SEC Inspectors Unit Under Fire

Another important provision of the bill would require the SEC to notify the public when an investigation of a particular firm has been completed. While that may not seem like a "big deal," says Finney, "if you're a company and an investor, and you're trying to understand as an investor what's going on with a particular company, not knowing that the SEC has finished an investigation is a piece of info that you need to know." This provision would help increase transparency at the SEC, she says, so that "investors and business are better served." In talks that Finney has had with SEC officials, she believes the commission as a whole understands that more transparency is needed. One recent example of this is the press conference SEC Chairman Christopher Cox and Linda Thomsen, director of enforcement, held in early January announcing the SEC's future practice on levying fines against corporate wrongdoers.

Industry officials also applaud the provision of the bill which would create an ombudsman to act as liaison between the SEC and the firms its oversees. For instance, B/Ds could contact the ombudsman and ask "'What-if' questions, and get a view on what the SEC's position is on certain issues," says FSI's Bellaire, "without fear of immediate enforcement activity as a result." Adds Finney: "When companies are trying to figure out how to comply with SEC rules and regulations, you want to be able to call the SEC and say, 'We're thinking about doing it this way. Does this make sense? What advice do you have for us?'" Rep. Fossella is the brainchild behind the ombudsman, and Finney says Fossella believes that if "businesses are going to be as effective as possible, they ought to have a cooperative relationship with the SEC so they can find out what the regulator's thinking is."

Giachetti agrees that an ombudsman is a good idea, and that it's imperative that there be a mechanism that allows for ongoing communication with the SEC on ways it can improve exams. But the ombudsman idea becomes troubling because if there were ever an enforcement proceeding against an advisor, the bill requires "the ombudsman to turn over any confidential communications that he or she had with the investment advisor." Giachetti adds that in his mind, the SEC, like the IRS, "suffers from an identity crisis." Does the regulator want firms "to self-report?" he asks. "Are they there to help and answer questions? Or are they there to enforce?"

All of the sources interviewed have been engaged in ongoing talks with the SEC and members of Congress about the regulator's examination routines, operations, and its transparency. They agree that the quickest way to resolve the industry's concerns is for the SEC to take action itself, not be forced to take action through legislation. However, as Finney says, "it helps [the SEC] to focus on [how to improve its operations] when members of Congress express their views." The financial services community has been "in a pretty difficult regulatory environment for a long period of time, and I think the companies [that must] comply with the SEC rules want to know what the operating rules of the road are," Finney says. "We've been talking to members of the [House] Financial Services Committee and Senate Banking Committee on ways to improve the SEC's operations to achieve that goal."

The IAA's Tittsworth says there are definitely "parts of the bill that we would support," and that IAA has been talking to "OCIE and SEC commissioners about e-mail and other abuses in the inspection area, or areas where there could be improved processes." FSI's Bellaire says the group plans to visit Rep. Fossella and offer its support. "There needs to be a little more sanity brought to the [SEC exam] process and balance between an understanding of the SEC's need to ensure that the markets are running in an appropriate fashion without harm to investors, and at the same time in an efficient manner allows good, honest businesspeople to run a business without unnecessary costs," Bellaire says. "There definitely is a feeling within the industry that some change is necessary."

An SEC spokesman said that Lori Richards as well as other top SEC officials declined to comment on the legislation. If Congress decides to hold hearings on the matter, that's when the SEC would voice its opinion. That may be Congress's next move.

Washington Bureau Chief Melanie Waddell can be reached at [email protected].