[NYTimes] December 1, 2002 S.E.C. Facing Deeper Trouble By STEPHEN LABATON
WASHINGTON, Nov. 30 - The Securities and Exchange Commission, still reeling from the recent resignation of its chairman, Harvey L. Pitt, and other top officials, is plagued by problems that go deeper than its leadership difficulties and have undermined its ability to police companies and markets, government officials and corporate law experts say. Created in the depths of the Depression, the commission has had a long history of effectiveness that has earned it a reputation as one of the brightest stars in the constellation of federal regulatory agencies. But today, on the anniversary of the collapse of Enron - which began a wave of stunning corporate failures that exposed severe regulatory shortcomings - the commission is struggling to maintain its role as protector of investors against abuses in the marketplace. Although the agency has managed to file a record number of cases this year and has adopted a series of tough rules, officials say the commission's divisions have lost ground in their efforts to keep up with the growth of business and the expansion of stock ownership to a new investor class. Two of the most important units of the 3,100-person commission, its enforcement division and its office of compliance inspections, are understaffed by hundreds of officials, experts say, sharply limiting their effectiveness. Its corporate finance department cannot keep up with the deluge of company filings. Its market regulation division has for years been unable to persuade the agency's five commissioners to adopt rules of enormous consequence to the way the markets set stock prices. And a new accounting board that is supposed to fall into place early next year is beset by budget and staffing difficulties that threaten to undermine its effectiveness. Many of the problems facing the agency, experts say, are traceable to powerful corporate interests on Wall Street and in the accounting profession that continue, both directly and through the help of well-placed allies in Congress, to exert enormous influence on the rule-making process. As a result, the commission's budget has remained relatively small, less than half a billion dollars, and inadequate to the task. A new law called for a spending increase of 77 percent. But officials now fear that any increase will fall far short of its needs because the agency has no leader to fight for its interests and faces a White House that has wavered over its commitment to raise the S.E.C.'s budget and a Republican Congress that has other priorities. "We're in a very bad situation," said Charles A. Bowsher, a former comptroller general of the United States. "It is probably one of the weakest oversight positions at one of the worst possible times." Mr. Bowsher said there were ominous parallels to the problems facing the commission and the difficulties that confronted regulators during the onset of the savings and loan collapses of more than a decade ago, when he led the General Accounting Office. As was the case then, he said, the regulators are sharply underfinanced, face ferocious corporate lobbying interests with friends in Congress who want to weaken the rules, and are often unable to anticipate or prevent major infractions that can wind up costing investors huge sums of money. Mr. Pitt, who has suggested he will remain chairman until the administration finds a replacement, declined requests to discuss his 15-month tenure at the head of the commission. In public appearances, he and senior administration officials portray an agency that has responded strongly to the corporate debacles of the last year by adopting a series of tough regulations and bringing more enforcement cases - against executives of companies ranging from Enron to WorldCom and Sunbeam. "I'm enormously proud of our accomplishments, our regulatory reforms and our enforcement program," Mr. Pitt said in a recent speech at Duke University. "They have been aggressive, creative, well focused and effective." But commission officials and securities experts describe a host of problems that have grown over the last decade. They trace many of the agency's shortcomings to the tenure of Arthur Levitt, the chairman of the agency under President Clinton, who faced significant challenges in the deregulatory climate of that era. Mr. Levitt succeeded in putting a variety of measures on behalf of investors into effect, securities experts say, but he has also concluded in a new memoir, "Take on the Street" (Pantheon, 2002), that he was forced to reach a variety of compromises - such as on rules governing stock analyst conflicts of interest and auditor conflicts - that he now regrets. Some experts say there are parallels between the problems the agency developed during his tenure and the difficulties it faced in its early days during the Depression, when the commission created the regulatory framework to prosecute white-collar criminals, invigorate corporate oversight by directors, and help restore the faith of investors in the markets. "The two periods of greatest political controversy in the history of the Securities and Exchange Commission were the initial years, when the statute to create the commission and its full mandate were adopted, and the last period since the 1994 elections, when Newt Gingrich's Contract With America attempted as part of broad deregulatory effort to roll back the registration and enforcement mechanisms of the commission," said Joel Seligman, a securities expert and historian of the commission. "We have seen a wild roller-coaster ride since 1994." He and other experts say many of the problems have grown worse under Mr. Pitt, who they say only belatedly sought a budget increase that was far less ambitious than the one approved in the Sarbanes-Oxley Act, the law adopted in July to improve oversight of markets, corporate governance and the accounting profession. Now, the agency is "at a low point" in its history, said Alan R. Bromberg, a professor at the Dedman School of Law at Southern Methodist University who has followed the commission for more than 45 years and written extensively on corporate law issues. The agency's challenges today hark back to its earliest days. It was created during the nation's worst financial crisis. When Franklin D. Roosevelt was sworn in as President in March 1933, the