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U.S. Securities and Exchange Commission

Speech by SEC Staff:
Remarks before the Committee on Federal Regulation of Securites; Section of Business Law; American Bar Association


David M. Becker

General Counsel and Senior Policy Director
U.S. Securities and Exchange Commission

Washington, D.C.
November 20, 2009

Thank you Jeffrey for the kind introduction and thank you all for the invitation.

This is a hard group to address. You follow the Commission, and you already know what we are doing. It's hard to tell this group much that you don't know already. Because of that, I am going to refrain from an extended review of our agenda and talk instead about the Commission as an institution.

I'm hoping that this will be interesting to the Commission aficionados in the group, and might even be useful to those who deal with the Commission regularly. As always, I'm going to be quite candid here, so, also as always, let me remind you that the views I'm about to express are my own and not necessarily those of the Commission, any Commissioner, or any member of the Commission staff.

I'm going to elaborate on five facts about the Commission, some recent, some not:

  • First, the Commission is a uniquely structured organization;

  • Second, the Commission is in the business of governing in the public interest;

  • Third, the Commission operates in a fishbowl and under a microscope;

  • Fourth, that fishbowl is — for now at least — under a cloud; and

  • Fifth, the Commission is in the process of reinventing itself.

1. The Structure of the SEC

This might seem elementary, but it's useful to remind everyone that what the SEC does is in large part affected by how it's structured. The Commission is a pyramid with a flattened top. Rather than having a single executive, the Commission is a hierarchy with final decision-making reserved to five Commissioners, each of whom has been appointed by the President and confirmed by the United States Senate. Certain administrative functions are allocated to the Chairman, and the Commission has delegated certain routine decisions to its staff; but the important decisions — what cases to bring and what rules to propose or adopt — must be made by vote of a majority of the Commission.

One consequence of this structure is that, without the votes of a majority of the Commissioners, enforcement actions and rulemakings simply don't happen. Given the volume of our activity, each Commissioner feels herself personally accountable for the actions of the Commission. Our Commissioners work extremely hard. The volume of materials that must be read and understood by each Commissioner is quite considerable.

This structure makes delegation harder. Imagine running a business in which all regular decisions of any significance need to be made by a committee. Imagine further that each member of that committee can be held publicly accountable for any decision made by the committee. It makes it harder to do things quickly, and it certainly makes it harder to manage by delegating to persons with broad discretion in their areas of responsibility, whose performance can be readily measured, and who can be held accountable for their performance.

Another obvious consequence of this structure is that it takes three votes to take any action. Again, no problem for those of us who are used to operating by consensus. You just sit down with your colleagues, talk through the available options, think about it a while, and sort through differences in a civilized way — compromising here, deferring to each other there, or coming up with new ideas through an open exchange of ideas. Easy, right?

That would be wrong. As some of you know, but I expect many of you do not, with certain exceptions, a quorum of the sitting Commissioners may not talk to each other about any action that the Commission is taking, will take, or even might take without first issuing a notice and convening a public meeting. We are subject to the Government in the Sunshine Act. Enacted in 1976, the Act was intended to prevent government agencies from taking action in secret, from taking action purportedly for one reason while actually pursuing a secret agenda. The basic purpose of the Act is to ensure that government remains accountable to the people. As a result, any discussion among a number of Commissioners equal or greater than a quorum must be preceded by a public notice and accomplished at a public meeting.

As those of you have seen our public meetings know, there is not much informal discussion that takes place at the Commission's open meetings. While the outcome is not always known in advance, the Commissioners understand that they are speaking to the public — via the media and the Internet — and not necessarily to each other.

I am not a fan of secret government. To the contrary, I strongly believe in a government that is transparent to its citizens. I also, though, believe strongly in collegial decision-making. Unfortunately, the strictures under the Sunshine Act are somewhat at war with our collegial structure. There is something of a contradiction between the requirement that a quorum of commissioners vote in order to take action and a requirement that they not talk together about what they may do without prior public notice and a public meeting.

This is not a new observation. Twenty-five years ago, the Administrative Conference of the United States observed that "one of the clearest and most significant results of the Government in the Sunshine Act is to diminish the collegial character of the agency decisionmaking process" (Recommendation 84-3, Improvements in the Administration of the Government in the Sunshine Act, 49 Fed. Reg. 29937 [July 25, 1984]).

