data processing (ADP) and telecommunications ($243,937,814) to ADP systems and development ($132,042,714), miscellaneous professional services ($60,695,091), expert witnesses ($53,096,026 ), and ADP software ($49,827,424).
The top five contractors employed by the SEC since 2002 were:
1. BDM International $124,411,625
2. Keane International Inc. $60,045,620
3. SAIC, Inc. $57,411,794
4. Lockheed Martin Corporation $56,849,675
5. Altegrity, Inc. $43,936,703
BDM International, the SEC’s largest contractor, was a subsidiary of TRW, which in turn was acquired by Northrop Grumman. BDM has provided systems and software integration, computer and technical services, and enterprise management and operations to public and private sector clients, including international defense agencies, civil government agencies, and commercial clients.
Keane International Inc., the SEC’s second-largest contractor, is a subsidiary of NTT Data that provides informational technology services to U.S. government agencies, insurance companies, financial institutions, global manufacturers, pharmaceutical companies, and healthcare insurers
SAIC, Inc., the SEC’s third-largest contractor is a scientific, engineering, and technology applications company that works in national security, energy and the environment, critical infrastructure, and health. For the SEC, the company provides telecommunication and technical assistance including the maintenance and repair of equipment.
Lockheed Martin Corporation, the SEC’s fourth-largest contractor is a global security and information technology company that is the largest provider of IT services, systems integration and training to the U.S. government. The majority of Lockheed Martin's business is with the U.S. Department of Defense and other U.S. federal government agencies. For the SEC, the company provides automatic data processing and telecom services.
Altegrity, Inc., the SEC’s fifth largest contractor, is a global screening and security solutions company that provides its clients with law enforcement training and data mining, and provides background investigations for the U.S. government.
According to the SEC FY 2013 Budget Justification (pdf), the agency’s proposed $1.566 billion budget will be spent as follows:
Personnel Compensation & Benefits $942,944,000
Other Contractual Services $321,482,000
Rent, Communications & Utilities $176,671,000
Travel and Transportation of Persons $16,873,000
Printing and Reproduction $9,995,000
Building Alterations $9,501,000
Supplies and Materials $3,838,000
Benefits for Former Personnel $2,653,000
Transportation of Things $95,000
Total Spending Authority (FY 2013 Budget) $1,566,000,000
SEC Lawyer Caught Up in Madoff Controversy
David Becker, a top lawyer in the Securities and Exchange Commission (SEC), was exposed in early 2011 for investing with Bernie Madoff and profiting more than $1.5 million while negotiating with attorneys representing victims of the multi-billion-dollar Ponzi scheme.
The conflict of interest raised questions about the SEC’s failure to stop Madoff before he robbed hundreds of people of their investments and savings.
Becker left his post as general counsel and senior policy director only days after the story broke. He and his two brothers, William and Daniel, were sued by Madoff’s victims.
A congressional investigation was launched into the matter, as was a probe by the SEC’s inspector general. The matter was then referred to the U.S. Department of Justice, which reviewed the case and, in late 2011, decided without elaborating, against pursuing charges against Becker. The situation had been complicated by the fact that Becker had disclosed his Madoff connection to SEC ethics lawyers.
Becker reached a settlement in early 2012 with trustee Irving Picard, who is handling Madoff’s bankruptcy. The SEC lawyer and his brothers agreed to pay back $556,017, which was about $1 million less than what the trustee originally sought.
Irving Picard Hits Securities and Exchange Commission's Top Lawyer with Bernie Madoff Lawsuit (by Wayne Coffey, Nathaniel Vinton, and Teri Thompson, New York Daily News)
Lawyer David Becker's Strange Story Is Now Subject of SEC Inspector General's Internal Investigation (by Wayne Coffey and Nathaniel Vinton, New York Daily News)
U.S. Won’t Investigate Former S.E.C. Lawyer Over His Madoff Ties (by Louise Story, New York Times)
Ex-SEC GC David Becker Makes $556K Madoff Payback Deal (by Sue Reisinger, Law.com)
SEC Drops Ball on Stanford Ponzi Scheme
In the end justice was served on Ponzi schemer Robert Allen Stanford, no thanks to the Securities and Exchange Commission.
The SEC suspected as early as 1997 that money manager Stanford was defrauding investors to the tune of billions of dollars. But the agency did not investigate the billionaire until 2005, and waited another four years after that to sue him.
