Securities and Exchange Commission

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  • Agency name - U.S. Securities and Exchange Commission
  • Formed - June 6, 1934
  • Jurisdiction - Federal government of the United States
  • Headquarters - Washington, D.C.
  • Employees - 3,798 (2007)
  • Budget -
  • Chairman - Mary Schapiro
  • Website

The U.S. Securities and Exchange Commission (commonly known as the SEC) is an independent agency of the United States government which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets.

The SEC was created by section 4 of the Securities Exchange Act of 1934 (now codified as USC 15 78d and commonly referred to as the 1934 Act). In addition to the 1934 Act that created it, the SEC enforces the Securities Act of 1933, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Sarbanes-Oxley Act of 2002 and other statutes.

See also Goldman Sachs.



The SEC was established by the United States Congress in 1934 as an independent, non-partisan, quasi-judicial regulatory agency during the Great Depression that followed the Wall Street Crash of 1929.

The main reason for the creation of the SEC was to regulate the stock market and prevent corporate abuses relating to the offering and sale of securities and corporate reporting. The SEC was given the power to license and regulate stock exchanges, the companies whose securities traded on them, and the brokers and dealers who conducted the trading.

The enforcement authority given by Congress allows the SEC to bring civil enforcement actions against individuals or companies found to have committed accounting fraud, provided false information, or engaged in insider trading or other violations of the securities law. The SEC also works with criminal law enforcement agencies to prosecute individuals and companies alike for offenses which include a criminal violation.

To achieve its mandate, the SEC enforces the statutory requirement that public companies submit quarterly and annual reports, as well as other periodic reports. In addition to annual financial reports, company executives must provide a narrative account, called the "management discussion and analysis" (MD&A), that outlines the previous year of operations and explains how the company fared in that time period. Management will usually also touch on the upcoming year, outlining future goals and approaches to new projects. In an attempt to level the playing field for all investors, the SEC maintains an online database called EDGAR (the Electronic Data Gathering, Analysis, and Retrieval system) online from which investors can access this and other information filed with the agency.

Quarterly and annual reports from public companies are crucial for investors to make sound decisions when investing in the capital markets. Unlike banking, investment in the capital markets is not Federal Deposit Insurance Corporation by the federal government.

The potential for big gains needs to be weighed against equally likely losses. Mandatory disclosure of financial and other information about the issuer and the security itself gives private individuals as well as large institutions the same basic facts about the public companies they invest in, thereby increasing public scrutiny while reducing insider trading and fraud.

The SEC makes reports available to the public via the EDGAR system. SEC also offers publications on investment-related topics for public education. The same online system also takes tips and complaints from investors to help the SEC track down violators of the securities laws.


Prior to the enactment of the federal securities laws and the creation of the SEC, there existed so-called Blue Sky Laws, which were enacted and enforced at the state level.[1] However, these laws were generally found lacking; the Investment Bankers Association told its members as early as 1915 that they could "ignore" Blue Sky Laws by making securities offerings across state lines through the mail. (Joel Seligman, "The Transformation of Wall Street", pages 45,51–52, 2003)

After holding hearings on abuses on interstate frauds (commonly known as the Pecora Commission), Congress passed the Securities Act of 1933 (USC 15|77a) which regulates interstate sales of securities original issues at the federal level. The subsequent Securities Exchange Act of 1934 (USC 15|78d) regulates sales of securities in the secondary market.

Section 4 of the 1934 Act created the U.S. Securities and Exchange Commission to enforce the federal securities laws. Both laws are considered part of Franklin Roosevelt's "New Deal" raft of legislation.

The Securities Act of 1933 is also known as the "Truth in Securities Act" or the "Federal Securities Act” and is often shorted to the "1933 Act."

Its goal is to increase public trust in the capital markets by requiring uniform disclosure of information about public securities offerings. The primary drafters of 1933 Act were Huston Thompson, a former Federal Trade Commission chairman, and Walter Miller and Ollie Butler, two attorneys in the Commerce Department's Foreign Service Division, with input from Supreme Court Justice Louis Brandeis.

For the first year of the law's enactment, the enforcement of the statute rested with the Federal Trade Commission, but this power was transferred to the SEC following its creation in 1934. (Interestingly, the first, rejected draft of the Securities Act written by Samuel Untermyer vested these powers in the United States Postal Service, because Untermyer believed that only by vesting enforcement powers with the postal service could the constitutionality of the act be assured.

The law requires that issuing companies register distributions of securities with the SEC prior to interstate sales of these securities, so that investors may have access to basic financial information about issuing companies and risks involved in investing in the securities in question. Since 1996, most registration statements (and associated materials) filed with the SEC can be accessed via the SEC’s online system, EDGAR. [2]

The Securities Exchange Act of 1934 is also known as "the Exchange Act" or "the 34 Act". This act regulates secondary trading between individuals and companies which are often unrelated to the original issuers of securities. Entities under the SEC’s authority include securities exchanges with physical trading floors such as the New York Stock Exchange (NYSE), self-regulatory organizations such as FINRA, the successor to the National Association of Securities Dealers (NASD), the Municipal Securities Rulemaking Board (MSRB), online trading platforms such as NASDAQ and ATS, and any other persons (e.g., securities brokers) engaged in transactions for the accounts of others.[3]

President Franklin Delano Roosevelt appointed Joseph P. Kennedy, Sr., father of President John F. Kennedy, to serve as the first Chairman of the SEC, along with James M. Landis (one of the architects of the 1934 Act and other New Deal legislation) and Ferdinand Pecora (Chief Counsel to the United States Senate Committee on Banking and Currency during its investigation of Wall Street banking and stock brokerage practices).

Other prominent SEC commissioners and chairmen include William O. Douglas (who went on to be a U.S. Supreme Court justice), Jerome Frank (one of the leaders of the legal realism movement) and William J. Casey (who would later head the Central Intelligence Agency under President Ronald Reagan).

As part of the continuing investigation in 1974-75, Watergate scandal prosecutors offered companies that had given illegal campaign contributions to Richard Nixon's re-election campaign lenient sentences if they came forward. (Source: "How We Got Here: The '70s", David Frum, pages= 31-32, 2000, Basic Books, ISBN 0465041957)

Many companies complied, including Northrup-Grumman, 3M, American Airlines and Braniff Airlines. By 1976, prosecutors had convicted 18 American corporations of contributing illegally to Nixon's campaign. The SEC, in a state of flux after its chairman was forced to resign his post, began to audit all the political activities of publicly traded companies. The SEC's subsequent investigation found that many American companies were making vast political contributions abroad.

New initiatives

Shapiro - "The Road Ahead"

  • Source: "The Road to Investor Confidence" Chairman Mary Schapiro, U.S. Securities and Exchange Commission, SIFMA Annual Conference, New York, New York, October 27, 2009

Revitalizing Enforcement Efforts

One of the first things I did with an eye toward restoring confidence was to begin to re-energize the Division that enforces our securities laws.

Most importantly, we sent a clear signal to our attorneys that we value toughness and speed by removing existing roadblocks impeding their investigations.

I hired a tough prosecutor — Rob Khuzami — to head up the Division and undertake one of the most significant reorganizations in decades.

He removed a layer of management, which will result in the redeployment of dozens of superbly qualified attorneys back to the front lines, and created specialized units — units where attorneys can concentrate their expertise in a particular area — such as structured products or market abuse — and better detect links and patterns that might not have been spotted before.

While statistics don't always tell the whole story, the numbers are nonetheless revealing. In the last nine months, compared to the same period last year, we've:

Issued more than twice as many formal orders (about 448, compared to 181) Filed more than twice as many emergency actions (about 62, compared to 30) Opened nearly 50 more investigations (approximately 713, compared to 663) Obtained orders for twice the amount in disgorgements and penalties, over roughly the same time ($1.8 billion compared to $865 million.) Complaints and Whistleblowers

Also upon arriving at the agency, we undertook a review of the way we handle the hundreds of thousands of tips we receive each year.

For an agency of just 3,700, the numbers of complaints were virtually impossible to keep up with, let alone manage. But, what concerned me was that there was no central repository — no effective tracking system to ensure the tips were getting to the attention of those who needed to know. So we brought in experts to help us revamp our business processes and begin to develop the technology needed to identify and pursue the most promising leads.

Of course, sometimes the best complaints are from those on the inside of an institution — whistleblowers. And so, we have been advocating for expanded authority from Congress to reward those who bring forward substantial evidence about significant wrongdoing.

Risk and Innovation

Apart from enforcement, I was also determined to improve the agency's ability to analyze risk and cutting-edge market trends. As long as new financial products or strategies are being pitched to investors or have the potential to destabilize financial institutions or the system, we need to have a unit that is capable of determining the risks and regulatory concerns posed by those products. We created a new Division of Risk, Strategy and Financial Innovation to serve as a knowledge-based center of expertise within the agency. It's a Division that will help link existing know-how from one segment of the agency to the needs of another. In addition, it will be populated by people with current street experience in derivatives, hedge funds, trading and risk.

