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Former SEC Inspector General Welcomes Tougher Enforcement Environment

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By Michael Cohn
January 31, 2013

H. David Kotz, who left the post of Inspector General of the Securities and Exchange Commission last year, sees a more aggressive enforcement environment at the agency in the aftermath of the financial crisis and the Bernard Madoff scandal.

Kotz, who is now director of the Berkeley Research Group in Washington, D.C., credits outgoing SEC chair Mary Schapiro with the improvement. “Mary Schapiro really brought the SEC back from almost the brink of extinction and gave it a lot more credibility,” he said in an interview Monday. “The enforcement division has been a lot more aggressive in the last couple of years bringing actions. Mary Schapiro certainly did her job, which was to restore some credibility to the agency and it’s up to the new nominee, who I assume will be the new chairman, Mary Jo White, to really carry the agency forward.”

President Obama nominated White, a former federal prosecutor in New York, last week to succeed Schapiro (see Obama Nominates Mary Jo White as SEC Chair). Kotz admitted he hasn’t worked with White, but he issued a statement last week praising the selection, albeit with a word of warning.

H. David Kotz

“Ms. White has an excellent reputation and a wealth of enforcement experience from her days as U.S. Attorney in New York,” he said. “Her presence will be a significant benefit for the Enforcement Division. The only minor caveat is that a significant portion of the Chairman of the SEC’s job is dealing with and managing expectations toward Congress, as well as navigating relationships with other agency heads. Acting in this ‘political’ climate may be more difficult for Ms. White, who lacks significant experience in the D.C. political arena.”

The SEC also named a new Inspector General, Carl W. Hoecker, a CPA, Certified Fraud Examiner, and Certified Government Financial Manager, on Tuesday. Hoecker currently serves as Inspector General of the U.S. Capitol Police. After Kotz left the job last year, having served from 2007 to 2012, FDIC Inspector General Jon T. Rymer held the post on an interim basis.

Kotz has high hopes for White as the next leader of the SEC, assuming she is confirmed, but acknowledged that she will be coming in a little late in the process if she hopes to bring fraud charges against any of the bankers who were involved in the financial crisis. “The statute of limitations is starting to run out on some of those cases, so I don’t know how much she’s going to be able to do with respect to the financial crisis cases,” he pointed out. “There may be a few cases that are still ongoing that she can move along in a more aggressive way. Certainly she has that reputation, and I think that bodes well for the enforcement unit of the SEC, which is obviously a very significant part of the SEC. I do think that she will likely bring that level of aggressiveness. The Enforcement Division has been better in the last couple of years, but I think you can always be more aggressive.”

However, White will also have to contend with the SEC’s rulemaking responsibilities, especially with the many provisions of the Dodd-Frank Act of 2010 that have not yet been implemented, thanks in part to efforts by the financial industry to ward off the regulations.

“I think the questions about Ms. White are more on the other side of the SEC’s processes, which include rulemaking, things like that,” said Kotz. “The SEC has not met a lot of the Dodd-Frank rulemaking deadlines, so it will be interesting to see how Ms. White transfers to that. I think the enforcement side of the SEC will really be a natural fit for Ms. White. She has had a tremendous amount of experience running enforcement type groups. The question is how well will she navigate the rulemaking side as well as the political side? You know, D.C. politics is very different from New York politics as a U.S. Attorney.”

Among the areas where he sees a need for rulemaking are with executive compensation disclosure requirements, the so-called Volcker Rule restricting U.S. banks from making certain speculative investments that don’t benefit their customers, as well as rulemaking around the JOBS Act that was signed into law last year, including the lifting of the general solicitation ban on advertising for private investment offerings.

The incoming SEC chairman will need to get up to speed with these complex issues, Kotz pointed out, while dealing with a divided commission made up of three Democratic and two Republican commissioners who have their own strong views on several subjects.

He sees many reasons why the SEC has missed its rulemaking deadlines. “There are so many rulemakings that they’ve had to do,” he noted. “The SEC was given a lot of new responsibilities and not much more resources to do them with, so there was simply a tremendous amount of work. Also, government agencies generally move slowly. Some of the issues that they had to deal with were very controversial. They did want to give opportunity for folks, including lobbying groups, to have their say, so that takes time. There are also some issues that the individual commissioners have have strong opinions about, so I think it takes time to go through those issues, make sure everybody has had their side, and then write up the regulations. It’s a lot of work. But I think they need to continue to work hard to try to move forward with many of these rulemakings.”

1 Comments

Does this "tougher enforcement environment" include investigating brokers? I know one who works contract for brokerages who has failed to report to FINRA and SEC multiple misdemeanor and felony charges against her. In the past she managed to weasel her way out and get some of the charges dropped or reduced. But right now there are two outstanding felony cases where she is out on $150,000 bond, and has now moved to another state. I don't know if the court (and her bondsman) know that or not. Prior to her move, I called in the info to the FINRA local office of the state she lived in--but her FINRA broker report remains unchanged. Maybe your article explains why she hasn't been looked at yet--they are short-handed.

In the meantime folks, don't rely on the FINRA and SEC broker reports. Investigate their court and arrest records, too. Note the states of their listed previous employers and check court records of all those counties. You don't want to hire someone who can't stop getting arrested for stalking and home burglary.

Posted by: oktaxcpa | January 31, 2013 9:59 AM

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