Among the agencies largely closed by the current partial U.S. federal government shutdown is the U.S. Securities and Exchange Commission (SEC). In the following guest post, John Reed Stark, President of John Reed Stark Consulting and former Chief of the SEC’s Office of Internet Enforcement, takes a look at what the SEC’s closure means for the processes and responsibilities that constitute the agency’s watch. Stark calls on the country’s political leaders to end the stalemate and re-open the government, including the SEC. Every day the shutdown continues, and the SEC staff remain at home, Stark says, the risks to U.S. markets increase. A version of this article originally appeared on Securities Docket. I would like to thank John for allowing me to publish his article as a guest post. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is John’s article.
**********************************
“Due to a lapse in appropriations for the federal government, the U.S. Securities and Exchange Commission is currently closed. I am currently out of the office, and will return to the office once an appropriation has been enacted. During the closure, I will not be monitoring or responding to my emails. (It would be unlawful for me to do so.)”
This is the typical email auto-reply of SEC staff members who are currently furloughed during the shutdown – and it is not an exaggeration. This SEC work restriction is ironclad, codified in the SEC’s 2018 “Operations Plan Under A Lapse In Appropriations And Government Shutdown,” which states:
“During the shutdown, employees who have not been designated as excepted may not volunteer to work without pay. Such voluntary services are a violation of the Antideficiency Act and will not be permitted under any circumstances.”
The Antideficiency Act mandates that SEC employees must turn off mobile phones, ignore email and keep their government-issued laptops closed during the federal shutdown. Enacted in the shadow of the Civil War after federal agencies flouted the U.S. Constitution’s prohibition on drawing money from the Treasury without “appropriations made by law,” the Antideficiency Act prohibits executive branch officials from authorizing future spending before Congress has appropriated the money to federal agencies like the SEC.
In accordance with the Antideficiency Act, only 5.8% of SEC staff, some 286 or so people, by virtue of an internal (and subjective) classification scheme, have been deemed “vital to a basic level of government functioning” and though not paid, must still report to the SEC for work in a bizarre constraint of involuntary servitude.
SEC enforcement resources in particular have become dramatically depleted. Per a January 15th article in Quartz:
This 94% diminution of SEC resources is staggering and should alarm even the most conservative financial experts. Critical to U.S. market safety, integrity, transparency and triumph is the omnipresence of a robust, responsible, dogged and vigilant SEC.
The SEC’s mission, formulated some 85 or so years ago, is to protect investors; to maintain fair, orderly, and efficient markets; and to facilitate capital formation. Along these lines, the SEC oversees a mammoth portfolio of regulatory responsibilities.
This article presents a rundown of just a few of these many critical SEC functions, illuminating the shutdown’s ill-fated, perhaps even disastrous impact upon the U.S. financial marketplace should the SEC remain in shutdown mode for much longer.
Enforcement Investigations
The SEC enforcement division primarily supports the SEC’s mission by investigating and bringing actions against those who violate the federal securities laws. By vigorously enforcing these laws, the enforcement division furthers the SEC’s efforts to deter, detect, and punish wrongdoing in the financial markets, compensate harmed investors, and maintain investor confidence in the integrity and fairness of our markets.
Prior to the shutdown, the SEC enforcement division, often considered the crown jewel of the SEC, was already substantially depleted. For one, SEC personnel resources were down dramatically. Due to budgetary constraints, the SEC lost many of its contracted legal support personnel and given an agency-wide hiring freeze, the SEC has been severely limited in its ability to replace employees who have departed.
Notwithstanding budgetary reductions and freezes, FY 2018 still reflected a high level of activity by the SEC enforcement division. The SEC brought 821 actions (490 of which were “stand alone” actions) and obtained judgments and orders totaling more than $3.9 billion in disgorgement and penalties. Significantly, the SEC also returned $794 million to harmed investors, suspended trading in the securities of 280 companies, and obtained nearly 550 bars and suspensions. By these raw metrics, the SEC’s overall results improved compared to FY 2017. Do not expect a similar increase in 2019, rather expect a noteworthy decrease because of the shutdown.
