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Crackdown Alert

After a GAO report documents a slowdown in the SEC's case generation and penalty volume under former chairman Christopher Cox, the regulator's new leaders talk tough.
Tim Reason and Alix Stuart, CFO Magazine
June 1, 2009

Note to public-company finance executives: brace for an enforcement backlash. Stung by a recent unflattering report from the Government Accountability Office (GAO), new leaders at the Securities and Exchange Commission are promising to make amends by being tougher than ever. "Reinvigorating the SEC's enforcement program is a top priority," said current enforcement director Robert Khuzami in testimony to a Senate subcommittee last month. Chairman Mary Schapiro has already overturned many of the policies that came under fire in the report, and the SEC had opened 138 new formal cases from the time she was appointed through early May, compared with 57 in the same period last year.

The GAO report documented a slowdown in case generation and an 84% decline in the volume of penalties levied during the tenure of former SEC chairman Christopher Cox, and suggested that some policies he instituted were at fault. Based on interviews with SEC attorneys, the report claimed that cases were needlessly prolonged because the enforcement staff was required to gain approval from the entire commission before launching a formal investigation or proposing fines. At least one case was closed simply because it had gotten old, the report says; in another, commissioners insisted on levying a lower penalty than the one a company had already agreed to pay.

How much of the SEC's new vigilance will be directed toward corporate finance versus, say, the next Bernard Madoff? "CFOs will be prominently in the mix," says Patrick Hunnius, partner at White & Case and a former SEC enforcement attorney. Particularly for cases involving financial institutions, he says, "there may be a focus on whether the CFO really understood the risks of financial instruments like asset-backed securities, and if so, whether he hid it" in SEC filings.

The SEC has backed off heavy corporate fines in recent years, but that trend may soon reverse.


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