The SEC’s Enforcement Program And The Subprime Crisis

SEC Chairman Cox testified before the Senate Committee on Banking, Housing and Urban Affairs on Tuesday, detailing in part efforts by the Division of Enforcement regarding the recent crisis in the financial markets. Noting that the “SEC’s mission [is] to protect investors, maintain orderly markets, and promote capital formation” the Chairman told the Committee that the agency currently has over four dozen pending investigations in the subprime area. Those inquiries “fall primarily into three broad categories: first, subprime lenders; second, investment banks, credit rating agencies, issuers and others involved in the securitization process; and third, banks and broker-dealers who sold mortgage-backed investments to the public.”

The Chairman went on to highlight key areas in which the Enforcement Division is focusing its efforts. Those include:

• Whether mortgage lenders properly accounted for the loans in their portfolios and set up the correct loan loss reserves;

• Whether investment banks and broker-dealers defrauded retail customers by making false representations or putting investors into unsuitable mortgage backed investments. As an example of these kinds of inquiries, the Chairman pointed to the action recently brought by the SEC and the U.S. Attorney’s Office against two former portfolio managers at Bear Stearns Asset Management, discussed here, who were accused of deceiving investors in an effort to prevent them from selling their shares in the funds which eventually collapsed last summer;

• Inquiries into the spreading of false rumors which can undermine market confidence and be manipulative. The SEC is coordinating its efforts in this regard with other market regulators as part of an industry-wide sweep discussed here.

In other parts of his testimony Chairman Cox’ went on to detail the efforts of other divisions to deal with the current market crisis, including the recent staff report on credit rating agencies, discussed here, and the proposed rules for those agencies.

Overall, Chairman Cox detailed a comprehensive effort by the agency to deal with the complex issues of the current market crisis. The testimony had a strong, positive overtone.

The current market crisis clearly requires a comprehensive effort to deal with the continually unfolding problems. While the SEC is only one of the regulators dealing with these issues, clearly a strong and vigorous enforcement program is essential, as the Chairman suggested. The SEC’s enforcement program has long been critical to its mission. Yet, in recent times many have seen it as inconsistent and less than effective. Its performance during this crisis may decide whether those critics are correct.