Of course, these internal reforms are just a slice of what has been keeping us busy, as we refocus on our core, investor protection mission. And equally, these are works in progress as we reorient and restructure the agency to better serve the interests of investors.

The Rulemaking

Throughout the past nine months, we have also pursued one of the most significant, investor-focused rulemaking agendas in our history — rules that will help protect investors and ensure that our markets operate fairly. And, we've been doing that, while simultaneously adding our voice to the ongoing regulatory reform effort underway in Congress.

Our list of rule initiatives is lengthy…

On the money market fund front — to avoid a recurrence of the serious problems exposed last year, when the Reserve Primary Fund broke the buck — we've proposed strengthening credit quality, liquidity and maturity standards, as well as introducing stress testing requirements.

We've also taken action to address the potentially harmful effects of naked short selling — adopting rules that have significantly reduced the number of times short sellers failed to deliver securities. And, we also have issued proposals to address the public confidence and market stability implications of short selling in a downward market.

Further, we proposed a package of measures designed to create a stronger, more robust regulatory framework for credit rating agencies — measures designed to improve the quality of ratings by requiring greater disclosure, fostering competition, helping to address conflicts of interest, shedding light on rating shopping, and promoting accountability.

Additionally, we have proposed rules to facilitate the effective exercise of the rights of shareholders to nominate directors to the Boards of the companies they own.

And, we proposed rules that would provide investors with more meaningful information about the leadership structure of boards, the qualifications of Board nominees and the relationship between a company's overall compensation policies and risk.

Boards are clearly — and will be increasingly — important to the effective management of financial institutions. I do not expect that the public outrage over compensation practices in financial firms will subside without meaningful change. And, I think the restoration of confidence in the integrity of our financial institutions is highly dependent upon a more thoughtful and rational approach to compensation by Boards. I view our disclosure proposals, coupled with facilitating shareholders' ability to nominate directors, as important efforts on our part to address their compensation concerns.

Earlier this year as well, in response to the Madoff fraud, we proposed rules that would better protect clients of investment advisers from theft and abuse. The rules would provide assurance to these clients that their accounts actually contain the funds that their adviser, and account statements, say they contain. Among other things, the rules would encourage investment advisers to place their clients' assets in the custody of an independent firm.

We also have proposed rules to curtail abusive pay-to-play practices by advisers to public pension plans and other municipal clients.

And, finally, we have proposed rules that will provide investors and other market participants more meaningful, ongoing information regarding municipal securities. Considering that roughly two-thirds of muni securities are owned — directly or indirectly — by retail investors, it's a rule I believe is long overdue."

SEC Strategic Plan for 2010-2015

The Securities and Exchange Commission today published for public comment its Draft Strategic Plan that outlines the Commission’s strategic goals for fiscal years 2010 through 2015.

The draft plan surveys the forces shaping the SEC’s environment and outlines over 70 initiatives designed to support its primary strategic goals.

The draft plan was prepared pursuant to the Government Performance and Results Act of 1993.

SEC to name investigative chiefs

The Securities and Exchange Commission is set to name chiefs for five new specialized investigative units, advancing a key aspect of the agency's effort to rebuild its enforcement program.

Enforcement Director Robert Khuzami is expected to announce the moves at a news conference Wednesday, along with the release of guidelines meant to encourage individuals to cooperate to earn credit for substantially aiding cases, people familiar with the matter say.

In his personnel choices, Mr. Khuzami tapped senior enforcement lawyers who have led offices or worked on significant cases over the years, these people said.

The five units identify high-priority areas for the agency. Daniel Hawke, head of the Philadelphia office, was selected to run the market abuse unit, which will focus on insider-trading and market-manipulation cases, people familiar with the matter said.

Kenneth Lench will run the structured and new-products unit, which will focus on derivatives and newly developed products, they said. Cheryl Scarboro will be named chief of the agency's unit that investigates foreign bribery by corporations, the people familiar with the matter said.

Elaine Greenberg, a veteran of the Philadelphia office, has been tapped to run the municipal-securities unit. The unit specializing in asset managers, including hedge funds and private-equity firms, is set to be jointly run by Bruce Karpati, who has run the agency's hedge-fund working group for the past several years, and Robert Kaplan, another SEC veteran.

Another unit, called market intelligence, will assume the responsibilities of the Internet enforcement unit and add new duties, such as handling tips and referrals.

Thomas Sporkin is expected to lead that office, these people said.

SEC releases initiative to foster cooperation

The SEC yesterday formally released an anticipated new initiative designed to encourage individual and company cooperation with SEC investigations and enforcement actions. [1] The initiative, laid out in a new section of the enforcement manual for the Division of Enforcement entitled “Fostering Cooperation,” (the “Initiative”) establishes incentives for early, substantial, robust cooperation with the stated goal of ensuring “that potential cooperation arrangements maximize the Commission’s law enforcement interests.” [2] The Initiative provides guidance for evaluating an individual’s cooperation and authorizes new cooperation tools, including cooperation agreements, deferred prosecution agreements and non-prosecution agreements. While the new Initiative provides more options for the Enforcement Division and individuals, only time will tell if it proves to be the “game-changer” that Enforcement Director Robert Khuzami anticipates.

di Florio named Director of OCIE

Securities and Exchange Commission Chairman Mary L. Schapiro today announced that Carlo V. di Florio has been named Director of the agency’s Office of Compliance Inspections and Examinations (OCIE).

Mr. di Florio comes to the SEC from PricewaterhouseCoopers (PwC), where he was a partner in the Financial Services Regulatory Practice and one of PwC's national leaders in corporate governance, enterprise risk management and regulatory compliance and ethics. As head of OCIE, Mr. di Florio will oversee the SEC’s nationwide examination programs for investment advisers, broker-dealers, mutual funds, credit rating agencies and self-regulatory organizations among other entities.

“A strong inspections and examinations unit is instrumental to the SEC’s investor protection efforts. Investors rely on our examiners to ensure that their financial professionals comply with the law,” said Chairman Schapiro. “Carlo brings the energy, insight, and experience necessary to ensure that we keep pace with the rapid changes in the industry and continue to build upon the reforms of the past year.”

Mr. di Florio said, “I’m honored to join Chairman Schapiro, the Commissioners and the SEC staff during this critical time of financial regulatory reform. I’m excited to collaborate with an outstanding team of talented and dedicated professionals across the country as we work together to strengthen our examination strategy, structure, training programs, processes and systems, while also recruiting colleagues with valuable new skill sets, including trading strategies, risk management and quantitative analytics.”

At PwC, Mr. di Florio has played a leading role in strengthening the corporate governance, risk management and regulatory compliance practice and defining new industry standards, including the Committee of Sponsoring Organizations (COSO) Enterprise Risk Management standard and the Open Compliance and Ethics Guidelines (OCEG). Mr. di Florio has extensive experience leading independent reviews and advising clients on regulatory expectations and industry leading practices across capital markets, investment management, banking and other financial services sectors and regulatory regimes.

In addition to helping financial institutions strengthen corporate governance and regulatory compliance programs, Mr. di Florio also has played a leading role in numerous high-profile engagements where PwC was retained to investigate corporate fraud, corruption, conflicts of interest and money laundering. In this regard, Mr. di Florio has directed international teams and engagements across numerous jurisdictions around the world.

Mr. di Florio received his Master of Laws (LL.M) with distinction from Georgetown University Law Center, his JD from Penn State University, and his BA in Political Economy from Tulane University.

Wall Street waits as SEC fails to bring Madoff inspired reforms

Mary Schapiro, chairman of the U.S. Securities and Exchange Commission, said she wanted to show that her agency was cracking down after missing Bernard Madoff’s $65 billion Ponzi scheme. In May, she proposed that almost 10,000 money managers undergo surprise inspections to make sure they weren’t ripping off clients.

“Investors are looking to the SEC to assure the safekeeping of their assets,” Schapiro said at the time. “We cannot let them down.”

On Dec. 16, she settled for something less sweeping. Schapiro joined four other commissioners in approving a rule that requires about 1,600 U.S. fund managers to submit to unannounced audits, 83 percent fewer than seven months ago. The revision came after lobbying by fund companies, including executives from T. Rowe Price Group Inc., who met with Schapiro, and Legg Mason Inc., who met with another commissioner, SEC records show.

The diminished inspections rule is one of at least four Schapiro announced as a way to protect investors and boost confidence, then later scaled back or delayed. In August, she bought herself more time on a rule to rein in short-sellers, after lobbying by hedge funds. In October, Schapiro put off plans to give investors more power to decide who sits on corporate boards after the U.S. Chamber of Commerce questioned the SEC’s jurisdiction.

‘Driving Hard’

“I’ve been driving people very, very hard in this building,” Schapiro said in a Dec. 22 interview. “We just don’t have the capacity to move any faster. We’re still at, I think, a very good pace.”

Schapiro became SEC chairman in January, having been nominated by President-elect Barack Obama to attack Wall Street’s “culture of greed” and bring the “new ideas, new reforms and new spirit of accountability” to an agency whose failures, Obama said, helped spur the 2008 market meltdown.