Speaking only for myself, I would prefer some statutory fix that preserves the public's ability to know what we do and why while creating greater opportunities for consultation, discussion, and compromise in advance of public discussion.It's not that we are utterly unable to operate within the strictures of the Sunshine Act. We have done so successfully for over 30 years. But we could operate more smoothly and swiftly if it were modified.

2. The Commission is in the Business of Governing in the Public Interest

Over the years, I've heard lawyers complain that the Commission is "political." I'm not always sure what people mean by this, but let me explain how my experience suggests that the Commission looks at these things.

By long-standing tradition, the Commission is not remotely partisan. Yes, our Commissioners are political appointees. And the Chairman is appointed by the President, who belongs to political party (unlike our current Chairman). And Chairmen tend to appoint senior staff who share their policy outlook. But in my time at the SEC, I've never heard anyone suggest that we take an action because it is good for the Republican party or the Democratic party. Nor have I heard of any case being brought or any rule being adopted because it was good for any political party. Nor have heard of any person being treated better or worse because of his or her political affiliation. In fact, not that it is a great secret, but I don't recall witnessing or hearing about being asked about their political affiliation. While I can guess about some, I honestly don't know the political affiliation of most of the people I work with.

And, as you know, we're an independent regulatory agency. Neither the Congress nor the Executive branch gives us direction on a day-to-day basis. But we are by no means unaccountable, nor are we especially far removed from the political process. We are a creation of the Congress, and we are no more than one phone call, letter, subpoena, or bill away. These days in particular, with regulatory reform under review, we are quite aware that Congress can alter our mission in fundamental ways at the stroke of a pen. For these reasons, even under ordinary circumstances — which these are most emphatically not — we are in touch with multiple members of Congress and their staffs every day.

Congress has enormous power over us. It has the power of the purse. It has the power of vigorous oversight. It can direct the Government Accountability Office to review any and all aspects of our operations and then publicize the results. And it can expand or limit our reach through legislation.

Similarly, as you know, the President appoints all our Commissioners and has the power to designate any one of them as Chairman. As a practical matter, the President has the power to cause the Chairman to resign. The Administration has first call on the agenda of the Congress. There are scores of thousands of administration employees whose work can affect ours. And there is only one bully pulpit.

Being an independent agency means that there is a layer of insulation between the Commission and the political day-to-day. But it is a layer whose thickness is never terribly great and that varies with the extent to which we come to the attention of the political organs of government.

I have no complaint about this, and I would submit that you shouldn't either. As wise as we always are, we are no wiser than the people who we serve. We should be, as we are, accountable to the people, their representatives, and their elected leaders.

This does mean, though, that we neither can nor should be insensitive to considerations of how we are viewed by the public or how the political organs respond to what we do or fail to do. To serve the public responsibly we must take seriously the business of governing in our small corner of the world. That includes expert consideration of policy and asking ourselves what we would do if we had time, resources, information, wisdom and power without limit.

But that is only the first step, because governing involves a clear-eyed recognition that there these commodities are in limited supply. There is only so much time, so we need to act promptly. There are so many resources, so we need to use what we have efficiently. Because, in part, there are limits on our available time and resources, we have only so much information. So we have to practice the art of making significant choices with imperfect knowledge. Because we are endowed with only limited wisdom, we need to open to the ideas of others. And because we have only so much power, we must do the most with what we have, achieving the most good that is available to us to achieve without squandering our resources on vain attempts to achieve the impossible.

Those concerns are particularly acute today. Since January of this year, the Administration and now the Congress are considering how to reform the structure of financial regulation. The Commission has been an active participant in these debates since their first moment. It is no exaggeration to say that, at one point or another, everything has been up for grabs. That is a political process, and we have tried to be vigorous and constructive advocates for investors and for fair and vibrant capital markets.

So, yes, in that sense we are "political." We keep abreast of the news, and we read our mail. We use our measure of independence to be one step removed from today's political winds. But we also recognize that we are part of a government and that our mandate is to govern in the public interest. We still bring the cases that deserve to be brought — and don't bring the ones that don't — regardless of who is the object of our attention. And we still write the rules we think we should the way we think we should. And we are aware of the world around us.

