SEC Details Its Actions to Protect Investors and the Markets During the Credit Crisis

By James Eccleston

n the midst of the current turmoil in the credit markets, the Securities and Exchange Commission (SEC) has published a lengthy list of accomplishments (with helpful links) to protect investors and the markets. The SEC divides its accomplishments into three broad categories: (1) "Aggressively Combating Fraud and Market Manipulation Through Enforcement Actions"; (2) "Taking Swift Action to Stabilize Financial Markets"; and (3) "Enhancing Transparency in Financial Disclosure." Let's examine the highlights.

In terms of combating fraud and market manipulation, the SEC lists several notable actions. First, the SEC currently has more than 50 investigations pending in the subprime mortgage area, which investigations likely will result in the filing of some charges. Second, the SEC points out that it and other regulators are responsible for "what will be the largest settlements in the history of the SEC" for investors who bought auction rate securities from Citigroup, UBS, Wachovia, Merrill Lynch, RBS Capital Markets and Bank of America. Third, the SEC details several pending enforcement cases, including those in which the SEC:

Has charged "two Bear Stearns hedge fund managers for fraudulently misleading investors about the financial state of the firm's two largest hedge funds and their exposure to subprime mortgage-backed securities";

Has charged "two Wall Street brokers with defrauding their customers when making more than $1 billion in unauthorized purchases of subprime-related auction rate securities";

Has charged "five California brokers for pushing homeowners into risky and unsustainable subprime mortgages, and then fraudulently selling them securities that were paid for with the mortgage proceeds"; and

Has charged Fannie Mae and Freddie Mac with accounting fraud in 2006 and 2007, respectively, for which the companies paid more than $450 million in penalties to settle the SEC's charges.

In terms of taking swift action to stabilize the financial markets, the SEC has done a great deal in a variety of areas. Numerous accomplishments are worth noting. First, the SEC initiated examinations of money market funds, specifically to analyze portfolios in order to ensure that they were not riskier than portrayed. Second, the SEC has attempted to put its arms around problematic credit default swaps. Specifically, the SEC states that it has "improved oversight and infrastructure for the over-the-counter credit default swaps market by executing a Memorandum of Understanding with the Federal Reserve Board and the Commodity Futures Trading Commission for dealing with central counterparties for over-the-counter credit default swaps." Third, the SEC has taken action with respect to credit rating agencies. In addition to performing examinations that led to new rules to reduce rating agency conflicts of interest, the SEC has "[a]pproved measures to strengthen oversight of credit rating agencies and ensure that firms provide more meaningful ratings and greater disclosure to investors." Finally, the SEC has taken many actions with respect to short selling. In addition to targeting fraud in short-selling transactions, the SEC has: "issued an emergency order to enhance protections against short selling in the securities of primary dealers, Fannie Mae and Freddie Mac"; took temporary emergency action to ban short selling in financial securities "in close coordination with regulators around the world"; and approved emergency rulemaking "to ensure disclosure of short-selling positions by hedge funds and other institutional money managers."

In terms of "enhancing transparency in financial disclosure", two accomplishments stand out. First, the SEC has issued additional guidance to clarify issues with respect to "fair value accounting", a hotly debated area. Pursuant to a Congressional mandate, the SEC has commenced a study of fair value accounting and has held a public roundtable to discuss the topic. Second, off-balance sheet arrangements by financial institutions continue to worry investors. As a result, the SEC "has asked financial institutions to provide additional disclosure regarding off-balance sheet arrangements and the application of fair value to financial instruments." Likewise, the SEC has sent letters to public companies "identifying disclosure issues relating to fair value measurements and off-balance sheet arrangements."

Clearly, the SEC does not want to be perceived as idle during the credit crisis. SEC Chairman Cox is quoted as saying that the SEC's mission - to protect investors and the markets - never has been "more relevant, and more urgent." Let's hope that the SEC's sense of urgency continues, with full vigor.

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About the Author:
James J. Eccleston is the president of Eccleston Law Offices, P.C. The Chicago-based firm represents investors and advisers nationwide in securities and employment matters. 312-332-0000 www.EcclestonLaw.com.