The listing standards of the stock exchanges represent an important source of corporate governance.  The requirements,  however, are only as good as the level of enforcement.  Recent actions by the Commission against Amex and the former chairman of Amex, Salvatore F. Sodano (Sodano), has raised questions about whether enforcement is adequate. 

On March 22, 2007, the Securities and Exchange Commission (SEC) issued an Order Instituting Proceedings (OIP) against Salvatore F. Sodano (Sodano), pursuant to Section 19(h) of the Securities Exchange Act of 1934 (Exchange Act).  This section reads:

The appropriate regulatory agency for a self-regulatory organization is authorized, by order, . . . to remove from office or censure any officer or director of such self-regulatory organization, if such appropriate regulatory agency finds, on the record after notice and opportunity for hearing, that such officer or director has . . .  failed to enforce compliance.

The OIP charged Sodano with failure to enforce compliance with the federal securities laws while he was chairman and CEO of the American Stock Exchange (Amex) from 1999 to 2005.  An earlier post discusses the OIP in more detail. 

The latest chapter occurred in August.  In a Motion for Summary Disposition (Motion) pursuant to Rule 250 of the SEC's Rules of Practice, Sodano sought dismissal of the charges - claiming that, according to Section 19(h)(4), the SEC lacked the authority to institute proceedings against an individual who was no longer an officer or director of a self-regulatory organization (SRO).  In an August 20, 2007 decision, the administrative judge agreed with Sodano's argument and dismissed the case without prejudice.

In support of his Motion, Sodano argued that Section 19(h)(4) only applied to current officers and directors of an SRO.  Further stating that "[if] Congress had intended to extend the Commission's… jurisdiction over 'officers and directors' of an SRO… it could have (and would have) said so explicitly."  In the Matter of Salvatore F. Solano, Exchange Act Release No. 333 (August 20, 2007).  Sodano pointed to Section 15(b)(6) of the Exchange Act and Section 203(f) of the Investment Advisers Act of 1940; both of which were amended by Congress to authorize a broader reach.  Furthermore, Sodano argued that the remedies authorized by Section 19(h)(4), removal from office and censure, further demonstrated Congress' lack of intent to broaden the SEC's reach to former officers and directors.

The SEC has since filed an appeal, expressing concern because the case was decided on jurisdictional issues rather than on its merits.  On appeal the SEC has argued that the judges findings would create a loophole for officers and directors who are otherwise subject to such proceedings by allowing them the option of resignation.  If the law is interpreted in this way, former officers and directors who have failed to enforce compliance with federal securities laws could easily re-enter the securities industry.

The staff is correct that it will impair enforcement if a responsible person can avoid sanction by resigning.  

Primary materials for these proceedings may be found at the DU Corporate Governance website.