Regulators defended their tardiness by claiming another, unnamed federal agency told the SEC to “stand down” in 2006 and not pursue actions against Stanford, as reported in The New York Times.
That excuse was rejected by members of the U.S. Senate who demanded the agency punish or fire someone at the SEC for allowing Stanford to get away with his schemes. If the SEC’s investigation had been timelier, it could have saved many investors from financial risk.
In March 2011, a federal jury convicted Stanford on 13 counts of fraud that totaled $7 billion and impacted 30,000 investors from 113 countries. He was later sentenced to 110 years in prison.
Internal Report Faults S.E.C. In Stanford Case (Bloomberg News)
Robert Allen Stanford (New York Times)
Kucinich: Who Told SEC to "Stand Down" on Stanford Probe? (Representative Dennis Kucinich)
Stanford Sentenced to 110-Year Term in $7 Billion Ponzi Case (Clifford Krauss, New York Times)
Stanford Convicted by Jury in $7 Billion Ponzi Scheme (by Clifford Krauss, New York Times)
Looming Over SEC: Big Cases That Helped Highlight Big Delays (by Marcy Gordon, Associated Press)
SEC Destroys Thousands of Investigative Documents
The destruction of thousands of investigative documents landed the Securities and Exchange Commission in hot water during 2010 and 2011.
Whistleblower Darcy Flynn, an SEC staffer, told Congress some of destroyed papers related to huge investment banks and financial institutions—including Bank of America, Lehman Bros., and Goldman Sachs—that played a role in the 2008 mortgage crisis. One set of documents, among the 9,000 shredded, involved a preliminary investigation into Ponzi schemer Bernie Madoff that was never followed up.
In its defense, the SEC said it was not required to retain all documents, especially records of preliminary inquiries, per a policy that was subsequently changed.
SEC Documents Destroyed, Employee Tells Congress (by Carrie Johnson, NPR)
S.E.C. Files Were Illegally Destroyed, Lawyer Says (by Edward Wyatt, New York Times)
SEC Still Destroying Records Illegally, Whistleblower Says (by David S. Hilzenrath, Washington Post)
SEC Misled Archives on Destroying Records, Inspector General Finds (by David S. Hilzenrath, Washington Post)
SEC Employees Watch Porn As Economy Collapses
Having already been lambasted for not catching Bernie Madoff at his pyramid scheme sooner or doing more to head off the 2008 financial crisis, the Securities and Exchange Commission came under even more criticism in 2010 after it was revealed more than 30 employees had wasted time looking at Internet porn on SEC computers.
Beginning in 2008, while major banks on Wall Street were teetering, some high-level SEC staff spent considerable time viewing Web sites like naughty.com, skankwire, and youporn.
The agency’s inspector general found 31 “serious offenders,” including 17 employees with salaries ranging from $100,000 to $222,000 per year.
One senior attorney logged up to eight hours a day accessing porn sites, filling up all the space on his government computer with sexually explicit files and copying even more onto CDs and DVDs that he piled into boxes in his offices.
A female SEC accountant tried to access porn Web sites 1,800 times in a two-week period and stored 600 adult images on her computer hard drive.
Another accountant attempted to access porn sites 16,000 times in a single month, and was blocked, but still managed to bypass the filter often enough to gather an impressive collection of graphic material.
The accounts were reported widely in the media, but the bad news was not enough to stop the problem. The inspector general reported in 2011 that three more SEC workers, including two lawyers, were caught using their computers to access pornography.
3 More SEC Employees Investigated for Viewing Porn on the Job (by Peter Barnes, Fox Business)
SEC Workers Investigated for Porn-Surfing (by Jim McElhatton, Washington Times)
SEC and Pornography: Workers Spent Hours on Porn Sites Instead of Stopping Fraud (by Jonathan Karl, ABC News)
SEC Staffers Watched Porn as Economy Crashed (CBS News)
Revolving Door at SEC
So many workers have shuttled between positions on Wall Street and its government watchdog, the Securities and Exchange Commission, that the revolving door rarely stops spinning.
More than 200 former SEC staff members went to work for investment firms and banks from 2006 and 2010, according to the Project on Government Oversight.
