More Problems at the SEC: Who Regulates the Regulator?

The Securities and Exchange Commission has come under fire once more over its ability to regulate the parties under its watch. This time, the accusations are over possible incidents involving its own employees engaging in misconduct and abuse. These allegations don’t come at a good time for the SEC, which has already been accused of failing to effectively regulate investment firms, failing to prevent Bernard Madoff’s $50 billion ponzi scam, and failing to stop the some of Wall Street’s biggest investment banks from failing.

One allegation, reported in the Washington Post, accuses SEC Deputy Secretary Florence Harmon of using her position at the agency to “intimidate and influence” a Morgan Stanley broker because she disagreed with the way the firm was handling her mother’s account. She allegedly told a bank executive that the broker should have “Googled her” before talking to her. The broker reported Harmon’s behavior to Morgan Stanley and to investigators.

Harmon has reportedly told the SEC that the only reason she identified herself as an SEC employee is because she felt that the broker was making incriminating statements. The SEC’s inspector general has called Harmon’s alleged misconduct a potential violation of agency rules. While the inspector general didn’t name Harmon, another official confirmed that she was the regulator involved in the incident. The inspector general recommended disciplinary action and possible dismissal. Harmon continues her work as a regulator for the SEC.

Another probe accuses a number of SEC enforcement attorneys of trading United Health Group and Citigroup stocks, as well as other companies’ stocks, at about the same time that the SEC began investigating the firms. The SEC employees involved did not properly report the trades, which they are required to do, per agency rules. Still another investigation accuses a leading SEC official of committed perjury, in court and in writing, when talking about attempts to stop short-selling.

The issue of whether the SEC is able to properly deal with possible violations by its own employees-let alone those committed by the members of Wall Street that it regulates-has been under debate for months. US Senator Charles Grassley says the SEC needs a better compliance system to discourage employee misconduct and allow the public to feel confident that incidents of misbehavior aren’t systemic issues.

Meantime, SEC Inspector General H. David Kotz is also recommending new protections to prevent such abuses. In a report he wrote about the suspicious stock trades by SEC employees, which the Washington Post obtained through the Freedom of Information Act, Kotz noted that the agency’s lack of a proper compliance system makes it hard to make sure that staff members don’t also engage in insider trading.

The SEC says it is working on improving its current compliance policies. New changes are to include the hiring of a chief compliance officer, the installation of a computer system that will report trades made by SEC employees, and the clarification of its rules.

Related Web Resources:
Watchdog Digs Into Conduct At SEC, Washington Post, May 17, 2009
Florence Harmon Named Deputy Secretary, SEC, November 7, 2006
H. David Kotz Named New Inspector General at SEC, SEC, December 5, 2007
On Wall Street, misconduct of any kind-whether by a broker, an investment firm, a financial adviser, or a regulator-is wrong and against the law. Contact our stockbroker fraud law firm to discuss your case.

Contact Information