Questioning the SEC, Gently
Wednesday, June 27, 2007
Under pressure to defend a series of actions that critics call harmful to investors, the Securities and Exchange Commission chairman began a congressional oversight hearing yesterday by exchanging a handshake with a Massachusetts Democrat and a pat on the back with a Georgia Republican.
And so it went as former Republican congressman Christopher Cox parried gentle questions from his former colleagues on the House Financial Services Committee -- and sought to minimize dissent within his sometimes-divided agency.
The hearing was the first in more than a decade to which lawmakers had invited all five SEC members to answer questions about whether they are aggressively protecting investors and policing markets without overburdening businesses with costly rules.
Shareholder advocates have expressed alarm about recent SEC actions, including a new enforcement policy they say restricts the agency's lawyers' ability to negotiate corporate fines, and what critics call a pro-business legal argument that would have made it more difficult for shareholders to proceed in class-action cases.
On the other side are industry groups, which have campaigned to loosen financial regulations and curtail investor lawsuits that they say burden the U.S. economy. Several members of Congress seized on those arguments to press regulators to denounce shareholder lawsuits, but the commissioners declined.
Instead, the proceeding descended into a grab bag of questions from lawmakers, whose inquiries were cut short by the gavel-pounding chairman, Rep. Barney Frank (D-Mass). "In my judgment, the commission as currently constituted has hit the right balance," Frank said.
Committee members mustered the most passion for two topics: the prevalence of class-action lawsuits and the SEC's refusal to grant another delay for small businesses to comply with a costly audit rule contained in the 2002 Sarbanes-Oxley law.
Sixteen Republican House members sent a letter to the SEC this month asking regulators to study what they view as frivolous securities lawsuits and allegedly improper behavior by plaintiff lawyers. Limiting such litigation is the centerpiece of proposals by the U.S. Chamber of Commerce and the Committee on Capital Markets Regulation to make U.S. markets more business-friendly.
The chamber and other groups criticized the SEC for its position in a coming Supreme Court case that could determine whether Enron investors recover financial losses from investment banks. Last month, the SEC voted 3 to 2 to urge the Bush administration to file a brief in support of shareholders in a related case who are suing third parties who they say knowingly helped corporate executives commit fraud.
Solicitor General Paul D. Clement declined to adopt the SEC position after hearing objections from President Bush and Treasury Secretary Henry M. Paulson Jr., who said allowing the case to proceed would create undue risks and substantial liabilities for business.
Rep. Richard H. Baker (R-La.) yesterday called the SEC's position in the case a "clear and present danger" to the capital markets.
Inside a crowded hearing room, the SEC's three Republicans and two Democrats rejected opportunities to air public disagreements and mostly stuck together under Cox's lead.
Rep. Al Green (D-Tex.) raised questions about a new program under which SEC enforcement-staff lawyers must ask for input from the five commissioners before they begin settlement negotiations. Cox said it is a pilot program that will be studied thoroughly before it is adopted permanently.
Cox also said that he and the other commissioners are working on a proposal that could give shareholders more say in how corporations are run. Cox said such a plan could be made public as soon as next month after Frank said it was "one area where I'd hope we get some action pretty soon."
Frank said he would hold a separate hearing on that proposal, which has been considered in one form or another for decades. Trade groups have fought the idea by arguing that it could make corporate management a hostage to labor unions and special interests. But investor advocates say it would help rein in outsize executive compensation.
As the hearing stretched on for four hours, the SEC sent signals outside the Rayburn House Office Building that it is open to hearing business complaints.
The agency issued a news release yesterday afternoon announcing that it would form an advisory group to study how to change the way companies file financial reports. Cox is to appear today with Robert C. Pozen, a longtime mutual fund industry executive who helped draft a U.S. Chamber of Commerce report this year, to announce the new panel.
That report and two other business studies concluded that U.S. companies were losing ground to foreign rivals, a position that former SEC leaders rejected and that Rep. Paul E. Kanjorski (D-Pa.) yesterday likened to saying that "the skies over New York are falling."
Cox responded: "I don't think first of all the sky is falling. . . . I think they are at a minimum overstating things. I think what's happening all around us is more competition."