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As Commissioners Go Public With Disagreements, Former SEC Officials Fear Damage to the Agency

The past few years have witnessed a growing tendency among the SEC’s commissioners to go public with their disagreements. According to some former regulators, the practice is a departure from the discretion and confidentiality commissioners adhered to for much of the agency’s existence, and it may be harming the way the public sees the SEC.

In an August 28, 2014, statement that accompanied the announcement of an enforcement settlement, SEC Commissioner Luis Aguilar criticized what he called the regulatory agency’s growing tendency toward light penalties for securities law violations.

The merits of Aguilar’s argument aside, some former top SEC enforcement officials said dissenting statements like Aguilar’s are undermining the agency.

“The speeches and pronouncements from individual commissioners that repeatedly and more frequently on more issues take on the agency… erodes the stature of the agency,” said William McLucas, a partner with Wilmer Cutler Pickering Hale and Dorr LLP, and the head of enforcement from 1989-1998.

McLucas was speaking during the Securities Enforcement Forum 2014 on October 14 in Washington. He said enforcement officials face more difficulty performing their jobs when the commissioners disagree publicly on enforcement issues.

McLucas acknowledged that individual commissioners have the right to speak their minds, but he said that for much of the SEC’s history, the commissioners made more of an effort to present a unified front in public.

“The effort that went into having the commission speak with one voice 20 years ago was dramatically different than it is today,” he said. “The identity of commissioners walking into that agency — Republican, Democrat, conservative, liberal, progressive — some of it seemed to dissipate once they were sworn in… Even when individual commissioners disagreed, they thought the better public policy message was to have the agency speak with one voice.”

“For the longest while, we talked about the commission as a single thing,” said Linda Chatman Thomsen, a partner with Davis Polk & Wardwell LLP, who headed enforcement from 2005-2009. In recent years, the divisions among the commissioners have become more apparent. “People talk about commissioners individually, their individual positions, and that factors into how things are packaged… [which is] not necessarily a good thing.”

Things become more complex when the commission doesn’t speak collectively, and there’s a potential that the make-up of the commission could change every few years, she said.

“Looking forward, the action of this commission can be … dismissed two years from now or marginalized, [making it] very difficult to predict where things are going,” Thomsen said.

Aguilar’s dissenting statement was prompted by the settlement of an alleged revenue inflation scheme by the former CEO and CFO of Affiliated Computer Services (ACS), a Dallas company that has since been bought by Xerox Corp. To settle the SEC’s charges, the former executives agreed to fines. (See Commissioner Aguilar Criticizes Lenient Penalties Against Accountant in Financial Reporting Misconduct in the September 2, 2014, edition of Accounting & Compliance Alert .)

Aguilar said former ACS CFO’s Kevin Kyser “egregious conduct” justified a punishment for a fraud violation and a suspension from doing accounting work for a public company as defined by Rule 102 (e) of the SEC’s rules of practice.

Kyser’s lawyer didn’t respond to a request for a comment.

Aguilar also criticized the general decline in the number of financial reporting and disclosure enforcement cases to 68 in the fiscal year that ended September 30, 2013, from 117 in fiscal 2010.

In July 2013, the SEC formed a Financial Reporting and Audit Task Force. An SEC summary of its enforcement activity for fiscal 2014, which ended September 30, said the agency had filed 135 fraud cases for financial reporting and disclosure violations.

“It’s very difficult to navigate the commission process, given how polarized the commission is now and has been over the last few years,” said George Canellos, a partner with Milbank, Tweed, Hadley & McCloy LLP and the co-head of enforcement from April 2013 until January 2014.

The partisanship that’s been so damaging on Capitol Hill in recent years has become a factor in SEC proceedings and interfered with commissioners’ ability to impose sanctions, Canellos said.

As much as the former SEC officials lamented the tendency to go public with disagreements, none of them expect the trend to be reversed in the near future.

“Individual commissioners feel free to assert individual views on various topics,” said Thomas Gorman, a former SEC senior attorney and now a partner with Dorsey & Whitney LLP, on October 17. “In some ways this encourages a candid discussion on various topics in my view. At the same time, it may detract from the effectiveness of the agency. I doubt, however, that we are about to return to the one voice approach of earlier years.”