The SEC at a Crossroads: Can Things Be Turned Around?

Over the past fifteen years, the SEC’s reputation has been routinely sullied – in the press, by the Courts and certainly in the halls of Congress. Although the mud slung at the SEC has intensified since the 2008 financial crisis and revelations of the Bernie Madoff Ponzi scheme, the Commission’s problems began well before then.  Particularly, the Enron and scandals forced editors to move journalists into the financial realm where bashing the SEC became good copy. More and more, the SEC has been losing major decisions in the Courts.  Professor John Coffee of Columbia Law School recently indicated that “the SEC’s batting average is close to ‘zero for 2008’ in the few cases that it has taken to trial stemming from th[e] financial crisis.”   And the SEC’s major case losing streak extends well before the 2008 crisis. In addition, recently departed SEC Chairman Mary Schapiro was asked by Congress to testify at what is likely a record rate for a SEC official. Those hearings almost never went well for poor Mary.

In the wake of the recent Presidential election, Chairman Schapiro announced her departure and almost immediately the SEC’s General Counsel and two of the four Directors of major Divisions said their farewell. Enforcement Director Robert Khuzami has now also hit the door. Perhaps the SEC’s declining reputation is a factor in this mass exodus. And compared to private practice, the pay is a fraction. What would you do?

A recent working paper by Professor Dan Ernst of Georgetown Law School, available here, may provide some insights as to how the SEC can salvage its reputation. Ernst describes the Commission’s beginnings.  Learning from the good old days may provide a good baseline to work from. For starters, the Commission has to turn things around in the courts. It has to take public relations more seriously and educate reporters who are prone to write negatively about the SEC.  This must become standard operating procedure. And the SEC has to do something about being a punching bag for Congress.  Don’t be afraid to hurt a Congressman’s feelings and call them out for how little they really know about the markets.

Bold steps are needed. And this means an auspicious beginning – perhaps an announcement by the new Chair on Day One that the SEC is undergoing a Roosevelt-style “First Hundred Days.” During that time, a fresh look at the way each office conducts its operations should be considered. There are quite a few things that haven’t changed in decades.  During the New Deal, the newly formed SEC shone like a beacon and became well known as the finest federal agency. It is time for the Commission to regain its luster.