During the federal shutdown, just a limited number of SEC enforcement staff remain on duty to handle only “emergency” enforcement matters, including temporary restraining orders; investigative steps necessary to protect public and private property; and ongoing litigation that cannot be deferred where there is a threat to property.
While this emergency posture sounds rational, it is basically a subjective and chaotic paradigm of impossible choices. Though SEC staff will clearly do their best, those conducting the triage on leads and investigations to determine which matters are “emergencies” would be the first to admit the absurdity of their process.
First off, just about every SEC investigation has an air of urgency and danger, because 99% of them involve a victim who may have lost, or is about to lose, their life savings. What standard should be applied? By what quantitative or qualitative measure can anyone determine whether a particular set of possible facts constitutes an emergency? Undertaking such a flawed process will inevitably yield capricious results. In short, it is pin-the-tail-on-the-donkey meets Alice in Wonderland.
Second, SEC enforcement cases are complex, involving dozens of witnesses and gigabyte’s, sometimes even terabytes, of data, including intricate financial documents, voluminous trading records, sophisticated spreadsheets, lengthy email chains, countless texts and a broad array of other electronic and paper evidence. To gather facts and determine any illegalities, SEC enforcement staff also conduct numerous witness interviews and testimonial proceedings during every investigation. Pouring over this mountain of data takes time, and sometimes the dire nature of an ongoing fraud is not discovered until after months of investigation (and vice versa). To make such an initial determination of exigent circumstances, and render such a rush to judgment, will lead to false starts, wasted time and squandered resources. A noble attempt yes – but a folly notwithstanding.
It is not surprising that the SEC has only filed one civil action in federal court since the shutdown began, which was a parallel action brought alongside the U.S. Attorney’s Office for the District of New Jersey. (The matter involved charges against nine defendants for participating in a previously disclosed scheme to hack into the SEC’s EDGAR system and extract nonpublic information to use for illegal trading.)
Finally, for those matters designated as “emergencies,” during the shutdown, the SEC still lacks adequate resources to act as quickly and efficiently as usual. By definition, emergency matters typically require a large team of attorneys, financial analysts, accountants, technologists, economists and a litany of other market experts. Meanwhile, the evidence gathering phase of an SEC investigation is typically massive in scope, yet the team must act quickly and methodically to stop frauds before investors become further victimized. The current skeleton crew of SEC professionals lacks the experience, depth and range of the typical SEC investigative squad, and is undoubtedly sluggish and hobbling at best.
Even the simplest SEC emergency actions, like those involving unlawful insider trading, where the suspects are typically fewer, the record typically smaller and the facts typically a bit more straight-forward, will be ineffectual. As one former SEC Assistant Director and securities regulation scholar noted, “[Although every trade creates a record], somebody abroad could make illicit trades and send the proceeds overseas, and it’s going to be very hard to get that money back later. Those cases have to be addressed with very quick asset freezes that effectively can’t happen now.”
Enforcement Litigation and Administrative Proceedings
Just about all SEC litigation and administrative proceedings must now pause indefinitely. To put this in perspective, in 2018 alone, the SEC filed close to 500 enforcement actions typically involving multiple parties and entities, which together with the hundreds (perhaps thousands) of ongoing SEC enforcement actions filed in prior years, is a colossal amount of litigation to suddenly discontinue.
The SEC freeze of federal actions a has already begun. For instance, in SEC v. Dwayne Edwards, et al., No. 17-cv-393 (D.N.J. filed Jan. 20, 2017), SEC litigator Lee Greenwood filed a January 4, 2019 letter with a federal court in New Jersey informing the judge that the SEC believes the case must cease due to a December 27th, 2018 New Jersey Federal Court Order titled “Stay of Civil Matters Involving the United States as a Party,” otherwise known as Standing Order 18-4.