In her first year in office, Schapiro’s found that issuing proposals is easier than completing rules. “You get zero points in history for what you proposed,” said former SEC Chairman Richard Breeden, who now manages a hedge fund that tries to remove directors at companies he says are underperforming. “You get points for what you get over the goal line.”

The SEC under Schapiro, 54, has suffered some setbacks, including a public humiliation in September by a federal judge who called a proposed $33 million settlement of an enforcement case with Bank of America Corp. a “contrivance.”

Democratic Relations

Even Schapiro’s attempts to maintain good relations with Democrats in Congress have prompted SEC Commissioner Kathleen Casey, a Republican, to caution against politicizing an independent agency. Regulation “needs to be driven by data, not politics or unfounded assumptions,” the SEC commissioner said at an October public meeting.

“If you go back to my days there were attempts to bring political pressure over some of our cases,” said Stanley Sporkin, a retired federal judge who in the 1970s led the SEC unit that investigates corporate fraud. “Everybody at the SEC knows you’ve got to fight it off. Mary knows that.”

Schapiro, who graduated from Franklin and Marshall College in Lancaster, Pennsylvania, before receiving a law degree from George Washington University, has spent more than two decades in financial regulation. She was first a staff attorney at the Commodity Futures Trading Commission, followed by stints as an SEC commissioner, chairman of the CFTC and then chief executive officer of the Financial Industry Regulatory Authority, a Wall Street-funded overseer of more than 5,000 U.S. brokerages.

Image Rehabilitated

Former SEC officials say Schapiro’s strategy of proposing rules and pursuing cases against industries and executives involved in the financial crisis helped rehabilitate the agency’s image -- even if she has had to change her mind on occasion.

“Sometimes you shoot too fast and you find out there are things you should have thought about first,” said Edward Fleischman, a former SEC commissioner who’s now a senior counsel at the Linklaters law firm in New York. “She doesn’t appear to be a steamroller who says ‘I made the proposal so it must be right.’”

At a time when lawmakers were threatening to strip the SEC of power because of failures in policing Wall Street, she helped restore its credibility, former officials said, by cleaning up units that missed Madoff’s crimes and proposing regulations for credit-rating companies that assigned top grades to toxic mortgage securities.

“Mary has behaved admirably,” said David Ruder, a Republican SEC chairman under President Ronald Reagan who now teaches law at Northwestern University in Chicago. “She has really made an effort to show the commission is revitalizing itself.”

Unfinished Rules

The SEC is reviewing public comments on the still- unfinished credit-rating rules, which would require companies such as Moody’s Investors Service and Standard & Poor’s to disclose how much revenue they get from their biggest clients and subject their employees to the same liability standards as auditors.

Schapiro also has yet to complete work on rules for money market funds. After last year’s collapse of the $62.5 billion Reserve Primary Fund, the Obama administration called the industry a “significant source of systemic risk.” SEC commissioners plan to vote next year on a proposal to force funds to hold a bigger share of their assets in investments that are easy to liquidate.

Other regulatory initiatives, however, are stuck in limbo. After saying in April that she would consider curbs on short- selling, which lawmakers blame for pushing down stock prices, Schapiro has postponed any rules until next year.

Hedge Fund Push Back

The decision followed push back from hedge funds, including Citadel Investment Group LLC, D.E. Shaw & Co. LP, and Renaissance Technologies Corp. They told the SEC in letters that there was little evidence that bearish traders caused the steep decline of share prices in 2008. The fund managers also said the SEC’s plans would damage markets.

Schapiro, in the interview, said the SEC in August sought a second round of comment because it was considering an alternative approach to the short-selling rules proposed four months earlier.

On the surprise audits, fund managers complained in private meetings that the agency was unfairly punishing an entire industry for the sins of one of history’s biggest fraudsters, according to attendees who requested anonymity to discuss the private sessions.

Exams Unnecessary

The exams weren’t necessary, the money managers also argued, because most investment firms hire banks to safeguard customer funds. And they said it would cost them at least double the SEC’s $8,100 estimate to pay for the annual exams.

“My view is always, if we are a bit more aggressive in proposing, we have more leeway,” Schapiro said in the interview.

In May, she proposed a rule that would give shareholders more power to choose board directors by making it easier to wage proxy fights.

Under the proposal, groups of shareholders who collectively own 1 percent of the biggest companies could nominate board members directly on corporate ballots, rather than absorbing the cost of printing and mailing a second proxy statement.

She linked the proposal to the global financial crisis, saying bank losses raised “serious questions” about the oversight performed by directors.

‘Unworkable’ Plan

The U.S. Chamber of Commerce, which represents more than 3 million companies, called the SEC plan “unworkable” in an August letter. The nation’s largest business lobby has also been discussing with Gibson, Dunn & Crutcher LLP attorneys a strategy for suing the SEC, said Tom Quaadman, a Chamber executive director.

By September, Schapiro’s staff began telling investors that the so-called proxy-access rules wouldn’t be in place for 2010 director elections. In October, the SEC publicly announced the delay.

Schapiro said the SEC still hopes to approve the rule in the first three months of 2010. “It’s a pretty profound change to the fabric of corporate governance,” she said in the interview. “We need to do it carefully and thoughtfully.”

Her agenda has sometimes been driven by political pressure, said James Angel, a finance professor at Georgetown University in Washington who has served as an adviser to stock exchanges.

Lawmaker Lobbying

The effort to curtail short-selling, in which traders borrow stock and sell it, hoping to profit by replacing the shares at a lower price, followed lobbying from Democratic lawmakers after the Standard & Poor’s 500 Index fell 19 percent in the first two months of the year.

Representative Barney Frank, chairman of the House Financial Services Committee -- the SEC’s overseer in the House -- announced Schapiro’s plans for her at a March 10 press conference. The Massachusetts Democrat said he was “hopeful,” after speaking with the SEC boss, that she’d reinstate the uptick rule “within a month.” The SEC in 2007 had scrapped the rule, which required investors to wait for the price of a stock to rise before executing short sales.

In July, the prodding came from Senator Charles Schumer. The New York Democrat urged Schapiro, a political independent, to ban flash orders, which such trading venues as Direct Edge Holdings LLC were using to take market share from NYSE Euronext.

Two-Tiered Market

Schumer said the practice, in which brokers get a split- second advance peek at buy and sell orders for stock, risked creating a two-tiered market that favored those with sophisticated computer systems over retail investors.

Schapiro, after a telephone conversation with Schumer, told her staff to get to work on a ban. To make sure she honored the commitment, the senator put out a press release disclosing their phone conversation and Schapiro’s pledge. The SEC proposed a prohibition on flash trades in September and the agency’s staff is now reviewing public comments.

Schumer spokesman Brian Fallon didn’t respond to requests for comment.

SEC Commissioner Casey and Senator Robert Menendez, a New Jersey Democrat, are among those who want the SEC to resist what they consider political influence. Menendez, whose state is home to Jersey City, New Jersey-based Direct Edge, sent Schapiro a letter on Dec. 9 advising her to base decisions about whether to ban trading practices on data, not input from “commentators.”

Schapiro said she’s not worried “at all” about the level of congressional feedback. “I welcome hearing their views just like I welcome hearing the views of the stock exchanges and the clearinghouses, retail investors and the institutional investors,” she said in the interview. “It’s all part of the mix.”

Weakened Clout

Her responsiveness to the concerns of lawmakers may reflect the weakened clout of the SEC after the agency missed Madoff’s fraud and politicians accused it of failing to police Wall Street, said former SEC General Counsel Ralph Ferrara.

“What’s being done now is to build credibility,” said Ferrara, a partner at Dewey & LeBoeuf LLP in Washington. “If the goal is to protect the agency, then what you do when the bear comes to the mouth of the cave is feed the bear.”

There’s evidence that the strategy is working. In May, the Treasury Department was mulling a recommendation to Congress that the SEC relinquish oversight of the $10 trillion mutual- fund industry.

Derivatives Regulation

Seven months later, the House approved legislation that would increase, not shrink, the SEC’s authority by adding regulation of derivatives to its plate and doubling its $1 billion budget. Senate Banking Committee Democrats also want to give the SEC authority over derivatives.

Traders use the mostly unregulated contracts to speculate on everything from interest rates to oil prices, and companies use them to protect against losses. Obama administration officials say a lack of transparency in the $605 trillion derivatives market exacerbated the credit crisis and contributed to the near-failure of American International Group Inc., once the world’s biggest insurer.

Under lawmakers’ plans, banks and investors would trade contracts on regulated platforms that are monitored by the SEC and Commodity Futures Trading Commission. Having won the battle to share oversight of derivatives with the CFTC, Schapiro now must prove that her agency can manage the new responsibility. In preparation, she has hired economists and former Wall Street traders to add market expertise to an agency staff made up mostly of attorneys.