In the other direction, many high-level Wall Streeters have taken jobs with the federal agency, which has raised questions about the SEC’s ability to investigate wrongdoings and enforce penalties.
One example is Adam Glass, the agency’s co-chief counsel. Prior to going to work for the government, Glass helped set up schemes involving derivatives, the complex financial instruments he now regulates.
Another is Robert Khuzami, the SEC’s director of enforcement, who previously was the general counsel of Deutsche Bank. Yet another is Eileen Rominger, the former global chief investment officer at Goldman Sachs Asset Management, who now works as the agency’s director of investment management.
Revolving Door at S.E.C. Is Hurdle to Crisis Cleanup (by Andrew Ross Sorkin, New York Times)
SEC 'Revolving Door' Data Online But Useful Information Redacted (by Stevie Mathieu, Sunlight Foundation)
SEC/Dodd-Frank Whistleblower Program Causes Controversy
When the Securities and Exchange Commission set out to bolster its program for rewarding corporate whistleblowers, companies and consumer advocates alike found things to complain about.
As a result of the Dodd-Frank reform bill, the SEC was compelled to strengthen ways for getting more employees to come forward about illegalities at their companies. The changes mandated by Congress called for the SEC to pay rewards of 10% to 30% of fines and settlements from enforcement actions triggered by whistleblowers.
These financial incentives alarmed more than 260 companies, which warned the SEC in a letter that workers would be encouraged to ignore early signs of fraud in order to maximize penalties and rewards. Corporate opponents that signed the letter included Delta Air Lines, FedEx, Gap Inc., and Pfizer.
While industry voiced concerns that the changes went too far, consumer groups said the new whistleblower program would not go far enough. Voices for Corporate Responsibility, the Government Accountability Project, and the National Employment Lawyers Association said there needed to be a mechanism for tracking whistleblowers and their contributions during an investigation. In addition, in order to receive any awards, whistleblowers would actually have to petition the SEC after it had succeeded in an action against a company.
Firms Assail Whistleblower Plan by SEC (by Jean Eaglesham, Wall Street Journal)
Furious Debate Over An SEC Whistleblower Program (by Ed Silverman, Pharmalot)
SEC Hedge Funds Limits Stir Backlash
A February 2007 Los Angeles Times article revealed that the SEC had decided to sharply limit the number of Americans who can invest in hedge funds, triggering a public backlash. The commission proposed limiting participation in the investment vehicles to investors who have a minimum of $2.5 million in investable assets, excluding the value of their primary residence. At that time, investors had to have at least $1 million in net worth, including real estate, or earn at least $200,000 a year. The change would have restricted hedge funds to 1.3% of U.S. households, down from 8.5%. The Dodd-Frank Act of 2010 contains provisions requiring hedge fund advisers with $150 million or more in assets to register with the SEC. To be a qualified client, an individual must have $750,000 in assets invested with the adviser, or have a net worth that is more than $1.5 million.
Investors zing SEC on hedge fund rule (by Tom Petruno, Los Angeles Times)
SEC Draws Fire for Decision to Ease Post-Enron Restrictions
In February 2007, the SEC began to take steps to protect corporations, executives, and accounting firms from investor lawsuits that accused them of fraud. The first step involved the filing of a brief in the Supreme Court, urging the adoption of a legal standard that would make it harder for shareholders to prevail in fraud lawsuits against publicly traded companies and their executives. Critics claimed this was the SEC’s way of backing away from reforms that had been made in the wake of the 2001 Enron collapse, while proponents claimed that consolidation in the accounting industry had forced measures offering greater protection. The second measure involves bringing a case to the Supreme Court in order to interpret a provision of the Private Securities Litigation Reform Act of 1995, which sets out what investors must charge in a fraud lawsuit to prevent the case from being dismissed. In reinstating the case, the 7th U.S. Circuit Court of Appeals in Chicago interpreted the law to mean that the investors had to show whether the accusations, if true, would permit “a reasonable person” to infer that the company and the executives “acted with the required intent.”
S.E.C. Seeks to Curtail Investor Suits (Stephen Labaton, New York Times)
SEC Subpoenas Journalists
The SEC raised controversy when it issued subpoenas to Herb Greenberg of MarketWatch and Carol Remond of Dow Jones Newswires in 2006. The subpoenas were issued from the commission’s San Francisco office and compelled the journalists to hand over notes, telephone records, emails, and other documents related to an investigation of alleged stock manipulation of online retailer Overstock.com. The journalists, who had both written stories critical of Overstock.com, believe the subpoenas were a form of harassment and trampled on their First Amendment rights.
