Commissioner Atkins' Critical Comments of the SEC

Commissioner Atkin's term at the SEC expires during the Summer.  He may stay over if the administration does not appoint a replacement.  But if he does depart, the Commission will be losing one of its most vocal critics. 

On February 8, 2008 SEC Commissioner Paul Atkins complained about the lack of predictability within the SEC. This is merely the latest in a long line of critical comments by Commissioner Atkins. Over the past couple of months Atkins has criticized SEC positions on several issues. He states that the basis for his positions is to protect shareholders; however, the benefits to the shareholders are suspect.

In his February 8^th speech Atkins’ laid out two examples where lack of predictability is a concern. First, he believes that the “materiality” issue in securities cases should be more predictable. Specifically, Atkins opposes Staff Accounting Bulletin 99 (SAB 99), which rejected the notion that a financial misstatement is only material if it misstated by more than 5%. His view is in direct opposition to the recent decision in the 10th Circuit in US v. Nacchio where the court found the materiality in SAB 99 persuasive.   

SAB 99 explained that “materiality cannot be reduced to a numerical formula” and that “materiality judgments can properly be made only by those who have all the facts.” The Bulletin also went on to discuss factors to consider when determining materiality. Atkins argues that such a vague standard is counterproductive, as it results in “an avalanche of trivial information,” and that the SEC should return to the “reasonable investor” standard from TSC Industries v. Northway, Inc., 426 U.S. 438 (1976). It is difficult to discern, however, how the reasonable investor standard is any more predictable than the factors and principles laid out in SAB 99. A reasonableness standard by its nature is fluid and rejects hard and fast rules. In fact, SAB 99 actually gives guidance in applying the reasonable investor standard by providing a list of factors for companies to consider.

Atkins’ second area of concern involves corporate penalties and settlements.  He argues that the SEC has been left with too much discretion in determining the amounts.   He did not, however, indicate how the problem should be resolved. Instead, Atkins advocated the use of an internal Enforcement Manual with an “open jacket” policy that would allow defendant-companies to view the evidence the SEC has against it. This policy may make enforcement more predictable, but it does not address the predictability of penalties and settlements.

Atkins also apparently believes that fines are unfair to shareholders, a penalty paid on top of any drop in share prices that result from the fraud.  Yet at the same time he argues that the fines are not steep enough to deter fraud, paling in comparison to private litigation awards.  Moreover, he ignores the value of the fines.  The penalties provide the company with incentive to expose fraud, making individuals less likely to engage in the offending behavior.  And, while it may be true that shareholders of a particular company suffer when fraud is uncovered and fines imposed, it benefits the market as a whole.  

Atkins also rehashed a previous criticism he made of the Commission, the use of credit to encourage companies to waive their attorney-client privilege.  In a speech given on January 18, 2008, Atkins advocated abolishing the credit system that the SEC employs related to attorney-client waivers. Under this system the SEC offers some leniency or “cooperation credits” to companies that waive their attorney-client privilege when the SEC conducts an investigation. Ultimately, he believes employees may refrain from engaging in candid communication with the company’s counsel because of the possibility that the company may waive its privilege.

There is no firm evidence that waiver somehow weakens the privilege.  Moreover, there is no evidence that companies failing to waive are some how penalized.  It is true that the issue is a delicate one and that investigators within the Commission should not be heavy handed in insisting on waiver of the privilege.  But Atkin's complaints are mostly aimed at the principal, not abuses that have arisen from its use.