Report on the Current Enforcement Program of the Securities and Exchange Commission

March 2006

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Executive Summary

The Securities and Exchange Commission (the SEC or Commission) has primary responsibility for maintaining the health and competitiveness of our capital markets. It has been and is regarded as a strong steward, promulgating well-considered regulation and carrying out fair enforcement. As a result, the U.S. capital markets have attracted trillions of dollars of investment from both domestic and foreign sources, and all aspects of our economy have benefited.

Over the last few years, as a result of a tremendous crisis in confidence in U.S. corporations, the Commission's policies and procedures have become subject to external pressures that threaten to have, or in fact have had, a negative effect on the fundamental fairness of certain aspects of the enforcement program. Concern has been expressed from many quarters about increased lack of clarity in standards of conduct and a move toward an overly punitive approach to enforcement. Such developments could be detrimental to the Commission, to the interests of the investors it is to serve, and to the capital markets that it is mandated to enhance.

The U.S. Chamber of Commerce (the Chamber), which represents the interests of more than 3 million businesses and organizations of every size, sector, and region, strongly believes that the U.S. capital markets are the lifeblood of our economy— and that sound regulation and enforcement are needed to help our markets remain healthy and competitive. Many of the Chamber's members have expressed the same concerns referenced above. In order to move away from argument by anecdote, the Chamber asked David Andrews, retired senior vice president for government affairs, general counsel, and secretary for PepsiCo Inc., to review the current SEC enforcement program and make recommendations for improvements. To support his review, Mr. Andrews engaged Bruce Hiler, chair of the Securities and Financial Institutions Regulation Department at Cadwalader, Wickersham & Taft and a former associate director of the SEC's Division of Enforcement. In addition to extensive legal research, this report is informed by interviews with over 35 securities practitioners, academics, and general counsels and corporate secretaries from public companies, including former SEC commissioners and staff members. It is intended to be a thoughtful and responsible examination of the issues presented in this critical area.

On pages 7–9, the report makes recommendations concerning both the investigative process and certain policies pursed by the Commission in assessing whether to bring an enforcement action and what the appropriate sanctions should be. It is recommended that the Commission appoint an Advisory Committee to study its enforcement processes and that the Commission review the reasons for a wave of recent litigation losses. In those recent losses, administrative law judges and courts have been critical of the SEC's legal and factual analysis or positions. The report greatly applauds the Commission's recent efforts to clarify its standards for seeking fines against public companies for securities law violations caused by individual employees, and suggests further clarification as it gains experience in applying those standards. In addition, it recommends that the SEC make clear that waiver of attorney-client privilege is not required in order to be viewed as cooperative in its investigations, and calls upon the SEC to stop entirely the practice of imposing fines on corporations for perceived lack of cooperation. The report also calls for the commissioners to be involved in determinations concerning the appropriateness of criminal referrals and criminal investigations of securities law violations, and to make clear that goodfaith reliance on the involvement of attorneys and accountants in corporate transactions and disclosure decisions will be viewed as relevant to the Commission's enforcement decisions, in accord with federal court decisions.

It should be emphasized that a critical examination of enforcement policies and procedures does not imply—and should not be construed as implying—any support for businesses or individuals that engage in improper conduct. It is critical for the health and welfare of our capital markets that the SEC have a strong and vigorous program of enforcement that punishes and removes bad actors from the stage. However, it also has to be acknowledged that enforcement that burdens good, responsible companies will have extremely negative effects on our markets. This report is simply intended to help the SEC to avoid that outcome.

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