Auditors see SEC deficiencies

[May 06, 2009]  WASHINGTON (AP) -- The Securities and Exchange Commission has made progress in tightening its procedures for managing its caseload of enforcement investigations but internal communications and use of resources still must be improved, congressional auditors have concluded in a new report.

The workings of the SEC's enforcement division have come under intense congressional scrutiny after revelations in December that the agency failed to detect the massive Ponzi scheme run by money manager Bernard Madoff, despite red flags raised to its staff by outsiders over the course of a decade.

The report released Wednesday by the Government Accountability Office, Congress' investigative arm, said the turmoil in the financial markets that began in mid-2008 has "underscored the importance of the role (the enforcement division) plays."

While noting that the division has brought several actions with record penalties against companies and senior executives in recent years, the report said there are questions about its "capacity to effectively manage its activities and fulfill its critical law-enforcement and investor-protection responsibilities."

The enforcement division faces challenges in balancing its personnel and other resources against a ballooning workload, while it grapples with inefficient operations and deficiencies in its information systems, the GAO auditors said. The division's overall resources have been at a stable level, but the number of investigative attorneys dropped 11.5 percent from fiscal years 2004 through 2008, the review found.

The GAO undertook the review last summer at the request of Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, and Sen. Jack Reed, D-R.I., who heads the subcommittee with oversight of the SEC. It did not address the SEC's regulatory failure in the Madoff situation -- an issue being examined by the SEC's inspector general.

Reed's panel is holding a hearing Thursday on the SEC's enforcement operation. Scheduled witnesses include Robert Khuzami, a former federal prosecutor who was installed as the agency's enforcement director in February, and GAO official Richard Hillman.

SEC Chairman Mary Schapiro, an Obama appointee, named Khuzami to replace Linda Thomsen, the enforcement chief since May 2005 who had become a lightning rod for criticism by lawmakers and others.

Schapiro also took several actions intended to strengthen and speed the SEC's enforcement efforts. For example, she ended a two-year-old policy requiring agency enforcement attorneys to get approval from the SEC commissioners before negotiating fines and penalties with companies accused of violations.

The old policy was considered to have resulted in delays in cases and fewer fines and penalties against companies, the GAO report said.

Christopher Cox, who was the SEC chairman in 2007 when the policy was put into effect, said Tuesday that it was a pilot program "designed to test ways to speed up cases and improve oversight," and was used in only nine enforcement cases of more than 1,000. "But the GAO analysis supports (Schapiro's) decision to end the pilot and pursue other approaches," Cox said in a statement.

Cox, a former Republican congressman from California, also said he was "heartened" by other findings in the GAO report, notably that staff turnover in the enforcement division has decreased and that enforcement activity has been fairly level while caseload backlogs have declined.

Schapiro, in written comments to the GAO, said she agreed with its recommendations and the agency was taking steps to put them into action. They include considering a new structure for the office in charge of collecting penalties from companies and distributing recovered funds to aggrieved investors, and reviewing the enforcement division's resources.

[Associated Press; By MARCY GORDON]

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