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December 6, 2011

November 16, 2011 – Senate Banking Committee Securities Subcommittee Hearing entitled, “Management and Structural Reform at the SEC: A Progress Report”.

Subcommittee Chairman Jack Reed, D-RI, called the hearing “critical” given the scrutiny the Securities and Exchange Commission has been under in recent years with the Bernie Madoff and Alan Stanford scandals. Reed was upbeat about changes that SEC Chairwoman Marcy Schapiro had made in almost three years at the helm, particularly by bringing in well qualified individuals as senior managers. Reed also called for full funding of the commission’s budget.

Ranking Republican Mike Crapo of Idaho was more measured in his remarks, focusing more on legislation that would amend the Sarbanes-Oxley corporate governance law and he said could spur capital formation. He also stressed the need for greater coordination of the SEC with other domestic and international financial regulators.

Reed pressed Robert Khuzami, director of the SEC’s enforcement division, over the agency’s limited civil action against individuals and a lack of criminal referrals. Khuzami noted the agency has pursued civil actions against some individuals, but many of the key business decisions in question were not made by the senior executives, but by managers anxious to move product and make profits. The SEC work closed with the Department of Justice but criminal cases are lengthy and difficult to win, he noted.

The SEC has been roundly criticized by proposing a $95 million fine in a settlement with Citigroup over a $1 billion derivatives deal that quickly went south and investors lost at least $700 million. Khuzami said the agency is limited by law in the amount of penalty to the amount of fines it can assess.

Reed also asked him on the effect of a revolving door at the agency where lawyers can go to private practice to make more money and use their talents to represent big banks. Khuzami said the SEC has very strong conflict of interest standards for former employees who join firms that interact with the agency. Despite the turnover, he said the agency is able to hire quality personnel and, in some ways, having individuals with SEC experience working in the private sector can benefit both the firm and the government.
 

Congressional Activities
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