economy was paralyzed, unemployment was rampant and the nation's banking system was on the verge of collapse. In the Senate, public hearings exposed a pattern of financial abuse by such distinguished banking institutions as J. P. Morgan, National City Bank and Chase National Bank that included insider trading, market manipulation, reckless speculation and special favors to influential friends. Congress responded with a flurry of New Deal legislation, including the Securities Exchange Act of 1934, which created the commission to keep watch over investment banks and the stock exchanges to ensure the efficiency and fairness of public markets. As in the current climate, the agency was buffeted by a variety of powerful corporate interests. William O. Douglas, an early chairman, noted at the time of the passage of one major measure in the 1930's that it had become law only "after a bitter struggle on the Hill against as strong a lobby as ever moved into Washington, D.C." But the commission grew in both size and stature and became a major force in Washington and Wall Street. Now, Professor Bromberg said, "the commission has lost its leadership in a whole bunch of vital areas." "It's partly because of Harvey Pitt, who came in promising to be friendlier to the accountants," he said. "It's partly because of this administration, which has been friendlier to big business. And it's partly because the agency has been starved for money and resources." The weaknesses of the commission, he said, have encouraged state prosecutors around the nation to pursue their own investigations of Wall Street and public companies, a shift in the balance of power that some experts criticize for leading to inconsistent results and balkanized rules. Both President Bush and Mr. Pitt have cited the agency's record number of enforcement cases over the last year as evidence of its continued vitality. They say the agency has performed remarkably well amid the wave of corporate failures and market turbulence, particularly in putting into effect scores of regulations required by the Sarbanes-Oxley Act. The new rules require companies to make faster and more detailed disclosures of financial information, impose more obligations on executives and lawyers and set higher standards for corporate boards. Experts say that the 24 percent increase in enforcement actions over last year, while significant, is hardly surprising given the extent of corporate abuses that have come to light, the record number of earnings restatements by companies and the precipitous decline in the markets. Officials and experts who closely follow the S.E.C. say that the enforcement staff lacks the resources to open important investigations and that the trial unit, which has about 75 professionals nationwide, is hard pressed to bring a significant number of cases to court. Corporate corruption cases involving accounting improprieties are particularly labor intensive. More than 20 lawyers and accountants, for instance, are working on the Enron case alone. A typical case involves just one or two professionals at the agency. Making matters worse, many corporate defendants are becoming more reluctant to settle their cases because the Sarbanes-Oxley Act and other new regulations substantially increased penalties for violations. The agency's corporation finance division, which for years never examined in detail the filings of thousands of companies, including Enron, remains unable to analyze the majority of the 15,000 filings by corporations each year. The division now focuses on the nation's largest companies. But in some cases, according to officials, reviewers have just one day to examine as many as six corporate annual reports to see if they are problematic. The secretarial staff is so small that many senior analysts spend huge amounts of time simply photocopying documents. Officials also labor under an antiquated computer system that makes it difficult to perform the most rudimentary kinds of analysis of financial information. "The headline here inside the agency is a lot of noise and little action," said Michael Clampitt, a lawyer and accountant who has worked in the S.E.C.'s corporation finance division for the last 12 years. "People are basically hoping that everything blows over and nothing bad happens. It has been a travesty." The division of market regulation, meanwhile, is years behind schedule in getting approval from the commission on a set of rules of enormous importance to how prices are set on the stock exchanges. For the last three years, the division has been working on a proposal by the Nasdaq to transform it to a stock exchange from a market, but in the regulatory triage of the last year, the issue has been shunted aside. The new accounting oversight board, which is supposed to set auditor standards and conduct regular investigations of accounting firms, has faced difficulties recruiting senior staff members. With the resignation of William H. Webster, it has no permanent chairman. The accounting board faces enormous political pressure from lobbyists and their allies in Congress to delegate the board's new standard-setting authority to the profession itself, which had set the rules until the Sarbanes-Oxley legislation took it away. At the top of the S.E.C. are five commissioners - nominated by the president and confirmed by the Senate - who are given staggered five year terms. No more than three can be from the same political party. President Bush has appointed all of the current commissioners. Earlier this year, Congress gave the commission a modest $30 million budget increase, to about $468 million, so that the agency could begin to hire an additional 100 professionals and enlarge its staff of about 3,100. In recent years, it has taken in fees of more than $2 billion a year, but Congress has rejected attempts to let the S.E.C. support itself directly because lawmakers are reluctant to give up their influence over the agency's agenda through its budget. The commission has faced turmoil in the past. During Watergate, its chairman was forced to resign during a political scandal. But many say those problems pale in comparison to today's challenges. "It's been a very disappointing year," Mr. Bromberg, the Southern Methodist law professor said, "for people who admire the commission and think it has an important role to play for investors."
