Читать книгу Financial Regulation and Compliance - Kotz H. David - Страница 6

During the week of March 10, 2008, I was in the first few months of my new position as Inspector General of the Securities and Exchange Commission (“SEC”). I had come over to the SEC after serving as Inspector General of the Peace Corps. At the Peace Corps, I dealt with many very significant issues, some involving life and death, as I tried to put into place procedures for ensuring Peace Corps Volunteer safety and security. Much of my time was spent working with foreign governments to assist in the prosecution of individuals who committed heinous crimes against Peace Corps Volunteers, such as assault, rape, and even murder. I found my job very rewarding and many of the protections we put into place for Volunteers remain in existence today. The Peace Corps position was, however, generally low profile, and while I testified before Congress on one or two occasions during my tenure as Inspector General of the Peace Corps, for the most part, we were able to operate out of the public eye. I recall when I interviewed for the SEC position that former Chairman Christopher Cox told me, at the end of my interview, words to the effect of “one thing you will realize if you work here, this is not going to be like working at the Peace Corps.” Chairman Cox certainly turned out to be right about that statement.

I was the second ever Inspector General in the SEC's history. The previous Inspector General had been in his position for approximately 18 years, and had recently retired among some rumblings from Capitol Hill that his office could have been more aggressive in certain investigations. Shortly after I arrived at the SEC at the very end of 2007, I received a letter from Senator Charles E. Grassley (R-Iowa), who was then the Ranking Member of the United States Senate Committee on Finance, referencing the previous Inspector General's tenure and pointing out that he expected my office to engage in aggressive oversight. I understood that I was being watched carefully and expectations were high regarding my tenure as Inspector General.

I very clearly recall the extreme concern at the SEC during the week of March 10, 2008, when word spread about liquidity problems at Bear Stearns. There was also, of course, a flurry of activity surrounding the March 16, 2008 Bear Stearns' sale to JP Morgan with financing support from the Federal Reserve Bank of New York (“FRBNY”). Little did I realize at that time how significant these events would be not only in my own life, but with respect to its role in the eventual global financial crisis.

On April 2, 2008, my office received another letter from Ranking Member Grassley, requesting that my office analyze the SEC's oversight of firms under its Consolidated Supervised Entity (“CSE”) program and broker-dealers subject to the SEC's Risk Assessment Program. The letter requested a review of the SEC's oversight of the investment banks that it supervised, with a special emphasis on Bear Stearns. The letter requested that we analyze the adequacy of the SEC's monitoring of Bear Stearns, and that we make recommendations to improve the SEC programs.

The CSE program was a voluntary program created by the SEC in 2004, to allow the SEC to supervise certain broker-dealer holding companies on a consolidated basis. These entities included Bear Stearns, Lehman Brothers, Goldman Sachs, Morgan Stanley, Merrill Lynch, Citigroup Inc., and JP Morgan. The CSE program was designed to allow the SEC to monitor for financial or operational weakness in a CSE holding company or its unregulated affiliates that might place regulated broker-dealers and other regulated entities at risk. The CSE program's mission was, in pertinent part as follows:

The regime is intended to allow the Commission to monitor for, and act quickly in response to, financial or operational weakness in a CSE holding company or its unregulated affiliates that might place regulated entities, including US and foreign-registered banks and.. broker-dealers, or the broader financial system at risk. (emphasis added.) 1

I understood at that point in time how important it was for there to be a thorough and comprehensive assessment of the circumstances that led to Bear Stearns' collapse and the effectiveness of the CSE program, and I was very aware that my office was being given an opportunity to demonstrate that we could engage in aggressive oversight of the SEC and its programs. Accordingly, I decided that I would not “pull any punches” with respect to this assessment and audit, and determined that one of my initial conclusions in my assessment would be that “it is undisputable that the CSE program failed to carry out its mission in its oversight of Bear Stearns because under the Commission and the CSE program's watch, Bear Stearns suffered significant financial weaknesses and the FRBNY needed to intervene during the week of March 10, 2008, to prevent significant harm to the broader financial system.”2

In the audit, we also found numerous specific concerns with the SEC's oversight of the CSE program, including the fact that, although the SEC was aware, prior to Bear Stearns becoming a CSE firm, that Bear Stearns' concentration of mortgage securities had been increasing for several years and was beyond its internal limits, and that a portion of Bear Stearns' mortgage securities (e.g., adjustable rate mortgages) represented a significant concentration of market risk, the SEC did not make any efforts to limit Bear Stearns' mortgage securities concentration. We also did not “pull any punches” with respect to Bear Stearns, as we concluded that there was evidence of significant shortcomings in the area of risk management at Bear Stearns, including a proximity of Bear Stearns' risk managers to traders suggesting a lack of independence.

There was a strong reaction within the SEC as a result of our findings, and concerns were expressed about the impact of the report on the SEC's reputation and credibility, which could negatively affect its ability to engage in regulatory oversight. There were even comments made that a weakened SEC as a result of my office's report would make it more difficult for the government to manage what was increasingly being viewed as the beginning of a serious financial crisis, and suggestions about whether the entire report should be publicly disclosed. Notwithstanding these concerns, I decided that it was more important for Congress and the public to understand what had occurred with respect to Bear Stearns' collapse and the SEC's oversight, and I declined to substantially edit the report and released it with minimal redactions.

Congressional officials appreciated my willingness to accurately report what I had found in my assessment even during this difficult time. Eventually, my report was utilized extensively by the Financial Crisis Inquiry Commission (“FCIC”) in their work in attempting to understand the causes of the financial crisis. I met with FCIC officials on numerous occasions over a period of months, and eventually testified before the FCIC with regard to my findings in 2008.

Chairman Cox was prescient in telling me that life as Inspector General of the SEC was going to very different than at the Peace Corps. My tenure as Inspector General at the SEC later included several other high-profile investigations, including my investigation of the SEC's failure to uncover Bernie Madoff's $50 billion Ponzi scheme. Operating in the glare of the public eye, while attempting to conduct oversight of the very people with which I was working side-by-side on a daily basis, was tremendously challenging.

Yet, my four-plus years as Inspector General at the SEC were also incredibly rewarding. Moreover, my experiences being in the center of the regulatory storm during the global financial crisis and being in a position to see Congress' reaction firsthand, led me to decide to write this book. As Congress began deliberating what eventually became the Dodd-Frank Wall Street Reform and Consumer Protection Act, I was often asked by congressional officials to provide input and guidance on the legislation. When submitting feedback, I tried to consider how actual companies and compliance officials would be impacted by these regulatory initiatives. I have seen too many occasions when legislation is thought to work well when discussing the proscriptions in theory; but the practical impact was very different.

Now that the Dodd-Frank Act has been enacted and many of the underlying regulations promulgated, I feel it is the responsibility of former government officials like myself to assist companies in responding to the many overlapping regulations that have been put into place. In this book, with the assistance of many very distinguished experts, I have tried to provide detailed, step-by-step guidance for the compliance professional seeking to manage these regulatory responsibilities. The hope is that the information in this book will lead compliance officials and companies to be in a better position to comply fully with their regulatory responsibilities while also achieving both their business and ethical goals and objectives.