Senate banking committee holds hearing on SEC enforcement responsibilities

Yesterday, the Senate Committee on Banking, Housing and Urban Affairs held a hearing entitled “Strengthening the SEC’s Vital Enforcement Responsibilities." The following witnesses appeared before the Committee:

• Richard Hillman, Managing Director, Financial Markets and Community Investment, U.S. Government Accountability Office
• Robert Khuzami, Director, Division of Enforcement, U.S. Securities and Exchange Commission
• Mercer Bullard, Associate Professor of Law, University of Mississippi School of Law
• Bruce Hiler, Partner, Cadwalader, Wickersham and Taft LLP

Director Khuzami stressed the SEC’s need for greater resources to recruit, retain and train attorneys to meet the demands of increased enforcement actions. He also indicated that the SEC’s Enforcement Division was at a significant disadvantage when it came to technological resources required to manage the increased case load. According to his testimony, enforcement actions have increased 32 percent since Mary Schapiro assumed the position as Chairman of the SEC.

As former members of the staff of the Division of Enforcement, both Mr. Bullard and Mr. Hiller echoed the concerns expressed by Director Khuzami. In their view, despite the reputation of the SEC has as a premier regulatory agency, its effectiveness has suffered in recent years due to poor leadership, a lack of funding and an increase in market sophistication and activity.

Citing a recent GAO report, Managing Director Hillman stated that the GAO found that the morale of the SEC’s staff had been damaged by policies that were seen to discourage investigations. The GAO also found that the SEC had not communicated effectively either internally or externally with regard to the implementation of those policies.

In response questions from several members of the Committee regarding the SEC’s failure to detect the $65 billion fraud orchestrated by Bernard Madoff, Director Khuzami said that the episode had served as a wake-up call to the Commission and staff. He stated that the Division of Enforcement is currently undergoing a change in culture, as the staff redoubles their efforts to meet the demands of the current financial crisis.