Standing Order 18-4, entered by Chief New Jersey District Judge Jose Linares, asserts that a stay is appropriate in the interests of justice and effectively pauses most civil litigation involving the United States, stating:
“Absent an appropriation, the United States represents that certain Department of Justice attorneys and employees of the federal government are prohibited from working, even on a voluntary basis, except in very limited circumstances . . . including ‘emergencies involving the safety of human life or the protection of property . . . Therefore the lapse in appropriations requires a reduction in the workforce of the United States Attorney’s Office and other federal agencies, particularly with respect to prosecution and defense of civil cases . . . “The court, in response, and with the intent to avoid any default or prejudice to the United States or other civil litigants occasioned by the lapse in funding, enters this order.”
The same goes for SEC administrative proceedings, i.e. matters that the SEC enforcement division files in the SEC’s administrative court, rather than in U.S. federal court. On January 16, 2019, the SEC issued an order halting all SEC administrative proceedings during the shutdown.
Never in SEC history has there occurred such a dramatic disruption of all active SEC enforcement actions. The known and unknown consequences of such a national enforcement withdrawal are unprecedented and will only become worse as the shutdown continues.
One thing for certain, the backlogs created by the SEC shutdown may take months or even years to clear out.
Examination and Auditing of SEC Regulated Entities
With approximately 1,000 staff in the Commission’s 11 regional offices and headquarters, the SEC’s Office of Compliance, Inspections and Examinations (OCIE) is responsible for overseeing more than 13,200 investment advisers, approximately 10,000 mutual funds and exchange traded funds, roughly 3,800 broker-dealers, about 330 transfer agents, 7 active clearing agencies, 21 national securities exchanges, nearly 600 municipal advisors, the Financial Industry Regulatory Authority (FINRA), the Municipal Securities Rulemaking Board (MSRB), the Securities Investor Protection Corporation, and the Public Company Accounting Oversight Board.
To oversee this vast number of financial firms, OCIE formulated the SEC’s National Exam Program (NEP). The NEP’s mission is to protect investors, ensure market integrity and support responsible capital formation through risk-focused strategies that: (1) improve compliance; (2) prevent fraud; (3) monitor risk; and (4) inform policy. The results of the NEP’s examinations are used by the SEC to inform rule-making initiatives, identify and monitor risks, improve industry practices and pursue misconduct. To carry out the NEP, OCIE, in FY 2018 alone, conducted over 3,150 examinations.
During the shutdown, except for emergency situations, OCIE has essentially halted all of its NEP-related operations.
The risks created by OCIE’s cessation of the NEP and alleviation of its critical market oversight responsibilities defy characterization. A vigilant and ubiquitous OCIE is a key component of financial industry compliance. Without OCIE oversight during the shutdown, it is only natural that regulatory compliance will slack and deteriorate. And the longer the lack of federal supervision, the more likely industry misconduct will propagate.
Whistleblowers
The SEC has one of the most robust, responsive, intricate and innovative whistleblower operations in all of government. Since August 2011, the Commission has received over 28,000 whistleblower tips, and in FY 2018 alone, received more than 5,200 tips.
The SEC is authorized by Congress to provide monetary awards to eligible individuals who come forward with high-quality original information that leads to an SEC enforcement action in which over $1,000,000 in sanctions is ordered. The range for awards is between 10% and 30% of the money collected.
The SEC has awarded over $326 million to 59 individuals since the beginning of the whistleblower program. In FY 2018 alone, the SEC awarded more than $168 million in whistleblower awards to 13 individuals whose information and cooperation assisted the SEC in bringing successful enforcement actions. This amount exceeds the total amount awarded in all prior years combined and reflects the significance of the information that whistleblowers are reporting to the Commission.
The table below, taken from the 2018 SEC Whistleblower Report to Congress, lists the number of whistleblower tips received by the SEC on a yearly basis since the inception of its whistleblower program.
Per the SEC shutdown plan:
“The Division of Enforcement will have only a limited number of staff on duty to perform critical functions. However, staff will attempt to respond to certain critical matters, including allegations of ongoing fraud and misconduct. The Tips, Complaints, and Referrals website will continue to be operational and submissions will be reviewed for appropriate action.”
