September 1, 2010

A Section 21(a) Report History Lesson: SEC Issues New One Cautioning Rating Agencies

Yesterday, the SEC’s Enforcement Division issued this Section 21(a) report cautioning credit rating agencies about deceptive ratings conduct and the importance of sufficient internal controls over the policies, procedures, and methodologies the firms use to determine credit ratings. Here is the related press release.

What is a Section 21(a) Report? – The SEC uses these reports as a vehicle to signal how it views a particular problematic area or set of practices – so they are essentially policy statements. Perhaps more important, they put people on notice that going forward the SEC and it’s Enforcement Division will consider similar conduct to be fair game for more conventional enforcement action.

Note that Section 21(a) reports are reports of the Commission, not its Enforcement Division. They typically follow a process similar to that of a settled administrative proceeding — i.e., the Division recommends resolving the investigation with a 21(a) report rather than an enforcement action, and the Commission accepts or rejects the recommendation. If it accepts, it issues the report – typically drafted by Enforcement – as a Commission document.

How often does the SEC issue a Section 21(a) Report? – The SEC doesn’t issue Section 21(a) reports often (here’s a list of them on the agency’s site). Besides this muni pay-to-play one from this March, the Division issued this one back in 2008 to emphasize the responsibilities of all investment professionals – including large public retirement systems and other public entities – and to highlight the risks they undertake when they operate without a compliance program.

And then before that there was this Titan one in 2005 that had implications for M&A deals – and then this Motorola report in 2002, which was one of the initial foursome that kicked off a series of Reg FD actions. And then finally, this 2001 Seaboard report that outlined how companies could get credit for cooperating during investigations (a report that has since been replaced by updated Enforcement policies).

So including this new rating agency one, that’s just six reports in a decade – and notably, there’s been two of those just this year. And I believe this decade has produced the most Section 21(a) reports of any decade since the SEC was born…

The Challenges in Coordinating the SEC’s Regional Offices

Even though the bulk of the SEC’s Staff resides at its headquarters in Washington, there are 11 regional offices that carry out enforcement tasks. As noted in this Washington Post article, there appear to be problems at the SEC’s Fort Worth regional office. Oversight of far-flung offices from DC definitely can pose challenges, just like any other large organization. But Senator Grassley is not happy with the SEC’s response to this story, as noted in this Washington Post article yesterday.

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– Broc Romanek