3. The Commission Operates In A Fishbowl Under A Microscope

Another fact of Commission life is that the Commission operates in the proverbial fishbowl and that fishbowl, to switch figures of speech, is under a microscope. We are nothing if not transparent. We have few secrets. Of course, not everything we do is immediately known to the public: we keep quiet about details of ongoing investigations and inspections, and we maintain significant commercial information in confidence. When we are quiet it is mostly to protect the integrity of open investigations or to protect the privacy of those members of the public who deal with us. As those law enforcement and privacy interests become attenuated over time, much information that we hold in confidence becomes publicly available.

We are very public about what we do. We propose and adopt our rules in public, by means of lengthy essays that describe what we are doing and why. We bring our cases through means of public charging documents and settle with speaking orders. We publish Commission and staff interpretations and codify our informal guidance. Our Commissioners and our senior staff maintain an active dialogue by speaking at industry panels, bar events such as today's, and continuing legal education seminars.

The fishbowl is not new; it has been a feature of Commission life for decades. The microscope, however, is a relatively new phenomenon. When I was first at the Commission, there was certainly some public attention to some of the things the Commission was doing. Regulation FD and auditor independence were some of the matters that caught the public eye. But these were matters that were of interest to only some of the public and some of the political world. We were, after all, in a time of prosperity and rapidly rising stock markets, and we had been, in the main, for 30 years.

We were far from the center of the political world. Presidential appointment of Commissioners was not the highest political priority. To take two examples, Arthur Levitt took his seat as SEC Chairman in late July 1993, months after the start of the Clinton Administration; and Harvey Pitt likewise was not appointed and confirmed until August of 2001, at the start of the George W. Bush administration. The Commission was — and is — a small regulatory agency, followed closely by those whose business leads them to deal with it, but otherwise not at the center of public consciousness.

Enron brought abrupt change. With the collapse of the dot com bubble, the Commission found itself an object of intense and sustained public scrutiny. The world wanted to know why Enron failed and why no one, including the Commission, was aware that it was defrauding the public. And the world wanted to know what the Commission, among others, was going to do about it. The Commission responded on many fronts: it brought more cases, and penalties skyrocketed. At around the time I first left the Commission in May 2002, the Commission brought and settled a financial fraud case against Xerox. The settlement, which resulted from prolonged and contentious negotiations, included a $10 million civil penalty. That amount barely moves the needle today.

In years since Enron and WorldCom broke, the stock market recovered but the scrutiny barely abated. And of course the financial collapse of 2008 changed everything. Last fall we saw the astonishing spectacle of a Presidential candidate promising that, if he elected, he would replace the sitting Chairman of the SEC. Throughout my 30 years of SEC practice, more than a few SEC Chairmen would have loved to come to the attention of a President, but the Presidents barely noticed. That a presidential candidate knew the identity of the SEC chairman, much less thought that he would make public promise to replace him, was extraordinary and unprecedented.

It is no exaggeration to say that almost every employee at the Commission understands that we are being watched. We know that every Commission action, every conversation, and every email may end up being highly public. And, as we know, there is a lot of public anger out there, and for good reason.

I'll leave it to others to decide whether this level of scrutiny is a good thing or not. Whether or not it is, it is a fact of life. It is a fact of life that political appointees take into account government-wide in deciding whether or not to engage in public service. For long-term civil servants, it is a fact a life they didn't necessarily take into account when they first started government service and that may or may not affect their tenure. And it is a fact of life that this level of scrutiny affects conduct. Government today — not just the SEC — reflects the Heisenberg Uncertainty to the nth degree.

Since my reference may be obscure, let me explain that Werner Karl Heisenberg was a German physicist who lived in the previous century. Heisenberg is (perhaps incorrectly) credited with the insight that the mere act of observing a phenomenon changes the phenomenon itself. It is unknown whether Heisenberg dabbled as a securities lawyer, though his observation is certainly apt as to the Commission. I just point out that Heisenberg died on February 1, 1976, almost exactly two months after the Hochfelder case was argued in the Supreme Court and — uncannily — almost exactly two months before the decision was announced. Coincidence? I'll leave that to you.

For those of you who don't believe in coincidences but who do believe in irony, 1976, the year in which Heisenberg died, was when the Sunshine Act was enacted. Certainly, that statute has confirmed the Heisenberg's insight.

