The SEC’s Fiscal 2009 Budget: More Money Please

SEC Chairman Cox testified before the House Subcommittee on Financial Services and General Government Committee on Appropriations on Wednesday, April 16th regarding the President’s budget for fiscal year 2009. Supporting the President’s proposal, the Chairman began by noting that the agency’s budget has not been increased for three years. Under the proposed fiscal 2009 budget, the SEC would receive about a four percent increase over two years. After taking into account inflation and the impact of the pay raises for the staff, the proposed budget would permit the SEC to maintain the staff at about its current 2007 level in fiscal 2009.

Nevertheless, the Chairman assured the Committee that “[t]he SEC is continuing to pursue wrongdoers in all corners of the securities markets, while also applying enforcement recourses to areas that pose the greatest risks to investors.” Those areas include the work being done by Enforcement’s subprime working group, which is aggressively investing possible fraud and market manipulation as well as:

• insider trading by large institutional traders;

• wrongdoing in the municipal bond market;

• microcap fraud; and

• scams against seniors.

At the same time, the Division will also continue to return funds to harmed investors through Fair Funds. Efficiency through “The Hub” – a recently-initiated agency wide database – will aid the staff in these endeavors, Chairman Cox noted.

The Chairman did not explain how the agency will continue to aggressively police the markets with the same number of people through the end of fiscal 2009 or September 30, 2010. While “The Hub” may aid efficiency, it seems doubtful that it is the answer to continually doing much more with less.

There is little doubt that the Division faces a daunting task going forward. Policing all corners of the markets, as Chairman Cox assured the Committee the Division would, is increasingly a global task, as even a casual review of last year’s enforcement cases demonstrates. At the same time, the challenges facing the Division are increasingly complex and belied by the overly simple description of Enforcement’s policing efforts given to the Committee.

In addition, as the Enforcement prepares to meet the challenges of tomorrow it must also deal with repeated calls for reform of its procedures, additional transparency and more speed and efficiency. Facing an increasingly complex, ever-changing and more difficult environment year after year with the same resources in not just daunting, at some point it becomes impossible. Yet, maintaining the integrity of America’s capital markets is an essential, critical mission. Perhaps the Committee will realize this and add a few dollars to the budget.

Part IV: SEC Enforcement Trends and Priorities 2008 – Calls For Reform

Last year, there were repeated calls for the SEC to reform its enforcement policies which, for the most part, went unheeded. The U.S. Senate Committee which held hearings on the botched Pequot hedge fund investigation made three key recommendations:

1) that standardized, comprehensive investigative procedures be prepared in a fashion similar to the U.S. Attorney’s Manual;

2) that procedures for assessing the complexity and needs of a case in terms of staff and resources be developed; and

3) that steps be taken to prevent improper influences.

Minority Staff of S. Comm. On Finance, 110th Cong. 1st Sess., “The Firing of an SEC Attorney and the Investigation of Pequot Capital Management” at 46 (S. Prt. 110-28 Aug. 2007).

Similarly, SEC Commissioner Paul Atkins also called for the creation of uniform enforcement standards, including an Enforcement Manual. Commissioner Paul S. Atkins, SEC, “Remarks to the ‘SEC Speaks in 2008’ Program of the Practising Law Institute’” (Feb. 8, 2008).

These suggestions have not been adopted.

In contrast, the suggestions of the GAO in a November 2007 study are, according to Chairman Cox, being implemented. That report called for the Enforcement Division to revise certain procedures to promote efficiency. Those recommendations focused largely on the relation of the Division to SROs and the use of reports from those organizations.

Unfortunately, most other calls for reform have been ignored. Thus, suggestions that the Seaboard Release and the Commission’s policies on cooperation be revised have failed. Despite requests for reform from Congress, Commissioner Atkins, the ABA and others, the staff, as noted in an earlier segment of this series, has reaffirmed the policies which many claim have created a culture of waiver.

Similarly, the Commission and the Division of Enforcement have ignored suggestions by Commissioner Atkins that a New Wells Commission be convened to reform settlement procedures and that an open file policy be adopted. Commissioner Paul S. Atkins, SEC, Remarks at the Eighth Annual A.A. Sommer, Jr. Corporate, Securities and Financial Law Lecture, Oct. 9, 2007; Commissioner Paul S. Atkins, SEC, “Remarks to the ‘SEC Speaks in 2008’ Program of the Practising Law Institute,” supra.

Finally, the disastrous results of cases such as SEC v. Jones and SEC v. PacketPort.com, Inc., discussed in earlier parts of this series, seem to have also been lost on the Commission. The rulings in those cases suggest that the Enforcement Division needs to reorganize and energize its procedures to bring cases in a more timely fashion. Such results would be consistent with the Commission’s key remedy, a statutory injunction which is forward-looking and not a punishment for past and ancient transgressions. Such a revision would also be consistent with the Enforcement Division’s “cop on the beat” role, rather that the archeologist it sometimes appears to be. Unfortunately, the lessons of these cases seem to have been lost on the would-be-cop.

Next: Significant cases – insider trading