Reforming the SEC: Areas of Expertise

One of the problems with effectiveness at the SEC has been the sense that the Agency has been outpaced by developments in the market.  This is a reflection of the growing complexity of transactions and products, with staff having to start investigations with little prior knowledge of the area. 

One of the ideas put forward by the new Division Director, Robert Khuzami, has been to develop areas of expertise.  He has indicated that the Agency will create five speciality areas:

• The Asset Management Unit, which will focus on Investment Advisors, Investment Companies, Hedge Funds, and Private Equity Funds.
• The Market Abuse Unit, which will focus on large-scale market abuses and complex manipulation schemes by institutional traders, market professionals and others.
• The Structured and New Products Unit, which will focus on complex derivatives and financial products, including CDS, CDOs and securitized products.
• The Foreign Corrupt Practices Act Unit.   
• The Municipal Securities and Public Pensions Unit.

In addition, the units will receive special training and efforts will be made to hire persons with "practical market experience."  The changes will be implemented quickly.  On a panel organized by BNA at the end of September, George Canellos, the director for the SEC's New York Regional Office, noted that the positions for unit heads have been posted and that the units should be up and running by year's end. 

In some ways, the idea is a throwback.  The Agency has gone through periods of allowing particular units and branches to develop expertise.  There was a Penny Stock Task Force and the Office of Internet Enforcement.  As Gary Lynch, the former head of the Division, noted in an interview:

• My group, when it was formed in ’78, was called “Changes in Corporate Control” and it was supposed to focus on the Williams Act and proxy cases, which it did, but since most of the insider trading cases related to tender offers and proxy contests, there was a good dose of
  insider trading as well.

In the case of Gary Lynch's branch, there was considerable esprit connected to the effort.  With respect to the Penny Stock Task Force, the impetus came from the Chairman (David Ruder) and was overseen by an Assistant Director and Associate Director.  There was also a high level of coordination with state and criminal authorities.  The Office of Internet Enforcement was operated out of the home office, giving it a higher profile. 

In the case of the current spate of reforms, the details of implementation are not promising.  For one thing, there will be a "Unit Chief," presumably a rank equal to assistant director who will be in one office while the staff under his/her supervision will be strewn throughout the others.  This will make supervision and efforts at cohesiveness difficult.  Indeed, those who apply may do so to affirmatively get out from underneath the current hierarchy of the branch office where they are located.

For another, the effort to hire those with market experience will be no panacea.  The limits on salaries (another argument for self funding) will impede the Commission's ability to hire the very best.  Those lawyers in the private sector who are working on the cutting edge of development will likely command much greater compensation than the Commission can pay.

Nonetheless, there is nothing wrong with the effort.  Certainly the idea that some within the Agency will become more effective by developing expertise in particular substantive areas is hard to object to.  To the extent that the positions become prized in the private sector, that in turn will improve the quality of those seeking the positions within the Agency.