LexisNexis Corporate & Securities Law Community 2011 Top 50 Blogs

Bon mots

"You can observe a lot just by watching." Yogi Berra

"We do not distain to borrow wit or wisdom from any man who is capable of lending us either." Henry Fielding, Tom Jones

"In our complex society the accountant's certificate and the lawyer's opinion can be instruments for inflicting pecuniary loss more potent than the chisel or the crowbar." United States v. Benjamin, 328 F.2d 854, 862 (2d Cir. 1964)

Year-end Summary - Has The Commission Abandoning The Administrative Enforcement Forum?

The Commission published only forty-seven opinions or orders this year. Of those, only eleven were substantive decisions in Commission instituted proceedings. Of those eleven one dealt with a "pump and dump" scheme. Two involved investment advisers. One involved a CPA. One was a 12(j) proceeding to de-register a stock. Four were so called "follow-on" proceedings to take disciplinary action based on injunctions or convictions. One involved a dispute involving the consolidated tape and one a request for relief from a previous bar. One involved Investment Company Act issues. The remainder of the orders were procedural or appeals from self-regulatory organization enforcement proceedings.

This is a terrible record. It demonstrates that the Commission has almost completely ceased bringing substantive non-settled enforcement cases in its administrative forum against broker-dealers, investment advisers, and investment companies and non-regulated persons subject to its administrative jurisdiction. The few decisions this year often dealt with trivia.

This is unfortunate as administrative proceedings are an effective and efficient enforcement remedy. There is virtually no discovery and trials are scheduled much quicker than in federal courts. Further, unlike federal court, there is nationwide service of process. This means that trials feature live witness testimony rather than endless drab deposition readings that make fraud cases so difficult to prove effectively in federal court.

When the Commission does bother to issue an opinion in an administrative case the result is often dismal. Both the speed and quality of Commission decisions are marginal. Commission decisions continue to be overly long. Opinions in routine matters take months. Readability suffers as footnotes abound. Ipse dixit pronouncements rather than sound reasoning are often resorted to.

Recent events have proved the bankruptcy of the de-regulatory market worship of recent SEC Chairmen and Commissioners. Efficient and effective in-house administrative proceeding are in many cases the best tool for taking prompt and cost effective enforcement action. The clear failure of the Commission to effectively police the industry in its own forum is significant.

Publicly available information shows the SEC's abandonment of its administrative proceeding forum. In FY 2008 the SEC brought 671 enforcement actions. 386 were administrative proceedings and 285 were civil actions. The SEC does not report separately how many of these cases were settled before trial. The following is a breakdown of the SEC's classification of the administrative cases it brought.

Issuer reporting - 76
Broker-dealer - 45
Investment advisers - 55
Securities offering - 56
Delinquent filing - 111
Insider trading - 19
Market manipulation - 13
Transfer agent - 2
Investment company - 9

According to the Washington Post, in FY 2008 the SEC brought only 60 cases (civil and administrative) against broker-dealers compared with 89 cases in 2007. This is a 30 percent decrease. There are more than 5,000 registered broker-dealers with 673,000 registered representatives. Yet apparently only 60 merited enforcement action. There are more than 10,000 investment advisers, 7,000 of which have individual clients. They manage more than $17 trillion of assets. Despite the fact that 823 SEC examinations of brokers, investment advisers and investment companies found significant deficiencies only 203 of those were referred to the SEC's enforcement division for investigation.

There is no excuse for the Commission to unilaterally disarm. A Commission that is not vigorously bringing administrative enforcement proceedings is one that is not fulfilling its profoundly important enforcement obligations. And the effectiveness of the enforcement program is a key barometer of the overall regulatory competence of the Commission itself. This year's record of administrative decisions is a clear indicator of the Commission's regulatory failure in recent years.