SEC will try to avoid media subpoenas (Associated Press)
SEC May Be Laying Groundwork to Weaken Protections
With Republicans frequently accusing Democrats and the Obama administration of burdening entrepreneurs with too many regulations, the Securities and Exchange Commission (SEC) decided in 2011 to form a special panel that would look for ways to help smaller companies grow.
The Advisory Committee on Small and Emerging Companies was charged to help the SEC “reduce the regulatory burdens on small business capital formation in a manner consistent with investor protection,” said SEC Chairwoman Mary Schapiro.
Some agency observers read this mission statement as a warning that the committee would recommend exemptions from disclosure requirements for smaller businesses, which would make it tougher for regulators to properly oversee their activities.
As it turned out, the advisory committee did suggest in 2012 for the SEC to relax “outdated rules that trigger public financial reporting for companies,” according to Reuters.
One proposal called for exempting most companies with less than 1,000 shareholders (up from the current 500) and community banks with fewer than 2,000 shareholders from having to disclose financial data to the agency. More troubling, perhaps, was the suggestion that the SEC implement interim rules right away in order to give companies relief, but continue to study their ramifications on the public.
SEC Concerned About Regulating Too Tightly? (by Greg Marx, Remapping Debate)
Advisory Committee on Small and Emerging Companies Meeting Friday, June 8, 2012 (Securities and Exchange Commission)
SEC Advisory Panel Concerned About Crowdfunding (by Sarah Lynch, Reuters)
Modernization Act and Other New Measures
Efforts to reform the Securities and Exchange Commission have come from Congress and within the agency itself, but it remains to be seen if any of these plans can stop the SEC’s habit of letting large banks off the hook for violating federal laws and regulations.
Representative Spencer Baucus (R-Alabama), chairman of the House Financial Services Committee, introduced in 2011 the SEC Modernization Act, which sought to reorganize the agency’s internal operations.
The proposal includes consolidating redundant offices, implementing management and ethics reforms, and using a reserve fund for essential technology upgrades.
Furthermore, the bill called for the SEC Office of Ethics Counsel—in order to reduce conflicts of interest and help restore confidence in the agency—to develop a new system for documenting recusals for employees who leave the agency.
Within the SEC, Enforcement Director Robert Khuzami was bent on implementing measures designed to facilitate the filing of major cases, reassigning midlevel managers to facilitate investigations, and creating teams specializing in specific areas of financial crime. The union representing SEC employees questioned whether Khuzami’s changes were appropriate or would work.
Regardless of where changes originated, it has become apparent that the SEC needs to stop being so easy on major financial firms after they have broken securities rules. The New York Times found nearly 350 instances over a 10-year period during which the agency did not penalize big Wall Street operators and instead granted waivers permitting them to underwrite certain stock and bond sales and manage mutual fund portfolios.
Real SEC Reform or Half Measure? (by Robert Bloink and William H. Byrnes, AdvisorOne)
SEC Faces Setbacks, Skepticism in Trying To Reform Its Enforcement Image (by Zachary A. Goldfarb, Washington Post)
S.E.C. Is Avoiding Tough Sanctions for Large Banks (by Edward Wyatt, New York Times)
Break Up the SEC
After enduring rounds of criticism for not better regulating Wall Street, the head of the Securities and Exchange Commission (SEC) offered a solution: Give us more money. Chairwoman Mary Schapiro told Congress her agency needed more attorneys and staff if it was going to be the watchdog it should. This suggestion prompted calls from some observers for the SEC to be broken up instead of giving it a larger budget.
Bill Singer at Forbes argued the last thing Congress should do is give the SEC more funding. He cited one costly decision by the agency—to lease 900,000 square feet of new office space for 10 years at $556 million—for why money wasn’t going to fix the embattled agency. Singer argued the SEC would be much more effective if it was decentralized. He suggested modeling the financial regulator after the U.S. Department of Justice, where U.S. Attorneys function autonomously in various regions of the country without a lot of interference from headquarters in Washington D.C.