This means that the SEC is conducting a cursory and rapid-fire triage on whistleblower tips, where only a select few of the most detailed and ongoing frauds are referred for further investigation. Then once referred, the leads are likely forwarded to a few overwhelmed “essential” enforcement staff members who will somehow attempt to investigate any tips considered of an “emergency” nature (as described above).
In addition, the SEC’s whistleblower hotline is effectively dead. During FY 2018, the SEC’s Office of the Whistleblower (OWB) returned nearly 2,770 phone calls from members of the public on their whistleblower hotline. Since the hotline was established, OWB has returned over 21,380 calls from the public. That phone line now goes to voicemail, which no one at the SEC will listen to until after the shutdown (listen to the voicemail here, or listen by calling the hotline directly at (202) 551-4790).
Alongside the OWB, the SEC’s Office of Investor Education and Advocacy (OIEA) receives investor complaints from members of the public (not the same as whistleblower tips, which are reviewed by OWB). During the shutdown, OIEA has a limited number of staff on duty to review investor complaints submitted through the SEC’s investor complaint form (which is different from the whistleblower form) but is unable to respond to investor complaints, questions, or requests for information.
Clearly, during the shutdown, SEC tips and consumer complaints are descending into a black hole, where, given their growing backlog, these crucial and historically fruitful leads may never receive the appropriate level of attention that they require.
Surveillance
Per the SEC shutdown procedures, the SEC claims to be performing so-called “MarketWatch” activities, i.e. monitoring market technology operations; monitoring any broker-dealers reported as being in financial distress; money market fund surveillance and monitoring; and monitoring any international market developments that might impact the US. However, this so-called monitoring is extremely minimal and severely technologically limited. Yes, there may be a lone SEC staffer sitting in the SEC’s Office of Market Intelligence computer lab, who might notice a problem at an SEC regulated entity, but there are few SEC staff actually available to take action should a problem arise.
Moreover, that the SEC conducts actual primary surveillance of capital markets is a myth. The SEC, while serving as the principal federal securities regulator, actually delegates some degree of regulatory authority, including market surveillance responsibilities, to the various Self-Regulatory Organizations (SROs) such as the Financial Industry Regulatory Authority (FINRA) and the various securities exchanges. This is the good news because SROs are self-funded and not impacted by the shutdown. But, unfortunately, there is also bad news.
Despite the surveillance delegation, the SEC retains a vital secondary surveillance role, receiving, reviewing and acting upon SRO referrals of potential unlawful activity such as insider trading, market manipulation and other forms of securities fraud.
Sending referrals to the SEC is big business for the SROs. For example, FINRA has legions of employees dedicated to market surveillance and fraud detection. FINRA even has its own Office of the Whistleblower to receive complaints, tips and referrals from the public. Coordinating closely with the SEC and other federal and state regulators has evolved into an important part of FINRA’s regulatory work, and in 2017, FINRA referred a whopping 855 matters to the SEC and other federal or state law enforcement agencies for investigation.
FINRA referrals are significant in depth and detail, and can take months to generate, representing countless hours of teams of FINRA attorneys, examiners, analysts, technologists and other experts, pouring over reams of trading data, financial documents, emails, texts, interviews and testimony.
The intake of FINRA and other SRO referrals is an important responsibility of the SEC’s enforcement division and, given the shutdown rules limiting the SEC to only acting on “emergencies,” most, if not all, SRO referrals are likely piling up, barely reviewed and wholly unaddressed.
Public Companies
EDGAR, the SEC’s Electronic Data Gathering, Analysis, and Retrieval system, performs automated collection, validation, indexing, acceptance, and forwarding of submissions by the 3,600+ public companies and others who are required by law to file forms with the SEC. Its primary purpose is to increase the efficiency and fairness of the securities market for the benefit of investors, corporations, and the economy by accelerating the receipt, acceptance, dissemination, and analysis of time-sensitive corporate information filed with the agency.
Since the EDGAR system is operated pursuant to a contract, EDGAR can remain fully functional as long as funding for the contractor remains available through, what the SEC shutdown protocol refers to as “permitted means” (whatever that actually portends is unclear). Thus, SEC personnel can for now process requests for EDGAR access codes and password resets; answer questions about fee-bearing EDGAR filings and other emergency questions regarding EDGAR submissions. But these are merely perfunctory, technical and non-substantive functions.
