On Thursday, September 15, SEC Chairman Mary Schapiro and former SEC Chairman Harvey Pitt provided testimony to the House Committee on Financial Services. As previously discussed, the SEC has faced a number of issues this summer, including inquiries about its now-suspended document destruction policy (here), upcoming reports from the Inspector General on a variety of topics (here), various reform recommendations (here) and legislation introduced in Congress which could significantly impact the agency’s authority (here). Both Chairman Schapiro and Mr. Pitt expressed concern about legislation that would impact the structure and authority of the Commission. Chairman Schapiro focused on the already-started process of analyzing recommendations proposed by the Boston Consulting Group as a path to reform. According to a Washington Post article, Mr. Pitt (who submitted written testimony) also "denounced the agency’s inspector general …, saying the internal watchdog appears bent on destroying reputations and staff morale and crippling the SEC’s effectiveness."
In her testimony (here), Chairman Schapiro told the Committee that when she arrived at the SEC two years ago:
the agency was reeling from a variety of economic events and mission failures that had severely harmed the ability of the agency to achieve its mission of protecting investors, maintaining fair and orderly markets, and facilitating capital formation. Reform was needed across the agency, and we immediately initiated decisive and comprehensive steps to reform the way the Commission operates. … Our goal throughout these many changes has been to create a more vigilant, agile and responsive organization to perform the critical mission of the agency.
She stated that, in addition, as required by Dodd-Frank Act § 967 (directing the study of specific areas of SEC operations) and the resulting report from the Boston Consulting Group ("BCG"), the SEC has prepared an initial report developing the necessary infrastructure to address these issues (previously discussed here) and "is conducting a thorough analysis of each recommendation and designing appropriate approaches for those recommendations selected for implementation." She stated that the next report (expected in six months), will describe the significant work done to analyze the BCG recommendations and "recommend what, if any, actions should be taken."
At the request of the Committee, Chairman Schapiro also addressed two pieces of legislation: the SEC Modernization Act of 2011 (which would significantly restructure the SEC); and the SEC Regulatory Accountability Act (which would establish specific standards for cost-benefit analyses for Commission rules and orders). She expressed concerns about both bills. With respect to the Modernization bill, she pointed out that the SEC was already reviewing similar recommendations from the BCG Report and testified that she was "very concerned about the overarching loss of the agency’s flexibility in the future to change with our dynamic capital markets if its structure is rigidly established by statute."
With respect to the Accountability Act, Chairman Schapiro stated that a number of factors in the bill are "potentially in conflict with the SEC’s mission, duplicative of existing requirements, unrelated to SEC rulemaking, or unclear in scope." She also testified that, as drafted, the bill would apply to "not only to rules, but also to orders, which could significantly impede the SEC’s ability to administer the securities laws."
Chairman Schapiro concluded her prepared remarks by focusing on the process started with the BG report and implementing those ideas.
According to an article in the Washington Post, former Chairman Harvey Pitt, also addressed the proposed legislation stating that the restructuring proposed by the Modernization Act would be "too restrictive" and "would likely cause certain critical SEC functions to lose independence." The Post reported that Mr. Pitt said that Accountability Act "is ‘imprudent,’ ‘seems far too cumbersome’ and would impose ‘onerous standards.’"
In a separate article, the Washington Post said that Mr. Pitt accused the SEC’s Inspector General of having "taken an ‘unprincipled approach’ in criticizing ‘hard-working, well-intending’ SEC employees." The article quoted Mr. Pitt’s written testimony:
Since this Committee is interested in improving SEC accountability, it should consider the activities of a single individual, and the office he heads, who seemingly operates on the assumption that he can effectively terrorize innocent employees under the guise of upholding the law but not follow the law himself.
Mr. Pitt, who has represented individuals on a pro bono basis in investigations led by the Inspector General, called the process "Kafka-esque, fraught with diatribes and bereft of professional integrity."