Four years ago SEC Enforcement went back to the future, reorganizing the Division to include specialty groups. The idea was to marshal the resources of the Division in view of an increasingly complex market place to more effectively and efficiently conduct investigations. The idea of specialty groups was not, of course, new. In the early days of the Division it had specialty groups. That structure was abolished in the 1980s but brought back in 2009.

The reorganization was successful. Once completed the agency filed record numbers of enforcement actions each year. While the number of cases filed is not the sole criteria for judging the success of an enforcement program, those statistics suggested that SEC Enforcement had been pulled back from the abyss of Madoff and other scandals and was moving forward in a positive fashion.

Now that momentum seems to be sputtering. The record numbers of cases are gone. In the first half of 2012, for example, the Commission filed 150 enforcement actions (excluding tag-a-long proceedings, which are really an additional remedy adjunct to another action, and delisting proceedings). During the same period this year the SEC filed a total of 116 enforcement actions. Similarly, in the second quarter of 2012 the Commission initiated 99 enforcement cases compared to just 51 in the most recent quarter. By any measure the number of cases being filed by the agency is dropping significantly.

At the same time the Division appears to be searching for its focus. This is reflected by the following points:

Co-Division directors: The Enforcement Division now, for the first time, has co-directors. While innovative, it is at best cumbersome. No matter how well the two men work together, someone has to make the decisions. The “buck,” to paraphrase President Harry Truman, has to stop someplace. That is always with the person making the final decision. Groups, committees and similar decision making bodies are typically a cover for lack of focus. While this innovation puts the new SEC Chair’s right had man at the front of the enforcement operation, giving her hands on control, is nothing but unwieldy on a day-to-day basis and makes the Division appear less than focused.

Admissions: There is a new policy being implemented under which admissions will be required in select cases, in addition to those obtained in actions where they were previously made in a parallel case. The precise criteria for selecting these cases, and the type of admissions that will be required, have not been specified. If the policy is applied to more than a handful of cases, and meaningful admissions are sought, such as those made in a guilty plea or a criminal deferred prosecution agreement, it has the prospect of bogging down the Division with more and perhaps difficult cases to take to trial. That can and will drain the Division of its already scare resources. It could also mean fewer investigations as the agency is required to be ever more selective about which matters to pursue, undercutting its ability to protect investors and markets. If on the other hand the new policy is only applied in limited cases and the admissions sought are along the lines of the “we made an error” type as in SEC v. Goldman Sachs, the new policy will surely undercut the credibility of the agency since it will be viewed as little more than a publicity stunt.

Financial fraud: This traditional stable of SEC Enforcement has been neglected in recent years. As reports from Cornerstone Research chronicle, the number of financial fraud cases brought by the SEC in recent years continue to dwindle. Now the Division reportedly is refocusing its efforts in this area. Yet no new specialty group is being created which seems contrary to the theory of the recent reorganization.

The trial unit: This long standing specialty unit of the Division is now rumored to be on the chopping block, doomed to be disbanded. The unit was created in the 1970s for largely the same reasons which underlie the recent reorganization. At the time of its institution each Associate Director group conducted its own litigation. The Unit was created to focus the litigation resources of the Division in a more effective manner. It is currently the only specialty group to have persevered from the early days of the Division. Dropping this specialty group in favor of a model previously found to be less than effective, while retaining others but refusing to create one to implement the new emphasis on financial fraud actions which can be very complex suggests confusion.

Collectively these changes paint a portrait of a Division in search of focus. To find its focus the Division need go no further than back to its and roots, that is, back to the future yet again. Its statutory mandate is to act as a regulator, not a prosecutor. It is to protect investors and markets by investigating and halting violations, making sure the wrongful conduct is not repeated in the future. It has a vast array of weapons to do this, from injunctions to equitable remedies, penalties and bar orders. These tools have in the past enabled the SEC to craft effective remedies such as corporate compliance and governance initiatives that prevented a repetition of wrongful conduct in the future. While this work may not garner the headlines of a billion dollar fine or an admission of guilt, its ingenuity and creativity protected investors and the markets, making the agency a most effective watch dog. If SEC Enforcement is going to become that watch dog again it is time to stop tinkering with organization and policy and go back to the future, back to crafting effective remedies that protect investors and the markets.