The SEC Divisions of Corporation Finance, Investment Management, and Trading and Markets are not processing filings, providing interpretive advice, issuing no-action letters or conducting any other routine activities. As a result, the SEC is not managing new or pending registration statements or applications for exemptive relief regardless of the status of any review of those filings. This limitation obviously has a serious impact on the operations of U.S. public companies.
IPOs
Historically, an initial public offering, or IPO, has referred to the first time a company offers its shares of capital stock to the general public. Under the federal securities laws, a company may not lawfully offer or sell shares unless the transaction has been registered with the SEC or an exemption applies.
To register an offering, a company files a registration statement with the SEC, typically using Form S-1. Some offerings may involve other registration statement forms. An important part of this registration statement is the “prospectus” that will be used by the company to solicit investors. The prospectus is the offering document describing the company, the IPO terms and other information that an investor may use when deciding whether to invest.
Registration statements for IPOs are subject to review by the SEC’s staff to monitor compliance with applicable disclosure requirements. In such reviews, the SEC staff concentrates on disclosures that appear to conflict with SEC rules or the applicable accounting standards and on disclosure that appears to be materially deficient in explanation or clarity. The SEC staff ’s review often results in revisions to the prospectus.
Once any SEC staff comments have been addressed, the SEC staff will issue an order declaring the registration statement effective, which means the company may proceed to consummate its IPO. (As an aside, the SEC’s review is not merit based but instead is process based. Therefore, although the staff will not declare a registration statement effective if the staff has reason to believe that the disclosure is incomplete or inaccurate in any material respect, the SEC’s declaration of effectiveness does not represent an approval of the merits of the IPO or an indication that the information disclosed is complete or accurate.)
During the shutdown, the SEC is not conducting IPO reviews, effectively shuddering the IPO marketplace, and thwarting the IPOs of some highly anticipated companies such as Uber, Lyft, Airbnb and Pinterest.
This freeze in the IPO pipeline applies to all business sectors, and will undoubtedly result in a litany of ripple effects. IPOs that are currently under SEC review are stuck for now, while their financial statements become “stale.” For example, when companies aim to price IPOs in January or early February of 2019, they will typically use financial results through the third quarter of 2018. By mid-February, those results become stale, and the companies must provide fourth-quarter numbers, which require auditing, certification, etc. and can severely slow the pace, and increase costs, of an IPO.
For IPOs submitted during the shutdown, their review will likely experience delays in the SEC’s typical review timeline, which generally come 30 days after the initial filing and 10 days after subsequent filings – creating more disruption and upheaval.
Proxy Season
The SEC each winter handles a flurry of requests from corporations to keep unwanted initiatives off the proxy ballots that every public company is required to put before its stockholders.
Typically, companies looking to exclude certain proposals can request so-called no-action letters from the SEC promising that the SEC would not recommend enforcement action if the company opts to exclude the proxy vote. Among other reasons, proposals can be excluded if they have been voted on before by a company’s shareholders; if they are deemed to not be economically relevant to a company’s performance; or if they do not relate to a company’s core business activities.
For example, according to the Wall Street Journal, Apple Inc. recently received SEC permission to exclude a shareholder proposal from its March 1, 2018 annual meeting that would have established a board of directors committee on social and environmental issues. Apple’s request was approved before the government shutdown. Other typical excluded proxies include disclosure of political contributions and lobbying; shareholder special meeting rights; climate change disclosures and antidiscrimination and diversity initiatives.
Proxy season is rapidly approaching, and many corporate boards will begin meeting to choose which shareholder proposals to list on their proxy statements for annual shareholder meetings. If the SEC remains shutdown, corporations will have to move forward on their proxies without any guidance from the SEC, perhaps forcing them to put to a shareholder vote thorny social and political proposals that they oppose, incurring a level of unanticipated and heretofore unquantified level of risk and uncertainty.
