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GAO Releases Study on SEC Enforcement

On May 6, 2009, the United States Government Accountability Office ("GAO") issued a report, "Securities and Exchange Commission: Greater Attention Needed to Enhance Communication and Utilization of Resources in the Division of Enforcement." This report follows up on a 2007 GAO study, and examines the resources and procedures currently in use in the Division of Enforcement ("Enforcement"). Specifically, the GAO was asked to evaluate: (1) SEC’s progress toward implementing GAO’s 2007 recommendations; (2) the extent to which Enforcement has an appropriate mix of resources dedicated to achieving its objectives; and (3) the adoption, implementation, and effects of recent penalty policies.

GAO found that Enforcement had implemented three of the four recommendations from the GAO's 2007 report:

  1. establish procedures for approving new investigations and for operating its new investigation management information system called the Hub;
  2. consider procedures for closing inactive cases; and
  3. improve management of the Fair Funds program, which returns funds to harmed investors.

After interviewing current and former SEC officials and staff, and analyzing information on resources, enforcement actions, and penalties, the GAO found that overall resources and activities in Enforcement had been relatively level, but that the number of investigating attorneys had decreased by 11.5% from 2004. According to SEC staff and management, this decrease in investigators has "delayed cases, reduced the number of cases that can be brought, and potentially undermined the quality of some cases." GAO also found that Enforcement's policies for imposing corporate penalties implemented in 2006 -- set factors for imposing penalties, and requiring Commission pre-approval of a settlement range -- had delayed cases, resulted in smaller penalties, forced some retreat on penalties, and made it more difficult for the Enforcement staff to obtain subpoenas for records and testimony. Bsed on these findings, the GAO came up with recommendations that the SEC:

  1. consider an alternative organizational structure for the Office of Collections and Distributions (OCD);
  2. further review the level and mix of resources dedicated to Enforcement, and assess the effect of the division’s internal case review process;
  3. examine whether the 2006 corporate penalty policy is achieving its intended goals; and
  4. take steps to ensure appropriate staff participation in policy development and review.

In a letter from SEC Chairman Mary L. Schapiro to the GAO, Schapiro gratefully received the recommendations, and agreed with all of the report's recommendations, and outlining steps she has already taken that anticipate some of the report's findings. Among those steps are the hiring of an able Director of Enforcement, Robert Khuzami, "a longtime federal prosecutor who served as the Chief of the Southern District of New York's Securities and Fraud Task Force," and abolishing the corporate "penalty pilot" program and streamlining the approval of formal orders of investigation. Anticipating the GAO's report, recent speeches by Chairman Schapiro, the Commissioners, and Mr. Khuzami have promised increased enforcement activity, noting the need to send an "outsized message of deterrence."

The full text of the GAO's May 6, 2009 report is available at: http://www.gao.gov/new.items/d09358.pdf

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