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., 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