March 10, 2006

US Chamber of Commerce’s Report on the SEC’s Enforcement Efforts

Yesterday, the US Chamber of Commerce issued a 44-page report on the SEC’s enforcement program. This Reuters’ article includes a reply from SEC Chairman Cox.

The Chamber seeks a special advisory committee to study – and possibly reform – the SEC’s Enforcement Division and its procedures. In addition, here are some of the report’s 15 recommendations noted on pages 7-8:

– review of whether the SEC is using its litigation and settlement positions to attempt to shift standards for civil liability, such as “materiality” and “scienter,” to an inappropriately low level

– refrain from interpreting or expanding the SEC’s regulatory reach through enforcement actions and clarify legal standards before initiating enforcement actions for violation of those standards

– greater SEC reliance on formal reprimands instead of enforcement actions to remedy inappropriate corporate behavior

– avoid blurring the line between civil actions and appropriate criminal prosecutions and ensure that SEC referrals to DOJ for securities violations are reserved for clearly egregious cases

– clarification that a waiver of attorney-client privilege or work product protection is not required to be viewed as cooperating with an SEC investigation

– refrain from imposing fines on companies entirely for lack of cooperation during investigations (because the SEC already has adequate tools through subpoena enforcement actions, threat of such actions, and rules on document maintenance to command cooperation)

– over the last several years, the investigative process has become more adversarial and less objective in finding the facts and determining whether a violation has occurred (so there should be more open dialogue and a reconsideration of the practice of industry sweeps due to overly broad requests for information)

What About Periodic Updates from Enforcement on Open Matters?

On a somewhat related note, on Tuesday’s webcast – “How to Handle a SEC Enforcement Inquiry Today” – Russ Ryan mentioned proposed legislation that would require the SEC to provide regular updates to companies under investigation. This would go a long way towards solving the dilemma discussed on the webcast – to quote Jay Dubow: “Do you want to call and get that confirmation or are you afraid you’re going to wake the sleeping dog; that it was on someone’s back burner and now they’re going to relook at the open matter?”

A few members asked for the name of the proposed legislation. It is the bill that seeks to reform OCIE called “HR 4618: Compliance, Examinations, and Inspections Restructuring Act of 2005.”

A Peek at

Howard Dicker sent me over to to get a taste of what OMB is up to these days. By plugging “securities” and “exchange” into the search tool, I found that the SEC’s OCIE received a “moderately effective” grade in 2005. In 2004, Enforcement received a “not performing” – and Corp Fin received a “not performing” in 2003.