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SEC enforcement operation under scrutiny
Enforcement operation of SEC under scrutiny as senators hear from new division chief
Marcy Gordon, AP Business Writer
On Thursday May 7, 2009, 1:42 am EDT
Buzz up! Print WASHINGTON (AP) -- Lawmakers are examining the enforcement operation of the Securities and Exchange Commission and whether it is up to the task of policing the marketplace at a time of shattered investor confidence and financial upheaval.
The workings of the SEC's enforcement division have come under intense congressional scrutiny after revelations in December that the agency failed to detect the massive pyramid scheme run by money manager Bernard Madoff, despite red flags raised to its staff by outsiders over the course of a decade.
The Senate Banking subcommittee that oversees the SEC will hold a hearing Thursday afternoon on the agency's enforcement division. Among those testifying are Robert Khuzami, a former federal prosecutor who was installed as the SEC's enforcement director in February, and Richard Hillman, an official of the Government Accountability Office.
The subcommittee's chairman, Sen. Jack Reed, was a consistent critic of the SEC under the tenure of former chairman Christopher Cox, saying the agency's oversight of Wall Street investment banks was lax in the period leading up to the financial crisis in mid-2008. Reed is looking for improvements under the new chairman, Mary Schapiro, an industry regulator who was appointed in January by President Barack Obama.
A report released Wednesday by the GAO, Congress' investigative arm, concluded that the SEC has made progress in tightening its procedures for managing its caseload of enforcement investigations but still must improve internal communications and use of resources.
While noting that the enforcement division has brought several actions with record penalties against companies and senior executives in recent years, the report said there are questions about its "capacity to effectively manage its activities and fulfill its critical law-enforcement and investor-protection responsibilities."
The enforcement division faces challenges in balancing its personnel and other resources against a ballooning workload, while it grapples with inefficient operations and deficiencies in its information systems, the GAO auditors said. The division's overall resources have been at a stable level, but the number of investigative attorneys dropped 11.5 percent from fiscal years 2004 through 2008, the review found.
The GAO undertook the review last summer at the request of Reed and Sen. Christopher Dodd, chairman of the full Senate Banking Committee. It did not address the SEC's regulatory failure in the Madoff situation -- an issue being examined by the SEC's inspector general.
Schapiro named Khuzami to replace Linda Thomsen, the enforcement chief since May 2005 who had become a lightning rod for criticism by lawmakers and others.
Schapiro also took several actions intended to strengthen and speed the SEC's enforcement efforts. For example, she ended a two-year-old policy requiring agency enforcement attorneys to get approval from the SEC commissioners before negotiating fines and penalties with companies accused of violations.
The old policy was considered to have resulted in delays in cases and fewer fines and penalties against companies, the GAO report said.
Cox, who was the SEC chairman in 2007 when the policy was put into effect, said Tuesday that it was a pilot program "designed to test ways to speed up cases and improve oversight," and was used in only nine enforcement cases of more than 1,000. "But the GAO analysis supports (Schapiro's) decision to end the pilot and pursue other approaches," Cox said in a statement.
Schapiro, in written comments to the GAO, said she agreed with its recommendations and that the agency is taking steps to put them into action. They include considering a new structure for the office in charge of collecting penalties from companies and distributing recovered funds to aggrieved investors, and reviewing the enforcement division's resources.