The appointment of Mary Schapiro to the SEC reminds me of The Carpenters classic, "We've only just begun." How's that for a boomer reference?
What are some of the "horizons that are new to us" that the chairman is now sharing? She recently wrote legislators saying there should be tougher capital requirements for broker/dealers, that hedge funds require oversight and regulated financial products must now come under the agency's thumb. FINRA has asked certain broker/dealers about the extent of investment advisory and hedge fund businesses associated with them. They must report back immediately.
And, if there still is uncertainty about how far the SEC will reach, Rule 151A, which added indexed annuities to the definition of a "security," took effect on Jan. 16.
Watching the signs along the way sheds light on what lies ahead. Auditors of broker/dealers will be registering with the Public Company Accounting Oversight Board. Not that the PCAOB presently has any regulatory authority to look into their audit work, but registering thousands of firms will, at a minimum, start the engines of the Quality Control staff rewriting the books on auditing all financial service providers. Congress can't wait to throw more money to the FBI for more agents to launch the next great Wall Street crackdown. Perp walks are a powerful deterrent, particularly when the previously untouchables begin to feel metal bracelets around their wrists.
Last time, the Skillings, Ebbers and Rigases scripted a rewrite of federal sentencing guidelines, creating a legacy for corporate miscreants to be longer in prison than many narcotics traffickers. So, why not ratchet up the numbers even more? Even the SEC stands to be a beneficiary of Congressional largesse for more enforcement lawyers, despite a more widely-recognized need and higher priority for investment in technology for sophisticated surveillance and analytical tools. And, will there emerge a new private regulator for hedge funds, to sit beside FINRA and the PCAOB?
What are the early messages providing a guide to some of the many roads to choose? On Dec. 2, the SEC issued a letter to the CEOs of all SEC-Registered Firms, albeit unlikely with return receipt requested, as a reminder that reductions and cost-cutting measures in these challenging financial times cannot include compliance programs and functions. There is an obligation to maintain a compliance program reasonably designed to ensure compliance with the law. Investment professionals should, as the letter set forth, "pay attention to ensuring that their interactions with investors meet high standards, that sales and trading practices are appropriate, that financial, valuation and risk controls are followed, and that all disclosure obligations are met." How prescient that the letter preceded by just nine days the start of Madoff Madness. Rest assured, Bernie and the four Ponzi scheme cases brought by the SEC in the six weeks since made certain that these will not be empty words and certain additions to inspection checklists.
Unfortunately, history dictates that financial services regulators will overreact to prove that they are up to their inspections and enforcement task. Matters which months ago would (or should) have warranted a slap or no-action for taking appropriate corrective measures may now become a one-way ticket out of the industry. Even for those who always have been law abiding, the road will be bumpy.
And yes, we've only just begun.
Jacob S. Frenkel is a partner in the law firm Shulman, Rogers, Gandal, Pordy & Ecker, P.A. in Rockville, Md. He is a former SEC Enforcement lawyer and former federal prosecutor who chairs his law firm's Securities Enforcement and White-Collar Criminal Practice Group.
