Markets & Finance

A Rap on the SEC's Hard Line


The business backlash against the Securities & Exchange Commission for regulatory overreach intensified on Mar. 8 with the publication of a study that says the agency is too adversarial and too punitive in the way it enforces federal securities laws.

The 63-page report by the U.S. Chamber of Commerce is a stinging rebuke of the aggressive enforcement stance the SEC has taken in the post-Enron era. "While the SEC has made significant progress in providing more transparent guidelines to determine corporate penalties, its enforcement process is not always fair, consistently, and appropriately applied, or respectful of due process," says Thomas Donohue, the Chamber's president and CEO.

"CLEARLY EGREGIOUS CASES." The study blasts the SEC for a range of practices, including pressuring companies to waive attorney-client privilege during investigations, expansive interpretations of securities rules, and industry-wide "sweeps" that require companies to respond to detailed requests for information.

The report calls on the five-member commission to appoint an advisory committee to examine the SEC's enforcement policies and litigation track record. The Chamber also wants the agency to be more circumspect about referring cases of securities violations to criminal prosecutors. The SEC should make such referrals only for "clearly egregious cases," the report says.

SEC Chairman Christopher Cox, while not dismissing the report, defended his agency's tough approach. "So long as a business is friendly to its investors, the SEC will be friendly to it," Cox said in a statement. "But anyone who attempts to drive a wedge between the interests of their business and the interests of investors in that business will find themselves confronted by a relentless and powerful adversary in the Securities & Exchange Commission. The SEC's Enforcement Division, under the outstanding leadership of Linda Thomsen, will therefore continue in their vigorous efforts to deter wrongdoing and punish violators."

TIME FOR EXAMINATION? SEC insiders also blasted the Chamber's contention that the agency is on a losing streak in the courtroom. In the fiscal year ended last Sept. 30, the SEC prevailed in 84% of cases against defendants that it litigated in federal court or before an administrative law judge. So far this year, it has won nearly 90% of the time. "We're not losing; most of the time we're winning," says one staffer.

Still, Thomsen has come under pressure inside the agency as well. Last week, SEC Commissioner Paul S. Atkins floated the idea of an advisory panel to examine the enforcement division's practices. Plus, he suggested that the division should spend less time pursuing corporations suspected of wrongdoing and more time cracking down on micro-cap and other securities fraudsters who prey on small investors.


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