Headline-Grabbing Cases

Meanwhile, new SEC Enforcement Director Robert Khuzami has tried to restore the prestige Madoff stripped from the agency by focusing on headline-grabbing cases, said Peter Henning, a former SEC attorney who now teaches at Wayne State University Law School in Detroit. The strategy went awry when U.S. District Judge Jed Rakoff questioned why the SEC settlement with Bank of America didn’t accuse any executives of wrongdoing.

The proposed settlement would have resolved allegations that the Charlotte, North Carolina-based bank misled its investors about billions of dollars in bonus payments during the acquisition of Merrill Lynch & Co.

The $33 million fine reflected a “cynical relationship” that allowed the SEC to say it exposed wrongdoing and permitted Bank of America to say it had been “coerced into an onerous settlement,” Rakoff wrote in a Sept. 14 decision.

The SEC now must square off against Bank of America in court next year and has requested a jury trial.

Lengthy Court Battles

The agency may also face lengthy court battles against Angelo Mozilo, the Countrywide Financial Corp. co-founder sued for inappropriate stock sales, and billionaire investor Raj Rajaratnam, who was accused of insider trading. Like some of Schapiro’s rule proposals, she can’t declare victory until those cases wend their way through the legal system.

“She’s taken on the job under extraordinarily difficult conditions, given constant demands from lawmakers and the evolving financial crisis,” said Barbara Roper, director of investor protection for the Washington-based Consumer Federation of America. “That’s had an impact on what she’s been able to accomplish. The next year will be a real proving ground.”

SEC steps up enforcement by adding 5 units

Source: SEC boasting enforcement The Bond Buyer, August 7, 2009

"The Securities and Exchange Commission is giving senior officials subpoena power and creating five national units specializing in complex areas of securities laws. The moves come as the SEC seeks to boost enforcement.

Areas covered by the units include municipal securities, public pensions, asset management, market abuse, structured and new products, and the Foreign Corrupt Practices Act."

Enforcement division granted permanent subpoena powers

The Securities and Exchange Commission on Wednesday quietly made permanent a vast expansion of the power of its enforcement division's ability to subpoena documents and compel testimony.

The move should ensure that investigators can move swiftly to pursue cases of financial wrongdoing. But some securities lawyers warn that it could lead to excessive costs as well as unfair treatment for the executives and companies that are targets of SEC probes.

Until last year, members of the enforcement division usually had to appear before the agency's five commissioners to request permission to issue a subpoena. Many investigators said this policy slowed down work on important cases because investigators would sometimes have to wait weeks to get such approval.

Last August, the SEC announced a one-year trial program in which the commissioners delegated subpoena power to the enforcement director, Robert Khuzami. He subsequently gave that authority to a number of deputies.

New division of Risk, Strategy, and Financial Innovation

"Securities and Exchange Commission Chairman Mary L. Schapiro today announced that University of Texas School of Law Professor Henry T. C. Hu has been named Director of the newly-established Division of Risk, Strategy, and Financial Innovation.

The new division combines the Office of Economic Analysis, the Office of Risk Assessment, and other functions to provide the Commission with sophisticated analysis that integrates economic, financial, and legal disciplines. The division's responsibilities cover three broad areas: risk and economic analysis; strategic research; and financial innovation...

...The new division will perform all of the functions previously performed by OEA and ORA, along with the following:

  1. strategic and long-term analysis;
  2. identifying new developments and trends in financial markets and systemic risk;
  3. making recommendations as to how these new developments and trends affect the Commission's regulatory activities;
  4. conducting research and analysis in furtherance and support of the functions of the Commission and its divisions and offices; and
  5. providing training on new developments and trends and other matters.

With the creation of the Division of Risk, Strategy, and Financial Innovation, the SEC now has five divisions, including the Division of Corporation Finance, the Division of Enforcement, the Division of Investment Management, and the Division of Trading and Markets.

Professor Hu holds the Allan Shivers Chair in the Law of Banking and Finance at the University of Texas School of Law and has written on bank, derivatives, hedge fund, and mutual fund regulation, corporate governance, global competitiveness of U.S. derivatives markets, model risk, risk management, and swaps and other financial innovations."

Cook named head of Trading and Markets

"Securities and Exchange Commission Chairman Mary L. Schapiro announced today that Robert W. Cook has been named Director of the agency's Division of Trading and Markets.

Mr. Cook, 44, comes to the SEC from the law firm of Cleary Gottlieb Steen & Hamilton LLP, where he has been a partner in the firm's Washington D.C. office since 2001. At Cleary Gottlieb, which he joined in 1992, Mr. Cook has established himself as one of the nation's leading practitioners on broker-dealer and market regulation.

"Investors will benefit greatly from the knowledge, leadership and insight that Robert will bring to the agency," said Chairman Schapiro. "Robert has an incredible grasp of the issues confronting the Division and a deep understanding of securities markets."

SEC to build IT Forensics Lab

In testimony before the House Subcommittee on Financial Services, SEC chairman Mary Schapiro identified IT investment as a key priority for the agency over the coming year.

She says: "While the markets were growing exponentially in size and complexity, the SEC was getting smaller and its technology was falling further behind. We are only just now returning to the budget and staffing levels of five years ago."

The President is requesting a total of $1.258 billion for the agency in FY 2011, a 12% increase over the FY 2010 funding level. Schapiro says the funds will enable the watchdog to hire an additional 374 professionals - a 10% increase over FY 2010, bringing the total number of staff to just over 4200.

"The request also will permit us to continue expanding our investments in surveillance, risk analysis, and other technology, as well as in better training for SEC staff," says Schapiro.

She says an additional $12 million will be allocated to the IT budget for 2011 as the SEC invests significant sums on a number of ongoing projects. These include improving the Division's case management system, managing ever-increasing amounts of electronic evidence with sophisticated new tools, and establishing a more centralised system for reviewing and analyzing tips, complaints, and referrals.

"We intend to commit whatever resources are necessary and available to ensure a timely conclusion to these upgrades," says Schapiro. "We also anticipate major future projects, including a new state-of-the-art IT Forensics Lab, enhanced data and trading analytics, and improved document and knowledge management to further enhance efficiency and consistency across the Division."

Earlier this week, the SEC's UK counterpart the Financial Services Authority, also laid out plans to strengthen its supervision and grow its headcount by 14% to 3700 staff.

Kroeker named as Chief Accountant

Source:James L. Kroeker Named Chief Accountant at SEC August 25, 2009, SEC release

Securities and Exchange Commission Chairman Mary Schapiro today announced the appointment of James L. Kroeker as the Chief Accountant in the SEC's Office of Chief Accountant. In this capacity, Mr. Kroeker will oversee accounting interpretations, professional practice issues, and international accounting matters. Mr. Kroeker replaces Conrad W. Hewitt, who retired from government service in January 2009.

Mr. Kroeker has served as Acting Chief Accountant since January 2009 and guided the day-to-day operations of the SEC's Office of the Chief Accountant during the recent economic crisis. He served as staff director of the SEC's Congressionally-mandated study of fair value accounting standards, and has led the efforts of the Office of the Chief Accountant to address the current economic turmoil, including steps to improve off-balance sheet accounting standards.

SEC's Investor Advisory Committee forms subcommittees

The three subcommittees are:

An Investor Education Subcommittee chaired by Dallas Salisbury (President and CEO, Employee Benefit Research Institute) plans to focus on matters related to financial literacy, the efficacy of layered educational resources that may permit investors to access information at varying levels of detail reflecting their needs, the ways that issuers and boards of directors communicate with investors, and the types of technology that can be utilized for education.

An Investor as Purchaser Subcommittee chaired by Mercer Bullard (Founder and President of Fund Democracy, Inc. and Associate Professor of Law, University of Mississippi School of Law) expects to examine the needs of investors when they purchase specific products (mutual funds, hedge funds, money market funds) and services (brokerage, investment advisory, and financial planning). This subcommittee also will consider the fiduciary duty owed to investors by those who provide investment advice, as well as issues related to pre-sale and other disclosure, intermediary fees and compensation practices, arbitration, and technology.

An Investor as Shareholder Subcommittee chaired by Stephen Davis (Executive Director of Yale School for Management's Millstein Center for Corporate Governance, and board member of Hermes Equity Ownership Service) intends to review proxy solicitation and disclosure issues, proxy voting and process (including the role of proxy advisory firms), majority voting, Regulation FD, executive compensation practices, the responsibilities of shareholders, international issues, and technology related to shareholder communications and voting.

A new web page with more information about the work of the SEC's Investor Advisory Committee is available.

SEC proposes "Large Trader Reporting System"


On April 14, 2010, the SEC took another step towards acting on its concerns about high frequency trading by proposing a new system that would allow monitoring of large traders’ activity through a requirement that broker-dealers record large traders’ activity and report it to the SEC upon its request.[1] Using statutory authority that Congress granted to the SEC after the market declines of 1987 and 1989, the SEC proposed new Rule 13h-1 under the Exchange Act, which would require “large traders” to identify themselves as such to the SEC on new Form 13H and thereby obtain a Large Trader Identification Number (“LTID”) from the SEC. Each large trader would then be required to disclose its LTID to each broker-dealer through which it trades and to identify all of the accounts at that broker-dealer through which it trades. The reporting regime is designed solely for SEC monitoring and not for public disclosure of Forms 13H or any trading activity reported to the SEC.

