The Benefits of the Falling Number of SEC Cases

he WSJ published a piece on the decline in the number of cases filed by the SEC.  The article suggests that this is a disaster for the Commission, one that will bring criticism from Congress and a headache for Mary Jo White.  There is, however, an entirely different way of looking at the issue.

First, an emphasis on numbers sends the wrong message.  The article indicated that the numbers were down from the SEC's "record breaking" numbers of the prior two years.  To the extent the SEC is judged based upon the number of actions (and the need to produce "record breaking" results every year), this will create incentives to bring actions designed to pad the numbers.  The result will be a swelling number of unimportant cases.  Dedicating multiple staff members to large investigations will be counter productive since they will likely bring fewer cases.  The result could easily be more cases but fewer that really matter.

Second, as the Madoff matter suggests, a pro-active SEC ought to have as its goal the exposure of fraud that is ongoing.  To do this, the SEC cannot simply wait until the fraud becomes public and investors have paid the price.  The SEC will need to continue to develop metrics that suggest the possibility of ongoing fraud and conduct immediate investigations.  One consequence of this approach, however, will be that more investigations end without a recommendation for an enforcement action.  In other words, fewer rather than more cases will be a better measure of success.

Mary Jo White may have to explain any decline to Congress and Congress may not always like the answer.  But the quality of the SEC's enforcement program is not something that can be or should be measured through excessive reliance on a single statistic:  The number of cases filed.