Rule-Making
Rulemaking is the process by which federal agencies implement legislation passed by Congress and signed into law by the President. In addition, an agency may engage in rulemaking to update rules under existing laws, or to create new rules within existing authority that the agency believes are needed. For the most part, the SEC’s authority to issue rules derives from what are generally referred to as the Federal Securities Laws: the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Investment Advisers Act of 1940.
Newer laws, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, also give rulemaking authority and require some specific rulemaking by the SEC. For example, over the past decade, the SEC has adopted final rules for 67 mandatory rulemaking provisions of the Dodd-Frank Act.
To ensure that the intent of Congress is carried out in specific circumstances — and as the securities markets evolve technologically, expand in size, and offer new products and services — the SEC engages in rulemaking. Rulemaking can involve several steps: concept release, rule proposal, and rule adoption.
Concept Release: The rulemaking process usually begins with a rule proposal, but sometimes an issue is so unique and/or complicated that the SEC seeks out public input on which, if any, regulatory approach is appropriate. A concept release is issued describing the area of interest and the SEC’s concerns and usually identifying different approaches to addressing the problem, followed by a series of questions that seek the views of the public on the issue. The public’s feedback is taken into consideration as the SEC decides which approach, if any, is appropriate. Per the SEC Shutdown Plan, the SEC continues to accept comment letters during the federal government shutdown. However, the SEC will have an extremely limited number of staff members on duty, so there will be delays in their review and even in posting them to the SEC website.
Rule Proposal: The SEC publishes a detailed formal rule proposal for public comment. Unlike a concept release, a rule proposal advances specific objectives and methods for achieving them. Typically the SEC provides between 30 and 90 days for review and comment. Just as with a concept release, the public comment is considered vital to the formulation of a final rule.
Rule Adoption: Finally, the SEC Commissioners consider what they have learned from the public exposure of the proposed rule, and seek to agree on the specifics of a final rule. If a final measure is then adopted by the SEC, it becomes part of the official rules that govern the securities industry.
SEC Rule-making is typically a tedious, lengthy and exhaustive process, rooted in the public comments the SEC receives during any rule’s initial proposal period. This is how the SEC insures that its regulatory pronouncements consider all points of view and are assured the most transparent and deliberative process. For instance, the SEC’s standards of conduct package proposal, also known as Regulation Best Interest, was approved by the SEC in April 2018 and garnered more than 6,000 comments.
During the shutdown, the SEC staff has discontinued all non-emergency rulemaking, leaving financial firms in a state of limbo with respect to their upcoming regulatory responsibilities, which require preparation and planning. For instance, the SEC was aiming to issue its final rule on Regulation Best Interest by September, 2019, but now that all rule-making is effectively on hold during the shutdown, Regulation Best interest’s enactment timeline will likely experience a delay.
Investment Advisers
The SEC’s Investment Adviser Registration Depository (IARD) maintains current information electronic filing and related information for SEC Registered Investment Advisers and SEC Exempt Reporting Advisers. Like EDGAR, IARD is operated pursuant to a contract and thus will remain fully functional and will continue to accept filings as long as funding for the contractor remains available through “permitted means.”
However, OCIE is not approving applications for registration by investment advisers; and the Division of Investment Management is not providing interpretive advice regarding the Advisers Act, rules, or forms, or consider applications for exemptive relief under the Advisers Act. As a result, the SEC is not processing new or pending investment adviser applications, slowing the growth and expansion of an important component of the U.S. capital marketplace.
Transfer Agent Registration System
Transfer agents record changes of ownership, maintain the issuer’s security holder records, cancel and issue certificates, and distribute dividends. Because transfer agents stand between issuing companies and security holders, efficient transfer agent operations are critical to the successful completion of secondary trades. Section 17A(c) of the 1934 Act requires that transfer agents be registered with the SEC, or if the transfer agent is a bank, with a bank regulatory agency.
There is no SRO that governs transfer agents. The SEC therefore has promulgated rules and regulations for all registered transfer agents, intended to facilitate the prompt and accurate clearance and settlement of securities transactions and that assure the safeguarding of securities and funds. The rules include minimum performance standards regarding the issuance of new certificates and related recordkeeping and reporting rules, and the prompt and accurate creation of security holder records and the safeguarding of securities and funds. The SEC also conducts inspections of transfer agents.