Who would be a “Large Trader”?

A “large trader” would be defined as “any person that directly or indirectly, including through other persons controlled by such person, exercises investment discretion over one or more accounts and effects transactions for the purchase or sale of any NMS security for or on behalf of such accounts, in any aggregate amount equal to or greater than”:

two million shares or shares with a fair market value of $20 million during a calendar day; or twenty million shares or shares with a fair market value of $200 million during a calendar month. The SEC stated that these thresholds are designed to monitor activity of traders that effect transactions equal to or greater than approximately 0.01% of daily volume and market value of trading in NMS stocks. The definition would include accounts over which a trader exercised indirect as well as direct investment discretion. For large and complex financial organizations, the proposed definition is intended to focus on the parent company of the affiliates that exercise investment discretion: the parent would have to aggregate activity in counting towards the prescribed thresholds, and the rule would encourage the parent to identify itself as the large trader. By focusing on parent companies, the proposed rule would require traders to aggregate the trading in all accounts over which persons they control exercise investment discretion for purposes of determining whether they fall within the definition of a “large trader.” Accordingly, even if any individual employee, group, or subsidiary within a company would not effect transactions that equal or exceed the identifying activity threshold by itself, if collectively the ultimate parent company operates subsidiaries or controls individuals that together effect transactions that equal or exceed the identifying activity threshold, then the parent company would need to identify itself as a large trader.

The proposal would require market participants to use a “gross up” approach in calculating their activity levels. Offsetting or netting transactions among or within accounts, even for hedged positions, would be added to a participant’s activity level in order to show the full extent of a trader’s purchase and sale activity. Traders would not have to count towards the threshold certain categories of trades that the SEC deems less risky, such as purchasing shares in an offering from an issuer. Although this definition is intended to include high frequency trading firms, it also is designed to capture a much broader segment of the trading public, including large mutual and hedge funds, as well as proprietary trading desks.

To help prevent circumvention of the proposed rule, persons would be prohibited from disaggregating accounts to avoid identification and the accompanying proposed requirements of a large trader. Accordingly, the proposal would prohibit splitting activity among multiple registered broker-dealers, accounts, or transactions for the purpose of evading the large trader identification requirement. Additionally, where two separate entities engage in a coordinated trading strategy that results in the joint exercise of investment discretion over their individual accounts, each entity would have to count the transactions in NMS securities effected through those “joint” accounts toward its identifying activity level. Moreover, the SEC expressly included non-U.S. entities and persons in the definition of a “large trader” – provided that they meet the relevant parts of the definition and that they effect their transactions through U.S. facilities or instrumentalities – rejecting an exemption for them on the grounds that it needed to be able to monitor their U.S. trading and that such an exemption would create competitive disparities.

Large Trader Self-Identification

Under the proposed rule, each large trader would be required to identify itself to the SEC by filing electronically with the SEC a new Form 13H. Additionally, each large trader would be required to identify itself to the broker-dealers through which it effects transactions as well as to any other entity with which it shares investment discretion over an account. Large traders would be required to file Form 13H with the SEC promptly after first effecting transactions that reach the identifying activity level. Thereafter, if any of the information contained in the Form 13H were to become inaccurate for any reason, a large trader would be required to file an amended Form 13H shortly after the end of a calendar quarter. The SEC proposes that these identification requirements for large traders become effective three months after the adoption of a final rule.

Form 13H is designed to elicit basic information about a large trader necessary for the SEC to monitor its trading. A large trader would have to check a box identifying its business and would have to describe the nature and form (e.g., corporation, limited liability company) of that business. It also would have to identify affiliates that are regulated by the CFTC or by banking, insurance or foreign regulators and affiliates that exercise investment discretion or otherwise have beneficial ownership of NMS securities. Finally, the Form would require a filer to identify all of the accounts over which it has direct or indirect investment discretion for purposes of the rule. The SEC stated that the information disclosed on Form 13H would be exempt from disclosure under the Freedom of Information Act.

Congressional oversight

Related legislation

  • 1938 - Establishment of the Temporary National Economic Committee 52 Stat. 705
  • 1964 - Securities Act Amendments PL 88-467
  • 1968 - Securities Disclosure Act PL 90-439
  • 1975 - Securities and Exchange Act PL 94-29
  • 1980 - Depository Institutions and Deregulation Money Control Act PL 96-221
  • 1982 - Garn-St. Germain Depository Institutions Act PL 97-320
  • 1984 - Insider Trading Sanctions Act PL 98-376
  • 1988 - Insider Trading and Securities Fraud Enforcement Act PL 100-704
  • 1989 - Financial Institutions Reform, Recovery, and Enforcement PL 101-73
  • 1999 - Gramm-Leach-Bliley Act PL 106-102
  • 2000 - Commodity Futures Modernization Act of 2000
  • 2002 - Sarbanes-Oxley Act
  • 2007 - Reg NMS

SEC 'revolving door' under review

A Senate panel asked the Securities and Exchange Commission's inspector general to review the agency's "revolving door," which shuttles many SEC staffers into jobs with the companies they once regulated.

In a letter sent Monday, Sen. Charles Grassley (R., Iowa), the ranking minority member on the Senate Finance Committee, asked David Kotz, the inspector general, to review the recent departure of a top official in the SEC's Division of Trading and Markets who took a job with a prominent high-frequency trading firm.

That move coincided with a continuing SEC examination of how high-speed, computer-driven trading in stocks and other securities is affecting markets.

Mr. Grassley also cited a Wall Street Journal article in April that reported how many former SEC employees have quickly turned around and represented clients before the commission, sometimes within days of leaving the agency.

"We need to ensure that SEC officials are more focused on regulation and enforcement than on getting their next job in the industry they are supposed to oversee," Mr. Grassley said in a statement.

"The inspector general's work," said Mr. Grassley, "can be a valuable tool to help the SEC become more open and transparent about its employees' ties to the industry it regulates."

Mr. Kotz declined to comment. But in a response to Mr. Grassley on Tuesday, he revealed a new revolving-door investigation he has undertaken.

"[W]e are currently conducting an investigation of allegations very recently brought to our attention that a prominent law firm's significant ties with the SEC, specifically, the prevalence of SEC attorneys leaving the agency to join this particular law firm, led to the SEC's failure to take appropriate actions in a matter involving the law firm," Mr. Kotz wrote.

It couldn't be determined which law firm he was referring to.

House panel votes to give SEC more money, power

The House Financial Services Committee voted Wednesday to give federal regulators more power and money to police major players in the stock market, four months after Bernard Madoff was sentenced for the biggest investment scam in history.

The 41-28 vote was the panel's latest move to try to rein in abuses on Wall Street. It would give the Securities and Exchange Commission new enforcement powers, including the ability to offer bounty money to tipsters on fraud cases and the power to bar violators of the law from employment in any securities-related industry.

The bill also would double the SEC's budget in the next five years.

Rep. Paul Kanjorski sponsored the legislation after leading the panel's investigation into the government's failure to uncover Madoff's massive fraud scheme for nearly two decades. Madoff was sentenced in June to 150 years in prison.

"In the last five years, there's been a significant change and a greater sophistication in the financial service industry than has ever happened in the history of mankind," said Kanjorski, a Pennsylvania Democrat. "So we're going to have to change fast."

The proposal was part of a broader effort by the committee to tighten rules governing financial institutions after last year's market crisis. The full House was expected to vote on the bill and related proposals in early December.

In addition to giving the SEC more power, the committee has voted to impose new restrictions on investment rating agencies and require oversight of hedge funds and other large pools of private capital.

House Oversight into SEC personnel policies

Last Thursday, House Oversight and Government Reform Committee Chairman Edolphus Towns (D-NY) wrote to SEC Chairman Mary Schapiro requesting additional specific information about the experience and capacity of the SEC's enforcement personnel, whom the SEC Inspector General (IG) H. David Kotz most recently blamed in an IG report published late last month, for failing to uncover the Bernard Madoff Ponzi scheme. In response to the IG report, and pursuant to authority "under House Rule X to investigate any matter," the Committee is "reviewing policies and practices related to recruitment and retention of experienced professional staff at [the] SEC."

Specifically, the Committee seeks a briefing from the SEC by September 11, 2009 on:

1) The level of experience of the SEC's professional staff;

2) How the SEC staffs investigations to ensure that professionals with the appropriate level of experience are adequately assigned;

3) The role of senior managers in supervising investigations, and what particular training, advice and guidance was given to "frontline" staff on the Madoff case;

4) The effect of the 2002 pay reforms on retention of experienced SEC employees; and

5) The SEC's plan for strategic human resources management.

