Is the SEC up to the task?
Agency is underfunded and outgunned, say former staffers
By John W. Schoen
MSNBC
msnbc.com
July 11 — Is the Securities and Exchange Commission up to the task of cleaning up corporate accounting abuses? Some current and former SEC staffers don’t think so. They say the agency is grossly underfunded, badly demoralized, plagued by turnover, crippled by vacant commission seats and generally outgunned in its efforts to reign in the recent outbreak of bogus corporate bookkeeping.
ESTABLISHED TO RESTORE investor confidence following the stock market crash of 1929, the SEC has never had the resources to fully monitor the activities of the securities markets and review every page of corporate bookkeeping. But over the past decade, the agency’s budget hasn’t kept up with a boom in the financial markets. As a result, its resources have dwindled to levels that have left it badly outgunned as top cop to the national’s financial markets, say past and current SEC staffers.
“It doesn’t even remotely have the resources at the moment,” said Lynn Turner, former SEC chief accountant from 1998-2001.
Much of the current debate in Congress over cleaning up corporate America centers on how much money is needed to fix the problem. But everyone agrees more is needed. From 1991 through 2001, the SEC’s annual budget rose from $213 million to $412 million, an average annual increase of about 8 percent. During that period, the number of corporate filings has risen 60 percent.
Meanwhile, total mutual fund assets rose five-fold, and New York Stock Exchange volume rose nearly seven-fold. But the surge in SEC fees generated by that boom, which peaked at $2.3 billion in 2000, bypassed the agency’s budget and went to pay down the federal budget deficit.
The resulting belt-tightening has left the commission powerless to keep up with the mounting pile of phony bookkeeping churned out by corporate accountants, some former staffers say. Earlier this year, the commission asked for $20 million in emergency funding to hire 100 new enforcement officers. Congress failed to free up the money.
The agency’s technological firepower has also suffered. While the tech boom of the late 1990s saw corporate America spending billions on new computer hardware and networking gear, spending on the SEC’s data systems didn’t keep up. Turner, the SEC’s former top accountant, estimates it would take at least $100 million to modernize the agency’s technology.
Many long time staffers have left the agency in frustration: turnover is twice the average for federal government workers, according to a March report from the General Accounting Office. That report also found that the exodus has left the agency with a relatively inexperienced staff: some three-fourths of SEC examiners have less than three years experience, the report found.
“That’s created an environment in which the learning curve on any individual fraud case is that much steeper,” said Donald Langevoort, a special counsel at the SEC in the late 1970s and now a law professor a Georgetown University.
LOW PAY, LOW MORALE
Meanwhile, current SEC staffers say morale has suffered badly. Salaries have fallen some 25 to 30 percent below those of other financial regulators doing similar work at the Federal Deposit Insurance Corporation or the Federal Reserve. That disparity has further demoralized the agency, say current and former SEC staffers.
“If you’re an SEC investigator working on a joint investigation, you’re working with a regulator who’s making 25 percent more than you, who has a better house than you — and you’re doing the exact same work,” said a current staffer who asked not to be identified.
Last year, Congress authorized an additional $76 million to bring SEC salaries up to par with other financial regulators, but the White House cut those funds from the fiscal 2003 budget proposed in February.
Then, as reports of corporate accounting abuses began mounting, the Bush administration proposed boosting the agency’s budget by $100 million, bringing the total to $567 million. A bill now before the Senate would raise that amount to $776 million. But a thorough review of corporate filings would take at least twice amount, say former agency officials.
“When you think about the fact that there are 10,000 companies out there, some of which are extremely large with overseas operations, and the complexity of the things they do, you’re really talking about a gigantic infrastructure,” said Steven Wallman, a Clinton-era SEC Commissioner.
A ‘KINDER, GENTLER’ SEC
Why is the agency so badly underfunded? Some former agency staffers say that, despite repeated calls for increased budgets, a business-friendly Congress squeezed the SEC’s funding to try rein in the tough, often combative stance of former SEC chairman Arthur Levitt. Current critics of the agency say that move to a more hands-off approach to securities regulation culminated with the appointment of Harvey Pitt as chairman.
“Harvey is fundamentally a deregulatory guy,” said Turner.
