Two legislative proposals which would reorganize the SEC
and impact the manner in which regulations are enacted are pending before the
House Financial Services Committee. These proposals were considered at a
hearing last week entitled "Fixing the Watchdog: Legislative Proposals to
Improve and Enhance the Securities and Exchange Commission." The Commission's
repeated and continuing scandals along with decisions by the D.C. Circuit
striking down its rules for failure to conduct the proper analysis undoubtedly
contributed to these proposals.
The two bill are titled the SEC Modernization Act of 2011
and the SEC Regulatory Accountability Act. The Modernization Act proposes to
legislatively mandate the internal organization of the SEC. In some respects
the bill reiterates the current structure. In others, it reorganizes and alters
the existing organization chart. For example, the bill would require that the
Commission have the following divisions: Corporate Finance; Enforcement;
Investment Management; and Trading and Markets. It also provides that the
Commission can establish regional offices which would report to the director of
each of the three divisions. The Act also directs that there be certain other
Offices. Those include the Offices of: the Chairman; Risk Strategy and
Financial Innovation; Compliance, Inspections and Examinations; the Chief Economist;
Equal Employment; Investor Education; and Ethics.
The Modernization Act would require that certain
functions be part of the Chairman's office. Those include the Offices of the
General Counsel, Secretary, Chief Accountant, External Affairs and Chief
Officer. The bill also proposes to consolidate the functions of certain offices
while creating an independent Ombudsman. The latter would report to the
Chairman and have responsibilities which include acting as a liaison between
the Commission and any affected person regarding any problem with the SEC from
its regulatory activities.
The Regulatory Accountability Act focuses on reforming
the Commission's rule making processes. The bill would require that the
Commission consider certain factors including the significance of the problem
addressed and the costs and benefits as assessed by the Chief Economist on a
qualitative and quantitative basis prior to issuing any regulation. The bill
would also require the Commission to periodically review its regulations to
determine if they are outmoded, ineffective or excessively burdensome.
The Committee heard testimony from several witnesses
including the Chairman, the Chamber of Commerce and the American Enterprise
Institute. Chairman Mary Schapiro commented briefly on the two bills, noting
primarily her concerns about mandating a specific structure for the internal
operations of the Commission and the fact that the new factors to be considered
in rule-making are in some respects duplicative, contradictory and confusing
In its comments, the Chamber, represented by former SEC
Secretary Jonathan Katz, was critical of many aspects of the study prepared
earlier by Boston Consulting Group under the Dodd-Frank Act. The Chamber also
reiterating the findings of an earlier study it conducted regarding certain
staff divisions while noting that a report on the Enforcement Division is being
In commenting on the proposed Modernization Act, Mr. Katz
told the Committee that he supported the goal of "transformative change that is
needed to restore the Commission as the world's preeminent financial regulator.
At the same time he called for the repeal of the Dodd-Frank provisions which
require the creation of five new independent offices at the SEC. Rather that
utilize this approach he called for Congress to "outline a series of principles
and objectives for the Commission to achieve . . ."
Similarly, Mr. Katz noted that he supported the goals of
the Accountability Act while discussing the inherent limitations of pre-enactment
studies of the potential impact of any rule. Accordingly, he suggested that a
three prong approach be used in rule making. This would require that when the
SEC votes to adopt a rule it would: 1) Require the Division of Risk, Strategy
and Financial innovation to submit a plan for collecting data on compliance
with the rule and its costs; 2) Provide a plan for examining the data
collected; and 3) Create a time table for presentation of the results of the
The testimony offered by the American Enterprise
Institute through former Commissioner Paul Atkins generally agreed with the
comments of the Chamber. Mr. Atkins cited what he called Reorganization Plan
Number 10 of 1950 which increased the power of the chairman, creating clear
authority over hiring and supervising the staff and its responsibilitie,s as a
model for organization. This contrasts with Dodd-Frank which Mr. Atkins
described as "a grab-bag of ideas that through micro-management has made
management of the SEC more difficult." In this context he noted that the draft
Modernization Act contains a number of good points including giving economists
a more prominent role. At the same time the draft bill "suffers in part from
the same prescriptive tendencies of Dodd-Frank . . . I would thus encourage
this Committee to address the specifics of Dodd-Frank and leave other
organizational aspects at a general level and to the SEC chairman's
In commenting on the Regulatory Accountability Act the
former Commissioner noted that the SEC has "for years failed to incorporate
true economic analysis into its rulemaking process . . . " He thus shares this
goal of the draft bill.
Finally, Mr. Atkins told the Committee that the SEC and
the CFTC should be merged: "Merging the SEC and CFTC and creating a new agency
with seven Commissioners would save money and reduce bureaucracy, owing to the
scheme's fewer Commissioners and a reorganized staff."
Program: ABA Seminar: Is the
DOJ and SEC War On Insider Trading Rewriting the Rules? ABA program, live in
New York City, webcast nationally. Friday September 23, 2011 from 12 - 1:30
p.m. at Dorsey & Whitney, 51 West 52 St. New York, New York 10019.
Co-Chairs: Thomas O. Gorman, Dorsey & Whitney LLP and Frank C.
Razzano, Pepper Hamilton LLP.
Panelists: Christopher L. Garcia, Chief, Securities and Commodities
fraud Task Force, Assistant U.S. Attorney, Southern District of New York;
Daniel Hawke, Chief, Market Abuse Unit, Securities and Exchange Commission;
Stuart Kaswell, Executive Vice President & Managing Director, General
Counsel, Managed Funds Association; Tammy Eisenberg, Chief Compliance Officer,
General Counsel and Senior Vice President, DIAM U.S.A., Inc.
For further information please click here.
For more cutting edge commentary on developing
securities issues, visit SEC Actions, a blog by Thomas
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