Chairman Towns further stated that "in light of the alarming findings related to the Bernard Madoff matter," the Committee expects to convene hearings on this topic in the near future. During the first few months of 2009, Congress held several hearings on the Madoff Ponzi scheme and the related regulatory system failures in detecting the fraud.

Schumer: Change SEC funding

A key senator wants to change how the Securities and Exchange Commission is funded, saying the agency must be buttressed to prevent future disasters like its failure to detect the multibillion-dollar fraud run for decades by Bernard Madoff. Sen. Charles Schumer, D-N.Y., a member of the Senate Banking Committee, plans to propose legislation next week that would dedicate all the annual revenue collected by the SEC to its budget instead of turning over a large portion of the fees paid by public companies and other entities that register stock with the agency to the Treasury Department for the government's coffers.

The Obama administration has proposed $1.03 billion for the agency for the fiscal year starting Oct. 1, the first time it would top $1 billion and up from $960 million in the current year. The House approved a $1.04 billion budget and a Senate panel approved $1.1 billion; the full Senate hasn't yet voted on it.

If the new proposal for funding the SEC had been in effect in 2007, the agency would have had $650 million on top of its $881.5 million budget, based on what it collected in revenues that year, Schumer said.

GAO reports on the SEC

Fair fund collections and distributions

SEC and CFTC harmonization efforts

2008 - 2009 audit of the SEC

In GAO’s opinion, SEC’s fiscal years 2009 and 2008 financial statements are fairly presented in all material respects. However, in GAO’s opinion, SEC did not have effective internal control over financial reporting as of September 30, 2009. Recommendations for corrective action will be included in a separate report.

During this year’s audit, we identified six significant deficiencies that collectively represent a material weakness in SEC’s internal control over financial reporting. The significant deficiencies involve SEC’s internal control over

  1. information security,
  2. financial reporting process,
  3. fund balance with Treasury,
  4. registrant deposits,
  5. budgetary resources, and
  6. risk assessment and monitoring processes.

These internal control weaknesses give rise to significant management challenges that have reduced assurance that data processed by SEC’s information systems are reliable and appropriately protected; impaired management’s ability to prepare its financial statements without extensive compensating manual procedures; and resulted in unsupported entries and errors in the general ledger.

As we reported last year, SEC’s ability to sustain effective internal control over financial reporting was at risk due to its continued reliance on processes and systems that were not designed to provide the accurate, complete, and timely transaction-level financial information that management needs to make well-informed decisions, or to accumulate and report reliable financial information without extensive manual workarounds and compensating controls. During this year’s audit, the nature of the errors and related internal control deficiencies we found indicate that SEC was unable to sustain the level of effort and resources needed to compensate for these deficient processes and systems to achieve effective internal control over financial reporting.

These deficiencies are likely to continue to exist until SEC’s general ledger system is either significantly enhanced or replaced, key accounting activity is fully integrated with the general ledger at the transaction level, information security controls are strengthened, and appropriate resources are dedicated to maintaining effective internal controls. In the interim, SEC will need to place greater emphasis on monitoring the current risks and vulnerabilities, along with the related compensating procedures, to determine whether these risks are being adequately mitigated on an ongoing basis. Successfully addressing these issues is critical to maintaining SEC’s credibility given its important role in the financial reporting process of registrants, and is vital to achieving SEC’s stated vision to be the standard against which federal agencies are measured.

Reform of the SEC

See Reform of the SEC.

Internal SEC investigations

Regulatory failures

Christopher Cox, the former chairman of the SEC, has recognized the organization's own multiple failures in relation to the Bernard Madoff fraud. [4]

Starting with an investigation in 1992 into a Madoff feeder fund which only invested with Madoff, and which, according to the SEC, promised "curiously steady" returns, the SEC did not investigate indications that something was amiss in Madoff's investment firm. [5]

The SEC has therefore been accused of missing numerous red flags and ignoring tips on Madoff's alleged fraud.[6]

As a result, Cox has said that an investigation will ensue into "all staff contact and relationships with the Madoff family and firm, and their impact, if any, on decisions by staff regarding the firm."[7]

A former SEC compliance officer, Eric Swanson, married Madoff's niece Shana, a Madoff firm compliance attorney. Approximately 45 per cent of institutional investors felt that better oversight by the SEC could have prevented the Madoff fraud.[8]

The abstract:

The current environment is highly supportive of increased government regulation, particularly in the financial field. One of the beneficiaries of this push for greater oversight of the markets appears to be the Securities & Exchange Commission, despite some recent high profile enforcement failures, most particularly the massive Ponzi scheme undertaken by Bernie Madoff. In this essay, I raise the question whether the SEC should retain its enforcement authority over fraud cases, or whether it would be better served if that function were shifted to the Department of Justice. The SEC’s recent push to take on a more prosecutorial air gives the clear impression that an adversarial approach to enforcement of the securities laws is in order.

However, the Commission must continue to solicit the views of Wall Street to fulfill its regulatory function, much like Madoff was included in the SEC’s deliberations on rules related to the stock market. At some point in the future, the push for greater regulation is likely to pass from the scene as the pendulum swings back toward a less intrusive approach to oversight. Whether the Commission can resist renewed entreaties to go easier on enforcing the law to free the capital markets from strict regulation is an open question. To allow the SEC to regulate Wall Street properly, splitting off at least a portion of the enforcement function to an agency with expertise in prosecutions - the United States Department of Justice - is at least worthy of consideration as the government looks to increase regulation.

IG recommendations for the OCIE and Enforcement Division

The SEC's Office of Inspector General released two more reports stemming from its investigation into the agency's failures in connection with the Madoff ponzi scheme. One, entitled Review and Analysis of OCIE Examinations of Bernard L. Madoff Investment Securities, LLC, sets forth 37 recommendations for improving OCIE. The other, Program Improvements Needed Within SEC's Divsion of Enforcement, addresses deficiencies in the Enforcement Division and contains 21 recommendations. Both reports state that OIG expects written corrective action plans within 45 days.

IG report on the Madoff ponzi scheme

Source: Report of Investigation, US Securities and Exchange Commission, Office of Inspector General, Case No. OIG-509, Investigation of Failure of the SEC To Uncover Bernard Madoff's Ponzi Scheme SEC, September 2, 2009

"The OIG investigation did not find evidence that any SEC personnel who worked on an SEC examination or investigation of Bernard L. Madoff Investment Securities, LLC (BMIS) had any financial or other inappropriate connection with Bernard Madoff or the Madoff family that influenced the conduct of their examination or investigatory work.

The OIG also did not find that former SEC Assistant Director Eric Swanson's romantic relationship with Bernard Madoffs niece, Shana Madoff, influenced the conduct of the SEC examinations of Madoff and his firm. We also did not find that senior officials at the SEC directly attempted to influence examinations or investigations of Madoff or the Madoff firm, nor was there evidence any senior SEC official interfered with the staffs ability to perform its work.

The OIG investigation did find, however, that the SEC received more than ample information in the form of detailed and substantive complaints over the years to warrant a thorough and comprehensive examination and/or investigation of Bernard Madoff and BMIS for operating a Ponzi scheme, and that despite three examinations and two investigations being conducted, a thorough and competent investigation or examination was never performed. The OIG found that between June 1992 and December 2008 when Madoff confessed, the SEC received six! substantive complaints that raised significant red flags concerning Madoffs hedge fund operations and should have led to questions about whether Madoffwas actually engaged in trading.

Finally, the SEC was also aware of two articles regarding Madoff s investment operations that appeared in reputable publications in 2001 and questioned Madoffs unusually consistent returns."

IG report on Allied Capital

A recent report by Securities and Exchange Commission’s inspector general shows that the investigation of Bernard L. Madoff was not the only one to go badly awry. While the impact of the S.E.C.’s missteps were not nearly as significant as in the Madoff case, the report shows that the agency’s enforcement division allowed itself to be manipulated by a company it should have been investigating more thoroughly while allowing former staff members to influence its decisions on how to proceed.

The inspector general, H. David Kotz, raised significant concerns about how the S.E.C. conducted itself in its investigation of Allied Capital, The Washington Post reports.

The report made available by The Post is redacted, but it gives a fairly damning picture of the S.E.C. staff ignoring serious allegations of corporate misconduct while different offices failed to communicate about the subject matter of the investigation...

...Allied Capital got the upper hand, at least initially, when the S.E.C. started a “vigorous” investigation of Greenlight Capital after its representatives met with enforcement division staff members. But the report notes that the investigation began “without any evidence of wrongdoing.” Less than a year later, it ended without finding any violations, but the S.E.C. did not officially close it until 2006 and never notified Mr. Einhorn of its conclusions.

While the investigation of Greenlight Capital progressed, two different offices in the S.E.C. also began to look at the valuation issues at Allied Capital that Mr. Einhorn raised. Both the S.E.C.’s office of compliance inspections and examinations and the agency’s enforcement division looked into the company’s financial statements, but apparently they were unaware of each other’s efforts – much like we saw in the various inspections of Mr. Madoff’s firm.

