The teeth of the SEC: too sharp, or not sharp, or not sharp enough?

• Author: Cheney, Glenn Alan
• Position: Securities and Exchange Commission

Though opinions vary on whether the U.S. Securities and Exchange Commission has been getting more aggressive in its enforcement, Chairman Mary L. Schapiro notes that in the fiscal year ending last Sept. 30, the agency filed a record 735 enforcement actions.

More than $2.8 billion was collected in disgorgements and penalties and some $2.2 billion--twice the commission's budget--was returned to investors. The increase may be the result of a significant reorganization of the SEC in 2009 and 2010.

At the same time, however, the commission has been criticized for failing to spot the debacles involving Bernard L. Madoff Investment Securities LLC, Lehman Brothers Holdings Inc. and several other shaky or shady organizations. Major Wall Street firms have been investigated for fraud, found guilty and often slapped on the wrist with picayune punishments.

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The New York Times found nearly 350 instances of the SEC giving financial institutions waivers that let them bypass regulations. Half the waivers, the Times said, went to repeat offenders that had settled previous fraud charges by promising never to misbehave in the future.

The more than 2,000-page Dodd-Frank Wall Street Reform and Consumer Protection Act--the most significant federal effort in a generation to regulate finance by writing new rules and beefing up enforcement--handed the SEC an extraordinary mandate to create and implement new regulations and, at the same time, increase its own effectiveness.

Dodd-Frank calls for a whole new cohort of investment entities, from investment advisers to hedge fund managers, to come under SEC scrutiny.

But writing the rules, expanding oversight, conducting more examinations, launching more investigations and pursuing more prosecutions all come at a cost. The funds needed to cover that cost have become a partisan bone of contention in an exceptionally politically partisan era.

Co-author of the Dodd-Frank bill, Rep. Barney Frank (D-Mass.), is appalled at the resistance to the reform he helped devise. "We gave the SEC significant new responsibilities, particularly in derivatives. When you get a new responsibility like that, you need more funding, better technology, more smart people. We have new rules that have to be written, and the opposition to regulation in the business community is very well funded in the litigation area, so the SEC has to spend a good deal of money documenting the process by which it adopts rules and that also requires staff."

Ninety provisions of the act require the SEC to generate new rules. Writing the rules is difficult and complicated, even more so when the mandate is ill-defined and fraught with legal questions. In a harbinger of troubles to come, the SEC saw its proxy access rule kicked back by a federal appeals court in...