The SEC Enforcement Division is about to be reorganized in an effort to revitalize the once highly respected program. The focus of the reorganization, according to a report from Bloomberg, is to streamline operations and add efficiency. The question is, will it revitalize the Enforcement Division?

The reorganization, billed as the largest in three decades, will eliminate supervisory positions and excess layers of management to create more front line investigators while adding expertise. Overall there will be five specialist teams focused on particularly difficult areas of the market, according to the report. In addition, Enforcement Director Robert Khuzami, recently brought in by Chairman Schapiro, has hired Lorin Reisner as his deputy. Mr. Reisner is a former prosecutor who has been in private practice.

More front line investigators are critical to effectively carrying out the mission of the Enforcement Division. It should permit the Division to return to basics, beginning with better case intake and a more critical evaluation of evidence done on a first hand basis by experienced investigators. This is clearly preferable to the current system which evidence is evaluated by layers of supervisory staff based largely on summaries from junior attorneys.

Investigations and an evaluation of evidence to determine if there are possible violations of the federal securities laws are the key focus of the Enforcement Division after all. They are designed to protect investors and ensure the integrity of the markets. Critical to that mission is the discovery of a possible violation at the earliest possible time. This has been highlighted recently by the Madoff debacle. Clearly, the SEC cannot stop someone like Mr. Madoff at inception. Equally clear however, is the fact that Mr. Madoff could have been stopped at a much earlier point. Moving the point of detection as close as possible to the time the improper conduct begins maximizes investor protection. It also can help prevent future violations by creating the aura of an effective cop on the beat. If the reorganization puts more investigators to work sifting the evidence, it should serve as a good beginning to revitalizing the Division.

While the precise structure of the reorganization is unclear, it is not critical. Regardless of whether the current structure is used or some other model or organization chart, the critical point is to have more front line investigators working the investigations and evaluating the evidence. This focus should also help speed the work of the Division because it necessarily implies less layers of supervision and reporting which can bog down the inquiry.

Finally, while the Division can no doubt benefit from additional expertise, before looking outside the agency, the Enforcement Director would do well to evaluate the manner in which the Enforcement staff works with other divisions of the staff. The Commission’s staff has many talented professionals with significant expertise in the operation of the securities markets. A critical step in rejuvenating Enforcement is to make sure that the Division draws on and utilizes that expertise. If that expertise is fully utilized, and Enforcement focuses on having more front line investigators sifting evidence and evaluating possible cases, the Division will have a sound foundation from which to move forward toward once again being Wall Street’s top cop and the protector of investors and the markets.

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