The investigation by the compliance office was derailed because one of Allied Capital’s representatives was a former S.E.C. staff member, and an associate director of the office said that anyone who had worked at the commission was “not going to be doing anything illegal.” The report states that the office’s examiner on the case – the only staff member assigned to it, in fact – “testified that she received considerable ‘pushback’ from the associate director with regard to her findings about Allied.”

IG report on the Stafford investigation

On April 16, the SEC released a report by the Inspector General recounting events that occurred at the Commission between 1997 and 2005. Since that time, there have been many changes regarding the agency's leadership, its internal procedures and its culture of collaboration.

The actions below address all of the recommendations contained in the report:

Establishing escalation procedures and revamping the process for handling tips, complaints and referrals:

In late 2006, referral review committees were established, whereby examiners and Enforcement Division staff in regional offices discuss referrals, analyze them, and identify those that should have the highest priority. In addition, the meetings provide feedback to the enforcement and examination programs to enhance the referral process.

More recently, the Commission has been revamping the way it handles tips, complaints and referrals. In fact, in March 2010, it completed the first phase of its overhaul by centralizing this information into one database so this information can be searched better. The Examination and Enforcement Divisions are working together to make certain that all enforcement referrals are handled efficiently and effectively.

Further, the Chairman and the new leadership have been instilling a collaborative culture within the organization, in which employees at all levels "own" the problems that they see and diligently work with colleagues across the agency to solve them.

Changing performance metrics so that quantity does not trump quality:

As of 2002, the Enforcement Division had ended an evaluation system that included the number of cases as a significant component of how the regional and district offices were evaluated each year.

In addition, in the past year, the Enforcement Division has made fundamental changes to the metrics used to manage and evaluate the performance of its staff. Rather than focusing on the number of actions filed, Enforcement Division members are now accountable based on their strategic focus on the most important cases; swift action; smart use of scarce resources; and successful efforts in building a strong case.

Further, the Enforcement Division now generates a priority case report on a regular basis so that the division focuses on significant cases, tracks the status of these cases, and ensures that appropriate resources are being devoted to these cases. The Enforcement Division designates certain investigations as "National Priority Matters," based in part on:

  • The nature or extent of the misconduct.
  • The number or nature of the victims of the misconduct, including whether they are particularly vulnerable.
  • The degree of financial harm or loss.
  • The presence or absence of other enforcement or prosecution authorities.

Finally, the SEC's Strategic Plan for Fiscal Years 2010-2015 -- which was circulated for public comment -- sets forth the performance measures it intends to use to gauge its progress in meeting its enforcement mission. The metrics focus not on how many cases that have been brought, but on the effect and impact of those cases.

Streamlining the approval procedures:

In 2009, the Commission streamlined its enforcement procedures by delegating authority for the initiation of a formal investigation. Now, instead of requiring Commission approval, senior managers in the enforcement program can authorize the issuance of subpoenas. This has eliminated the sometimes burdensome process of Commission review and approval, allowing staff to issue investigative subpoenas in real-time rather than waiting to compel the production of necessary information.

Also in August, the Enforcement Division announced that it would adopt a flatter, more streamlined organizational structure, including the elimination of an entire layer of management. And, the Enforcement Division has reduced the layers of approval required to begin and pursue an investigation, issue Wells notices, and engage in settlement negotiations.

Considering potential, and potentially growing, investor harm:

The current enforcement manual makes it clear that staff should consider the potential investor losses involved, or harm to investors, in determining whether to open an inquiry into potential wrongdoing.

The manual, which was developed and disseminated in October 2008, and last updated in March 2010, also lays out other factors to consider, including:

  • The egregiousness of the potential violation.
  • The potential magnitude of the violation.
  • Whether the potentially harmed group is particularly vulnerable or at risk.
  • Whether the conduct is ongoing.
  • Magnitude or nature of the violation.
  • Size of the victim group.
  • Amount of potential or actual losses to investor.

And, before closing an investigation, the manual spells out factors that the staff should consider. Listed first among the factors is the seriousness of the conduct and potential violations.

Establishing and consistently applying factors for referring matters to others agencies:

A newly-established Office of Market Intelligence has been created to oversee and coordinate the collection, analysis and distribution of complaints, tips and referrals that come to the Enforcement Division's attention.

If, in the course of conducting its initial review and triage, OMI recognizes that a piece of information is relevant to the mission of another component of the SEC, a state or federal agency, a criminal authority, or a self regulatory organization, OMI will provide the information to all other entities that may have an interest.

In addition to setting out general policies as to when referrals should be made to other entities, the manual also advises staff that after an informal referral is made, the staff should maintain periodic communication with the agencies to which the matter was referred concerning the status of any investigation or inquiry.

Making effective use of other resources within the agency, such as economic and international experts:

Each component of the SEC now has a formal liaison for Enforcement Division staff to contact with questions and concerns. With respect to international issues in particular, Enforcement Division staff regularly consults with and seeks assistance from the Office of International Affairs (OIA) when confronted with international issues.

In fact, OIA has a proactive program to work with the Enforcement Division to obtain documents and information from abroad, to locate and freeze assets abroad, and to help with other international enforcement issues.

Additionally, in 2009, the SEC established the Division of Risk, Strategy, and Financial Innovation to help bore through the silos that have compartmentalized, and therefore limited the impact of our institutional expertise. This new division - the first created in more than 30 years - has attracted renowned experts in the economic, legal, and public policy implications of the financial innovations being crafted on Wall Street.

Training Enforcement Division staff on potential remedies available under the laws applicable to both investment advisers and broker-dealers:

During fiscal year 2009, the SEC brought at least 76 actions against 227 individuals and entities in matters involving investment adviser misconduct, comprising more than 10% of the total number of enforcement actions during the fiscal year. During the same year, the SEC brought at least 109 actions against 182 individuals and entities in matters involving broker-dealer misconduct, comprising 16% of total actions.

As with the SEC at large, the Enforcement Division also is strengthening its training programs for new hires and for current staff. For example:

  • Attendance at training will be one performance criterion on which supervisors and employees are evaluated. Some training will be mandatory.
  • Staff is provided ongoing targeted training, including training related to hedge funds, new products, derivatives and options, complex trading, and regulated entities, such as investment advisers.
  • A formal training unit led by a senior Enforcement Division official has been approved.

The Division's new Asset Management Unit will specialize in matters involving investment advisers, investment companies, hedge funds and private equity. This Unit will greatly enhance the knowledge base of the Division in these areas, work closely with the Division of Investment Management and OCIE, and provide substantial training to staff on these areas. Sensitizing employees who leave the organization to their ongoing restrictions:

The events described in the OIG's report demonstrate that the SEC's current system operated effectively to prevent a former SEC employee from violating applicable "revolving door" restrictions.

The SEC enforces the same laws as other federal agencies regarding restrictions on former government employees' contacts with the agency they left. Under those laws, no former employee may switch sides on the same party matter that he or she had actually worked on. Supervisors with official responsibility for party matters may not appear in that matter for two years.

Senior officials, such as Commissioners and upper management, are subject to a one-year cooling off period, during which they may not appear before the Commission on any matter at all. The Commission has a process designed to ensure that all of these laws and rules are followed. To implement stronger restrictions, the Commission would need additional authority from Congress.

As with other federal agencies, former SEC employees, under certain circumstances (for example, after the expiration of the required "cooling off" period), are allowed to contact the SEC so long as it's about matters they did not work on while at the agency. In fact, the SEC goes further by providing a way for employees to confirm that they are not violating the party matter restrictions.


The SEC consists of five Commissioners appointed by the President of the United States with the advice and consent of the United States Senate. Their terms last five years and are staggered so that one Commissioner's term ends on June 5 of each year. To ensure that the SEC remains non-partisan, no more than three Commissioners may belong to the same political party.

The President also designates one of the Commissioners as Chairman, the SEC's top executive. However, the President does not possess the power to fire the appointed commissioners, a provision that was made to ensure the independence of the SEC. This issue arose during the John McCain presidential campaign, 2008 in connection with the ensuing global financial crisis of 2008.

Within the SEC, there are four divisions, 19 offices and approximately 3,800 staff. Headquartered in Washington, DC, the SEC has 11 regional offices throughout the United States.

The SEC's four main divisions are: Corporation Finance, Trading and Markets, Investment Management, and Enforcement.

Corporation Finance is the division that oversees the disclosure made by public companies as well as the registration of transactions, such as mergers, made by companies. The division is also responsible for operating EDGAR.

The Trading and Markets division oversees self-regulatory organizations (SROs) such as FINRA and MSRB, and all broker-dealer firms and investment banks. This division also interprets proposed changes to regulations and monitors operations of the industry. In practice, the SEC delegates most of its enforcement and rulemaking authority to FINRA. In fact, all trading firms not regulated by other SROs must register as a member of FINRA. Individuals trading securities must pass exams administered by FINRA to become registered representatives.[9]

The Investment Management Division oversees investment companies including mutual funds and investment advisers. This division administers federal securities laws, in particular the Investment Company Act of 1940 and Investment Advisers Act of 1940. This Division's responsibilities include:[10]

  • assisting the Commission in interpreting laws and regulations for the public and SEC inspection and enforcement staff;
  • responding to no-action requests and requests for exemptive relief;
  • reviewing investment company and investment adviser filings;
  • assisting the Commission in enforcement matters involving investment companies and advisers; and
  • advising the Commission on adapting SEC rules to new circumstances.