Pitt began his legal career at the SEC in the late 1960s before entering private practice representing, among others, all of the big-five accounting firms and for the American Institute of
Public Accountants. While critics complain that he is too close to the industry, Pitt defended his continued meetings with accounting industry executives in a recent Money magazine interview with CNBC’s Ron Insana.
“If we regulate a major firm and they are subject to our regulation and they have a new CEO, who wants to meet us and make it clear that we can call on them to do what they’re supposed to do in the public interest, that’s a meeting that helps investors,” he said. “It doesn’t hurt investors. Much of the criticism that I’ve seen, in my view, is both ill-informed and misdirected.”
But the tone of Pitt’s regulatory approach was spelled out early in his tenure when, to the great relief of many in the business and accounting communities, the new chairman promised a “kinder, gentler” SEC.
That speech is now coming back to haunt him. Democrats this week began calling for Pitt’s ouster. Now, Republican Sen. John McCain has joined them, noting that Pitt’s ties to the accounting industry has forced him to recuse himself from 29 SEC decisions in less than a year.
“The circumstances today require a new leader of the SEC whose background and record leave no question that he or she will proactively assert the independence and authority of the SEC to protect the integrity of our markets,” McCain told reporters Thursday.
The White House has strongly supported Pitt, and shows no signs of backing down. In a chat Thursday on MSNBC.com, Labor Secretary Elaine Chao said she thinks the criticism of Pitt has been unfair.
“It is true he has worked in the past with accounting firms,” she said. “But many people have worked with many, many other firms as well. Harvey Pitt took a pledge when he entered the federal government that he will protect investors and ensure the integrity of the financial markets. He’s a man of integrity and he will carry out his responsibilities.”
Elaine Chao: Public trust is ‘very fragile’
But former SEC staffers note that the commission was recently badly upstaged in the campaign to clean up Wall Street by New York state Attorney General Eliot Spitzer. In May, Spitzer won a $100 million settlement from Merrill Lynch, which agreed to sweeping changes in the way its analysts are paid, eliminating bonuses for researchers whose stock recommendations help generate investment banking fees. Other firms have begun to adopt similar changes.
EMPTY SEATS
Regardless of Pitt’s regulatory leanings, the agency is further hampered at the top by two vacancies on the five-member commission.
“It’s completely inexcusable that we don’t have a fully staffed commission,” said Langevoort, the former special counsel to the SEC.
While the absence of those commissioners has little impact on the day-to-day operations of the agency, it has tied the SEC’s hands in cases involving the accounting industry. A recent enforcement action against Ernst & Young was thrown out by an administrative law judge, after Pitt and Commissioner Cynthia A. Glassman, a principal at the accounting firm, recused themselves. That left the only one commissioner, Isaac Hunt, a Clinton-era holdover, to vote on the action.
Not surprisingly, the remaining appointments remain mired in politics. Bush’s efforts to appoint commissioners with close ties to the accounting industry have raised opposition from Democrats in Congress. To bypass Senate confirmation, Bush made so-called “recess appointments,” naming Glassman and Hunt earlier this year when Congress was not in session.
Progress on filling the empty seats has been painfully slow. In December, Bush nominated Paul Atkins, a lawyer and partner at PricewaterhouseCoopers, but that appointment has since been held up in the Senate. In January, Senate Majority Leader Tom Daschle urged Bush to nominate two Democrats, but the nominations didn’t happen until April. One is Harvey Goldschmid, law professor at Columbia University in New York, who was SEC general counsel in 1998 and 1999.
The second is Roel Campos, a lawyer and communications industry executive in Houston and formerly assistant U.S. attorney in California. Goldschmid’s nomination has been sent from the White House to the Senate Banking Committee for consideration, but Campos name has not.
But even if Congress quickly fills those vacancies and approves a big increase in funding, don’t expect to see quick results. Given the lead time involved in staffing up the agency, opening and conducting investigations and referring criminal cases to the Justice Department, it could be two years before cases begun today actually bear fruit.
In the meantime, “some of these cases are going to drop by the wayside because they don’t have the staff to deal with them,” said Turner. “I think the American public is right: some of these crooks are going to get off.” |