“Regulation and prosecution are most effective when handled locally and on a relatively small scale—and are often at their worst when the command-and-control structure is a ponderous bureaucracy situated remotely in Washington D.C.,” Singer wrote.
He recommended Schapiro terminate 25% of the SEC’s staff and reassign another 50% to regional offices. “Go smaller. Go local. Encourage more nimble, quicker investigations and prosecutions. It’s time for bare bones in D.C. and a beefed-up presence where it truly counts: in the field,” he concluded.
Break Up the Securities and Exchange Commission (by Bill Singer, Forbes)
Arthur Levitt Jr., who chaired the SEC under President Bill Clinton, came to its defense in a New York Times op-ed piece, arguing what the agency needed was for Congress to stop meddling with it and properly fund it. He cited numerous examples when lawmakers and other critics have tried to deplete and micromanage the SEC.
Most recently, Congress adopted the 2,300-page Dodd-Frank financial reform law and demanded the SEC implement it—while not increasing the agency’s budget one dollar. Other congressional moves were even more damaging, according to Levitt.
One proposed bill would have broken up the agency’s Office of Compliance Inspections and Examinations. Another piece of legislation would subject “nearly every securities law ever passed—including laws passed in 1933 and 1934 that created the commission and established its core functions—to a cumbersome and impossibly subjective review of their relative costs and benefits,” wrote Levitt.
These bills and other actions demonstrated “a pattern of Congress’s grabbing the steering wheel of an independent agency,” which Levitt said must stop.
Don’t Gut the S.E.C. (by Arthur Levitt Jr., New York Times)
Elisse B. Walter is following Mary L. Schapiro again. In the wake of Schapiro’s resignation as chair of the Securities and Exchange Commission (SEC), Walter, who has twice taken new jobs in order to follow Schapiro, was appointed by President Barack Obama to serve as acting chair, which she also did, albeit briefly, in January 2009. Appointed to the SEC by President George W. Bush in July 2008 to a term that ran out in June 2012, under SEC rules Walter can stay 18 months after her term ends, allowing her to serve as acting chair until December 2013 before needing Senate confirmation to keep the post.
Born April 14, 1950, in New York City and raised by her parents, a language teacher and an accountant, Walter’s two childhood dreams were to be a United Nations translator and a mathematician. She graduated from Herricks High School in New Hyde Park, Long Island, in 1967. After briefly attending Brown University, Walter earned a B.A. in mathematics at Yale University in 1971 and a J.D. at Harvard Law School in 1974, citing the “politically turbulent times” to explain her career shift.
Walter practiced law at a private firm before joining the SEC in 1977. At SEC, Walter rose to become associate general counsel and deputy director of the Division of Corporation Finance. Walter left the SEC in 1994 at the request of Mary Schapiro, who had become her mentor at SEC, to serve as general counsel of the Commodity Futures Trading Commission.
Following Schapiro again, in 1996 Walter left public service to work for the National Association of Securities Dealers (NASD), then the nation’s largest private-sector regulator of securities firms, where she was senior executive vice president for Regulatory Policy & Programs, a job she kept when NASD merged with New York Stock Exchange Member Regulation in 2007 to form the non-governmental Financial Industry Regulatory Authority (FINRA).
Walter returned to the SEC in July 2008, appointed a commissioner by President George W. Bush to serve in one of the two seats reserved for Democrats. In January 2011, she was criticized for conflict of interest by the Project on Government Oversight for urging that the SEC delegate some of its regulatory power over investment advisors to FINRA.
Walter is a member of the Academy of Women Achievers of the YWCA of the City of New York and the inaugural class of the American Bar Association’s DirectWomen Institute.
A Democrat, Walter has contributed $13,350 to Democratic candidates and causes since 1996, including $5,000 to the Democratic National Committee, $2,300 each to the 2008 presidential campaigns of Barack Obama and Hilary Clinton, $2,000 to John Kerry’s 2004 presidential campaign, and $750 to the pro-choice Emily’s List. Walter is married to law school classmate Ronald Alan Stern, the chief anti-trust attorney for General Electric Co. They have two sons, Jonathan and Evan.
An Ally of the Old Boss Also Goes Her Own Way (by Scott Patterson, Wall Street Journal)
Elisse Walter Steps Out of Schapiro Shadow Into SEC Chairmanship (by Robert Schmidt, Bloomberg)