SEC Faces Some Crucial Questions

Agency Under Pressure to Loosen Rules Tightened After Corporate Scandals

SEC Chairman Christopher Cox, center, and his fellow commissioners are gearing up to make decisions that will determine the course of financial regulation in the coming year. (By Lawrence Jackson -- Associated Press)

In the coming weeks, the Securities and Exchange Commission must decide a series of critical issues worth billions of dollars to the business community: from how far to cut back accounting rules to whether it should side with investment banks or shareholders in a Supreme Court case.

The nation's premiere markets watchdog is operating in the wake of complaints that government clamped down too tightly on business practices after financial scandals from Wall Street to Main Street. Several crucial decisions the SEC is about to make will determine the course of financial regulation in the coming year -- and will offer indications about whether the agency will respond to the concerns of either investors or industry.

SEC leaders have launched a pilot program that restricts staff lawyers' ability to negotiate corporate settlements, filed a court brief that supports raising the bar for investors to prevail against business in class-action lawsuits, and mulled a proposal that would have forced consumers to bring brokerage disputes in arbitration rather than before a jury.

The sheer number of critical issues before the agency, and growing complaints from investor and labor groups, are prompting Barney Frank (D-Mass.), chairman of the House Financial Services Committee, to hold an oversight hearing next month at which all five SEC commissioners have been invited to testify.

Heightened scrutiny of the agency comes after a series of industry-funded reports have advocated a sweeping deregulatory agenda that would rewrite securities rules and defang enforcement efforts in the name of making American business more competitive against foreign rivals. The Bush administration, which has been concerned that corporate rules are overgrown, has about 18 months left to put its stamp on SEC policy.

Treasury Department official Robert Steel will deliver a speech in Washington today that will announce a new committee to overhaul the accounting sector. Accounting firms amassed enormous profits in recent years. But the firms say they fear being put out of business by shareholder lawsuits in cases where accountants failed to detect fraud schemes.

In the weeks ahead, the SEC must approve adjustments to the 2002 Sarbanes-Oxley law under intense pressure to make rules less costly for business; choose sides in a Supreme Court case that will resolve whether investors can sue bankers who helped clients get away with fraud; draft a plan to address how much power shareholders will have to nominate corporate directors; and vote on settlements and penalties for companies accused of improperly backdating stock options for executives.

Business lobbyists and investor advocates await forthcoming revisions to the most contentious part of Sarbanes-Oxley, passed after widespread corporate accounting scandals. Officials from the SEC and the accounting industry oversight board will host public meetings next week to unveil changes to a rule mandating that companies assess their anti-fraud controls. Business has protested that the rule is overly burdensome, spurring regulators to draft new language which they say should reduce costs.

The developments alarm some investor-protection activists and former SEC officials who fear the agency could be straying from its mission and unduly favoring business. Onetime SEC chairman Arthur Levitt and former agency general counsel Harvey Goldschmid, among others, have called Frank in recent weeks to share concerns, Frank said.

The attorneys general of Ohio and Utah wrote federal lawmakers earlier this week, urging them to step up their oversight and reminding them that "we are only five years removed from the scandals at Enron and WorldCom and yet many have forgotten the lessons those cases have taught."

The appearance of all five SEC commissioners before the Financial Services Committee the week of June 25 is an unusual break from recent practice. In the past, the agency's chairman, Christopher Cox, a former Republican House member from California, has handled questions from his onetime colleagues alone. This time, the agency's three Republicans (including Cox) and two Democrats, who clash on such issues as financial penalties for corporate wrongdoers, will field inquiries individually.

"The fact that we're having a hearing doesn't mean that we've come to any negative conclusions," Frank said in an interview. Strong and opposing views from consumer groups and business lobbyists alike require a hearing to assess the agency's direction, he reasoned.

"I've been very disturbed by some of the developments we've seen in recent months at the SEC, and I think some good congressional oversight is welcome," Barbara Roper, investor protection chief at the Consumer Federation of America, said in an interview.

In some cases, Roper added, SEC officials "sound like they're taking dictation from some of those [industry-funded] reports . . . which is not what we need."

John Nester, a spokesman for the SEC, said Cox and others welcome the chance to share their story with Congress. "Everything we do is on behalf of investors," Nester said. "We hope the hearing is on C-SPAN and everyone watches."

Whether the House hearing will prove contentious is an open question, analysts said. Former lawmakers like Cox often receive a warm welcome when they return to Capitol Hill. But emotions are running high as the SEC ponders how to act in the face of multiple hot-button issues.

"As far as I can see, there hasn't been the ability of the SEC to explain where they're going" on numerous issues, said James D. Cox, a law professor at Duke University. "This hearing is a chance for them to do that."