REJUVINATING SEC ENFORCEMENT: A LONG ROAD
A recurring topic of discussion these days is the rejuvenation of SEC enforcement. In the wake of gaffes, blunders and outright failures, it is all but conceded that the program requires a major overhaul for the agency to carry out its role as the top cop of Wall Street and primary protector of all investors. If the enforcement program is only suffering from a couple of blunders requiring a bit of tinkering, then one might ask what is all this talk of “rejuvenation” and “reinvigorating” (with apologies perhaps to George Carlin who had a way with words). A brief look at the not so distant past surely will convince even the casual observer that “rejuvenation” is the correct word for the right idea.
No one should think that the current Chairman and her fellow Commissioners have anything but a big job ahead in rebuilding enforcement – and it is a long term job. Yet, in the time of the 24/7 news cycle, it is hard to get that much time and easy to lose focus. Success today is the barometer and at a premium. Statistics – the number of skins on the wall and dollars in the coffers – becomes a driving force. Whether they should be or not is a different matter, but in headlines and congressional testimony, both count for plenty.
In this context, consider the recently published first half of 2009 statistics for SEC enforcement. Not exactly a picture of a rapid rise to restoration. NERA reports that in the first half of 2009, the SEC settled 335 cases compared to 330 in the same period last year. If the immediate past is viewed as less than successful, these numbers arguably are an improvement (this year is up by 5 cases), but they hardly bespeak of a program rapidly being rejuvenated.
There are more statistics to ponder. For example, according to NERA, in the second quarter of 2009 the SEC settled 160 cases, which is down from the 174 in same quarter in 2008. It is also down from the 175 cases settled in the first quarter of 2009 which again looks a lot like the year before when things were not supposed to be very good – the reason that enforcement needs to be “revitalized” and “rejuvenated.”
But wait, like those TV offers where there is always more if you wait and then rush to order, NERA has more. Penalties always make a good headline and are great fodder for congressional testimony. In the first quarter of 2009 the median penalty was $1.7 million. In the second quarter it dropped to $1.6 million. Both of these numbers are over the median for 2008 of $1.3 million. Likewise, the average for the first half of 2009 is $10.1 million which is up from the 2008 amount of $8.4 million. Overall however, the trend for 2009 is a decline from the beginning of the year.
What all of this says is that in the 24/7 headline news cycle scoreboard of rejuvenating enforcement, the SEC has some numbers to talk about. The trends however, suggest that much more needs to be done. The trend for this year is down. The trend compared to last year while up is hardly robust.
Statistics are only a small part of the story. In fact they say little about the overall health and vitality of the enforcement program. During some periods, the Commission might in fact bring fewer cases and levy smaller penalties and have a better, more effective enforcement program. After all, in the glory days of the program the SEC could not even impose penalties. Rather, its enforcement efforts focused on identifying who was involved and on remedial measures such as the imposition of procedures or the installation of a monitor to ensure that whatever went wrong was fully corrected and, more importantly, that it did not happen again in the future. Those measures protected investors in a way that taking their money through a corporate fine does not and can not. Those efforts protected the markets. This is what statistics do not measure. Effective enforcement is the key to rejuvenating enforcement, not big number, big headline enforcement.
The current skirmish over the SEC’s proposed settlement with Bank of America, discussed here, is emblematic of this point. It is also what is missing in the settlement with General Electric. Both cases were resolved (assuming the court eventually accepts the settlement in Bank of America) with injunctions and big fines. Both got the SEC headlines at the time, some suggesting the enforcement program was back and restored. Both suggest that revitalization efforts need to be refocused from the 24/7 new cycle to long term effectiveness.
As Bank of America’s briefs trying to justify the deal makes clear, the settlement (and the headlines) miss the point. Bank of America candidly admits it made a business decision to settle the case by paying out the shareholder’s money, despite the fact it claims that it did no wrong. Given the bank’s view, what assurance did the SEC obtain for investors and the markets that everything that went wrong according to the SEC, has been cleared up? Given the bank’s view, what assurance did the SEC obtain for investors and the markets that in the future those who participated in the wrongful conduct and the bank will not repeat it?
When the SEC can answer these questions adequately about any of its settlements – and surely the fine did not do it here, it just increased the shareholder’s loss – then the agency can say that enforcement has been rejuvenated. At the moment, there are numbers to talk about and perhaps some headlines, but surely it is a long road.