The key word in the Heisenberg Uncertainty is "Uncertainty." I can not tell you exactly how the level of scrutiny the SEC is under affects behavior. I can say that I am worried about it. There is little more crippling than the fear of being publicly pilloried for making a decision that turns out to be a mistake. Perhaps the only thing more crippling is the fear of being publicly pilloried for a decision that turns out not to have been a mistake but that it twisted into distorted caricature of itself so that the pillorying can begin.

This condition is the biggest change in the Commission since I was here last. The SEC under the microscope is a different place.

4. The Fishbowl Under the Microscope Is Under A Cloud

To mangle figures of speech yet again, that fishbowl under the microscope is under a bit of a cloud these days. We're not alone under there: in the aftermath of the meltdown the public is justifiably angry at its government. It has rightly asked why its elected representatives and the financial regulators didn't do a better job in protecting it against collapse. As we all know, there is a lot of anger out there.

I happen to believe that the cycles of public perception about the Commission reflect the underlying realities only in part. The Commission has always been an aggressive and effective regulator — sometimes more so, sometimes less. It is a caricature to say that the Commission was vigorous until the dot com bubble, lax on corporations until the fall of Enron, over-zealous in the immediate aftermath, a threat to national competitiveness thereafter, and a deregulatory patsy in the last few years. The truth, I think, is that the changes at the Commission have been less sudden, that we have never been as good as our public successes or as bad as our failures.

Our recent string of insider trading cases involving hedge funds provides a good example. These are wonderful cases, precisely the type of cases we should be doing. They are a wonderful example of the new SEC. But they are a fine exemplar of the old SEC as well. Cases like this aren't built overnight. They require years of patient, meticulous, investigation. So even while the Enforcement Division was accused by some of being asleep in the hedge fund area, what was really going on was that it was patiently, meticulously, and quietly putting together the biggest insider trading case in a generation.

But then there is Madoff. The plain truth is that the investor's advocate did not protect investors from the biggest Ponzi scheme this country has ever known. There are explanations but there are no excuses. Whatever we might think about some of the complaints that have been leveled against the Commission, the Madoff story has been a blow to the solar plexus.

At the Commission, we all — and I do mean all — understand that our basic job is to win back the confidence of the American people. There are no shortcuts; superb sustained performance is the only way.

Madoff will fade into insignificance only if public consciousness of our shortcomings is supplanted by our accomplishments. So that is what we will have to do.

5. The Commission Is Reinventing Itself

Separate and apart from the Commission's policy goals, we are striving to do what we do better than we have. As we all know, there is no standing still. Institutions either improve or stagnate. Without going through the entire list of measures the Commission is taking, I would like to focus a bit on our newest Division.

I'm not sure that we've given a full explanation of why the Commission created the Division of Risk, Strategy, and Financial Innovation, what, for lack of a more euphonious abbreviation, we call "RiskFin." There are several reasons:

First, given our scarce resources and the press of daily business, we are inevitably focused on the here and now. But we need also to think about next year and beyond. While most of us are working as hard as we can just to keep our heads above water, we need some people to have their heads in the clouds. To put it another way, we need to be actively engaged in considering the Risks that the Commission faces and our Strategies for dealing with them.

Second, while enormous expertise resides at the Commission, we need a center of financial and economic analysis. That center has to keep up with the markets. It must constantly learn the latest trends in market activity and new products, and it much teach what it learns to the rest of us. Markets move at an accelerating trajectory. The current crisis has underscored the necessity for us to keep up with new products and strategies. In other words, someone at the Commission has to keep up with Financial Innovation.

Third, we need to make sure that all our divisions understand the economic and financial significance of what we do. The Commission, after all, is a financial regulatory agency. A job of RiskFin is not only to give to enhance the expertise of the other divisions, but also to be an active participant in our rulemakings and, where appropriate, our enforcement actions as well.

I'm very optimistic that RiskFin will provide a significant enhancement to our capabilities.

In fact, I'm very optimistic about the future of the Commission. I think Chairman Schapiro is making a difference. My colleagues on the staff are better than ever. And so far, Congress seems inclined to enhance our mission in the new regulatory world.

On that note of optimism, I think I'll end. Thanks again for having me here.


Modified: 11/23/2009