In a 135-page report issued entitled "U.S. Securities and Exchange Commission: A Roadmap for Transformational Reform" issued on December 14, 2011, the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness expanded on the incremental changes it proposed in a 2009 report, saying that "extraordinary steps are needed to achieve change." The Report, which was authored by Jonathan Katz (who was Secretary of the SEC for twenty years) and was briefly discussed in our Monthly Review entry on December 15, contains 28 separate recommendations on how to reform the Commission as a whole, and specifically addresses the Division of Enforcement and the rulemaking process.
This Report is not the first time the Chamber of Commerce has suggested changes. In 2009, the Chamber released a Report entitled: "Examining the Efficiency and Effectiveness of the U.S. Securities and Exchange Commission." It contained 23 recommendations which the Chamber described as "proposals for incremental change." However, the Chamber now has concluded that "incremental change will no longer do."
To prepare the Report, the Chamber reviewed "public actions, reports, and statements of the SEC," and conducted interviews with a wide range of individuals, including "current and former SEC Commissioners and staff (at both senior and subordinate levels), employees of public companies, employees of financial services firms regulated by the SEC, and lawyers and other professionals specializing in the capital markets sector."
The Chamber acknowledged the SEC has a long-standing respected reputation as "an outstanding government regulator." However, the Chamber concluded that "the events of the past decade, and the perception that the SEC failed to identify problems early and failed to respond strongly and quickly, has eroded the trust and confidence of the public, the industry, and policymakers."
The Chamber made a group of 15 recommendations intended to address the Commission's leadership structure. Those recommendations included:
• "Congress should increase the number of Commissioners from five to seven and specify that at least one Commissioner must be an accountant, one an economist, and one an attorney."
• "One Commissioner should be designated by the President, on the recommendation of the Chairman, as Deputy Chairman for Management and Operations. This Commissioner should be required to have expertise and experience in the management of a large organization."
• "The Chairman should appoint the Deputy Chairman for Management and Operations to oversee a comprehensive review and reorganization of the Commission, as the Chief Transformation Officer."
The Chamber also examined the SEC's Enforcement Division. Enforcement has undergone a its widest range of organizational changes since 1972 (as discussed here). The Chamber stated that the structural reforms "are largely positive and should, over time, improve the effectiveness of SEC enforcement," but noted that it "is too soon to conclude that they are already successful." The Chamber had its own recommendations, which included:
• "The number of specialty units should be increased and the staffing of the specialty units should grow to 40% of the Division." The Chamber proposed adding a specialty unit for complex accounting frauds or misstatements, corporate debt market and a subunit devoted to alternative trading systems, dark pools, and other nonexchange platforms.
• "The Foreign Corrupt Practices Act (FCPA) group should have expanded responsibility for all investigations of foreign issuers listed in the United States."
• "The Division should establish a goal of reducing its open case inventory each year by identifying one-third of its investigations that are least likely to warrant action, due to age, significance, or weak evidence. Any investigation that is more than 18 months old or based on a possible violation older than three years should be closed routinely unless the Division Director or Deputy affirmatively concludes that it is essential to continue the investigation."
• "The procedure for assignment of investigations should be revamped. The process should not be based largely on the person or group that first identified the matter or the geographical location of the issuer of securities or headquarters of a registered firm. A disciplined top-down system should assign cases based upon staff expertise and experience in the area and the availability of sufficient resources to complete the investigation in a timely manner."
• "The investigation management process should consider the mix of cases in the pipeline when assessing investigations. The Division should have an explicit goal of bringing cases that advance the Commission’s entire regulatory agenda."
• "Use specialty staff to promote consistency throughout the Division. … Permit defense counsel to request meetings with specialty teams to discuss relevant investigations conducted by other units.
• "The SEC should update the Seaboard principles on voluntary cooperation and then commit itself to applying them whenever appropriate."
• "The Division … should refrain from issuing press releases that evaluate its performance based on the total number of cases and the amount of money ordered to be paid. Instead it should rely on measures of case importance and timeliness. … Statistics on money judgments should be based on the amounts paid, not the amounts ordered to be paid."
The Chamber also considered the SEC's Rulemaking process, pointing to the judicial reversal of several high-profile rules (such as the one discussed here). The Chamber stated that "[b]ecause it is difficult if not impossible for any regulator to know what will happen when a regulation is adopted, the Commission should combine a pre-adoption cost-benefit analysis with a post-adoption look-back requirement." The Chamber suggested that the Commission should collect data and re-evaluate its rule after a defined period "to determine the effectiveness of a rule and the need to keep it on the books or modify it."
In a speech the day the Report was released, SEC Commissioner Daniel M. Gallagher stated that criticism of the SEC "provides the Commission with a unique opportunity to re-think and critically analyze the way we fulfill our mission." He elaborated that:
[W]e should not reflexively protect past practices or shun appropriate criticism. Smart regulation, smart enforcement, and smart management require that we constantly evaluate and evolve as regulators. And so we are here today, in all of our various capacities, to help ensure that the Commission meets this obligation of serious introspection … .
Commissioner Gallagher asserted that "[t]he Commission should consider specific proposals like those included in Jack Katz's report … as well as others presented …, and should work with Congress on appropriate legislation to enhance the Commission's operations."
At least one commentator has criticized the Report. Broc Romanek of theCorporateCounsel.Net blog acknowledged that "the report does have some good ideas," but was concerned that "the report doesn't tackle the most glaring problem of the SEC – that it's forced to cater to a Congress bent on the SEC not fulfilling its mission to protect investors. Often due to business lobbyists like the Chamber influencing Congress. In my opinion, that needs to be the starting part of any reform ... ."