The Enforcement Division works with the other three divisions, and other Commission offices, to investigate violations of the securities laws and regulations and to bring actions against alleged violators. The SEC generally conducts investigations in private.

The SEC's staff may seek voluntary production of documents and testimony, or may seek a formal order of investigation from the SEC, which allows the staff to compel the production of documents and witness testimony. The SEC can bring a civil action in a U.S. District Court or an administrative proceeding which is heard by an independent administrative law judge (ALJ).

The SEC does not have criminal authority, but may refer matters to state and federal prosecutors. On February 9, 2009, five days after her appearance before a House subcommitee, the SEC announced that Director of Enforcement Linda Chatman Thomsen would resign from her position with no replacement identified.[11]

Among the SEC's offices are:

  • The Office of General Counsel, which acts as the agency's "lawyer" before federal appellate courts and provides legal advice to the Commission and other SEC divisions and offices;
  • The Office of the Chief Accountant, which establishes and enforces accounting and auditing policies set by the SEC. This office has played an important role in such areas as working with the Financial Accounting Standards Board to develop Generally Accepted Accounting Principles, the Public Company Accounting Oversight Board in developing audit requirements, and the International Accounting Standards Board in advancing the development of International Financial Reporting Standards;
  • The Office of Compliance, Inspections and Examinations, which inspects broker-dealers, stock exchanges, credit rating agencies, registered investment companies, including both closed-end and open-end (mutual funds) investment companies, money funds and Registered Investment Advisors;
  • The Office of International Affairs, which represents the SEC abroad and which negotiates international enforcement information-sharing agreements, develops the SEC's international regulatory policies in areas such as mutual recognition, and helps develop international regulatory standards through organizations such as the International Organization of Securities Commissions and the Financial Stability Forum;
  • The Office of Investor Education and Advocacy, which helps educate the public about securities markets and warns investors of fraud and stock market scams; and
  • The Office of Economic Analysis, which helps the SEC estimate the economic costs and benefits of its various rules and regulations.

Commission members

The SEC is composed of five commissioners, of which no more than three can be from a single political party. Currently the SEC commissioners are:[12]

  • Chair Mary Schapiro (D)
  • Kathleen L. Casey (R)
  • Troy A. Paredes (R)
  • Luis A. Aguilar (D)
  • Elisse B. Walter (D)

Relationship to other agencies

In addition to working with various Self Regulatory Organization (SROs) [Independent Agency Overview|federal agencies]], state securities regulators and law enforcement agencies, [13] the Securities and Exchange Commission also works with other entities such as NYSE and FINRA.

In 1988 Executive Order 12631 established the President's Working Group on Financial Markets. The Working Group is chaired by the Secretary of the Treasury and includes the Chairman of the SEC, the Chairman of the Federal Reserve and the Chairman of the Commodity Futures Trading Commission.

The goal of the Working Group is to enhance the integrity, efficiency, orderliness and competitiveness of the financial markets while maintaining investor confidence.[14]

The Securities Act of 1933 was originally administered by the Federal Trade Commission (FTC). The Securities Exchange Act of 1934 transferred this responsibility from FTC to the SEC. The main mission of the FTC is to promote consumer protection and to eradicate anticompetitive business practices. The FTC regulates general business practices, while the SEC focuses on the securities markets.

The Temporary National Economic Committee was established by joint resolution of Congress 52 Stat. 705 on June 16, 1938. It was tasked with reporting to the Congress on abuses of monopoly power. The committee was defunded in 1941, but its records are still under seal by order of the SEC.[15]

The Municipal Securities Rulemaking Board (MSRB) was established in 1975 by Congress to develop rules for companies involved in underwriting and trading municipal securities. The MSRB is monitored by the SEC, but the MSRB does not have the authority to enforce its rules.

While most violations of securities laws are enforced by the SEC and the various SROs it monitors, state securities regulators can also enforce state-wide securities laws known colloquially as Blue sky laws.

States may require securities to be registered in the state before they can be sold there. The National Securities Markets Improvement Act of 1996 (NSMIA) addresses this dual system of federal-state regulation by amending Section 18 of the 1933 Act to exempt nationally traded securities from state registration, thereby pre-empting state law in this area. However, NSMIA preserves the states' anti-fraud authority over all securities traded in the state.[16]

The SEC also works with federal and state law enforcement agencies to carry out actions against actors alleged to be in violation of the securities laws.

SEC communications

Comment letters

Comment letters are letters by the SEC to a public company raising issues and requested comments. For example, in October 2001, the SEC wrote to Computer Associates (CA), covering fifteen items, mostly about CA's accounting, including five about revenue recognition. The chief financial officer of CA, to whom the letter was addressed, pleaded guilty to fraud at CA in 2004.

In June 2004, the SEC announced that it would publicly post all comment letters, to give investors access to the information in them. In mid-2005, Allan Beller, former head of the SEC's Division of Corporation Finance, said that the SEC believed that "it is appropriate to expand the transparency of our comment process by making this information available to an unlimited audience."

An analysis in May 2006 of regulatory filings over the prior 12 months indicates, however, that the SEC has not accomplished what it said it would do. The analysis found 212 companies that had reported receiving comment letters from the SEC, but only 21 letters (for these companies) were posted on the SEC's website. John W. White, the current head of the Division of Corporation Finance, told the New York Times: "We have now resolved the hurdles of posting the information.... We expect a significant number of new postings in the coming months." ("Deafened by the S.E.C.'s Silence, He Sued", New York Times, May 28, 2006, section 3, p. 1)

No-action letters

No-action letters are letters by the SEC staff indicating that the staff will not recommend to the Commission that the SEC undertake enforcement action against a person or company if that entity engages in a particular action. These letters are sent in response to requests made when the legal status of an activity is not clear. These letters are publicly released and increase the body of knowledge on what exactly is and is not allowed. They represent the staff's intrepretations of the securities laws and, while persuasive, are not binding on the courts.


SEC Forms List by category

  • SEC Form 4 (stock and stock options ownership and exercise disclosure)
  • SEC Form S-1 (IPO)
  • Form 8-K
  • Form 10-K

SecuritiesLinks Links to commonly used SEC forms

Actions related to the credit crunch

The S.E.C. announced on 17 September, 2008 strict new rules to prohibit all forms of "naked short selling" as a measure to reduce volatility in turbulent markets.[17][18]

The SEC investigated into cases involving individuals attempting to manipulate the market by passing false rumors about certain financial institutions. The commission has also investigated into trading irregularities and abusive short selling practices. Hedge fund managers, broker-dealers, and institutional investors were also asked to disclose under oath, certain information pertaining to their positions in credit default swaps. The commission also brought about the largest settlements in the history of the SEC (approximately $51 billion in all) on behalf of investors who purchased auction rate securities from six different financial institutions.

Litigation against the SEC

"Two victims of Bernard L. Madoff’s huge Ponzi scheme sued the Securities and Exchange Commission on Wednesday, saying that the agency’s failure to detect the fraud years ago contributed to their financial losses.

Echoing complaints that other victims have made for months, the two plaintiffs argued in the lawsuit that they would not have fallen prey to the fraud if the government had “simply done its job” and if the commission had not “closed its eyes to Madoff’s obvious crimes.”

The lawsuit, filed in federal court in Manhattan, is aimed at forcing the commission to repay $2.4 million lost by the two plaintiffs — Phyllis Molchatsky, a disabled retiree, and Stephen Schneider, a doctor nearing retirement, both residents of New York. They had previously demanded compensation through administrative complaints to the commission, which have been denied.

“Based on our initial understanding, we believe there is no merit to the complaint,” said John Heine, a spokesman for the commission.

The lawsuit, filed by lawyers with Herrick, Feinstein in New York, faces a significant fight because the legal doctrine of sovereign immunity makes it extremely difficult to sue a government agency for the consequences of its official activity.

Lawyers for the two victims acknowledged that the doctrine might prevent litigation arising from the commission’s discretionary decisions, formal policies and rule-making. But they assert that the doctrine does not shield the S.E.C. from the consequences of “serial, gross negligence” in carrying out its day-to-day duties.

“The S.E.C. staff who investigated Madoff from time to time were not crafting policy or making rules,” the complaint asserted. Rather, it said, the staff members were carrying out their routine obligations to investigate numerous tips and warnings about Mr. Madoff and simply “botched all of them.”

The complaint draws heavily on a report by the commission’s inspector general, released in August. That report identified dozens of hapless errors, faulty procedures, inaccurate legal interpretations and inept staff work that marred the commission’s numerous failed investigations of Mr. Madoff over a 16-year period beginning in 1992.


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