Though the SEC’s Transfer Agent Registration System continues to accept filings, the SEC’s Division of Trading and Markets and OCIE are not reviewing pending filings, considering new or pending applications or registrations, providing interpretive advice, or issuing no-action letters, nor is OCIE likely conducting any transfer agent exams or audits.
The transfer agent industry thus becomes yet another crucial financial business abruptly downgraded to a regulatory standstill.
Looking Ahead
Conservative pundit Ann Coulter recently analogized the government shutdown as nothing more than the closing of the gift shop at Yosemite National Park. If only Ann Coulter were right.
As of now, the SEC has just 286 of its 4,436 employees on the clock, while the risks to the stability and prosperity of the U.S. financial marketplace continue to grow. Our country needs the many dedicated and hard-working SEC lawyers, accountants, analysts and other professionals back at their desks, protecting investors and fostering economic growth.
Oft misunderstood, the SEC is seen by some as a technologically automated giant. In stark contrast, the SEC is rather an agency whose primary asset is its people, a unique cadre of experts who come to work every day honored and thrilled to serve as the investor’s advocate. Indeed, despite having undergone budgetary cuts and a depleted workforce, the SEC has forged forward achieving exceptional results, especially its enforcement and examination divisions, who must now manage the rapidly emerging threat of cyber-attacks.
Of course, like any organization, the SEC has endured their fair share of weak managers who prioritize process over mission and rogue or lay-about employees, who embarrass colleagues with their laziness or chicanery. How could anyone forget the SEC failures involving the fraud of Bernie Madoff and the larceny of Enron. But since then a refreshed and invigorated SEC leadership has streamlined operations; improved efficiency; re-doubled their examination and enforcement efforts and emerged a far stronger, leaner and exemplary government organization.
Just ask anyone who has ever worked with, or fought against, the SEC, and they will acknowledge that for the most part, the SEC is comprised of an extraordinarily talented team of committed, enthusiastic, well-respected and diligent public servants who deserve better.
Having served at the SEC for almost 20 years under multiple Republican and Democratic administrations, I have always marveled at the ability of the SEC staff to cast their politics aside, put their heads down and do their jobs. In keeping with its apolitical tradition, I would relay the following messages to the President and the Speaker:
To Speaker Pelosi: We get that you won back the House and that you are a force of nature. Battling for the rights of those who cannot fight for themselves is a valiant undertaking indeed, and we admire that about you. But you have also proclaimed on many occasions that you are a “master legislator.” It is time to act like one and find common ground to put SEC staffers back to work, protect investors and stabilize the U.S. financial marketplace.
To President Trump: We get that you made border security the lynchpin of your campaign and that you keep your promises. Keeping campaign promises is a lost art, and we admire that about you. But you literally wrote the book on the “Art of the Deal.” It is time for you to broker a deal to get the SEC back to work and put the financial cops back on the beat.
Every day the shutdown continues, and the SEC staff remain at home, the risks to U.S. markets increase. This is not akin to closing a gift shop at Yosemite during the dead of Winter, it is more akin to closing the neighborhood police station during a power outage, and if it continues, could have disastrous consequences for us all.
_________________________________________
John Reed Stark is president of John Reed Stark Consulting LLC, a data breach response and digital compliance firm. Formerly, Mr. Stark served for almost 20 years in the Enforcement Division of the U.S. Securities and Exchange Commission, the last 11 of which as Chief of its Office of Internet Enforcement. He has taught most recently as Senior Lecturing Fellow at Duke University Law School Winter Sessions and is teaching a cyber-law course at Duke Law in the Spring 2019 semester. Mr. Stark also worked for 15 years as an Adjunct Professor of Law at the Georgetown University Law Center, where he taught several courses on the juxtaposition of law, technology and crime, and for five years as managing director of global data breach response firm, Stroz Friedberg, including three years heading its Washington, D.C. office. Mr. Stark is the author of, “The Cybersecurity Due Diligence Handbook.”