SEC Faces Congressional Scrutiny Over Spending, Ethics Questions

Thursday, 10 Mar 2011 06:51 AM

 

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The U.S. Securities and Exchange Commission will come under congressional scrutiny today in a set of hearings ostensibly about the agency’s spending that may detour into explorations of ethical questions surrounding a former general counsel and use of pornography by employees.

House and Senate lawmakers have called SEC Chairman Mary Schapiro and five unit chiefs to Capitol Hill amid Republican efforts to cut their budget by $25 million over the next six months to trim the federal deficit. The House Oversight and Government Reform Committee said it may also “explore current and historical problems with the SEC’s management practices”

The hearings will bring Schapiro and her top lieutenants before lawmakers who have questioned the agency over ex-general counsel David M. Becker’s involvement in SEC policy decisions related to Bernard Madoff’s fraud after he inherited profits from his parents’ holdings with the convicted money manager. Becker stepped down last month after he was sued by the bankruptcy trustee unwinding Madoff’s business.

In prepared remarks for the House Financial Services Committee, the division chiefs and office directors tell lawmakers the agency needs money promised by the Dodd-Frank Act to handle responsibilities imposed by the regulatory overhaul. Even without Dodd-Frank, the SEC’s “tools for collecting data and overseeing markets do not even incorporate readily available technology currently used by those the commission regulates,” Trading and Markets Director Robert Cook said in his statement.

Taking on oversight of hedge fund advisers, over-the- counter derivatives and credit-rating firms “will require significant additional resources or a substantial reduction in the performance,” Schapiro said in her submitted testimony.

Budget Standoff

Federal spending for the current fiscal year -- including the SEC budget -- has been frozen at fiscal 2010 levels by a congressional standoff after Republicans took control of the House on a vow to slash spending.

“This restricted funding has required the SEC to severely restrain any new hiring this year, even to replace staff who leave the agency; to postpone most technology initiatives; and to limit its base mission operations” Schapiro said in her prepared remarks.

President Barack Obama’s 2012 budget, released Feb. 14, seeks a $305 million increase over the SEC’s 2010 level and a 16 percent increase in agency staff.

Republican spending cuts would “dramatically” undermine the SEC’s abilities, said Senator Robert Menendez, a New Jersey Democrat who urged lawmakers not to use the budget to punish the agency for other perceived failings.

“If we don’t have a cop on the beat, then we won’t have integrity in the marketplace,” Menendez told reporters in a conference call yesterday. Menendez is a member of the Senate Banking Committee, which is scheduled to hear from Schapiro.

‘Inexplicable Failure’

In her prepared remarks, Helen Davis Chaitman, a Becker & Poliakoff LLP partner who represents about 500 people who lost money in Madoff’s fraud, points to the agency’s “inexplicable failure” to stop the Ponzi scheme and faults Becker’s work on a legal opinion that victims’ investments should be adjusted for inflation.

“That proposal, if adopted, would certainly have benefited Mr. Becker by reducing his clawback exposure,” she said.

Irving H. Picard, the bankruptcy court trustee unwinding Madoff’s business, is trying to recover $1.5 million of what he called fraudulent profit reaped by Becker and his brothers. Becker, 63, said the lawsuit played no role in his decision to step down last month.

The oversight committee’s hearing may “examine the way management handled 2010’s employee pornography scandal” in which SEC workers accessed online pornography at work, according to the hearing notice.

Darrell Issa, the committee’s chairman, told Schapiro in a Jan.7 letter referring to the matter that she “must terminate employees who perform poorly or violate policies.”


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