A collection of 60 or so institutional investors have sent a letter to President Elect Obama addressing this matter.  The letter asked the president elect to take actions in the first 100 days designed to increase the voice of shareholders in risk disclosure, including not only credit risks associated with the mortgage crisis, but also environmental and social issues that have large financial implications.  According to the letter:

• We are writing to urge you to work to restore one element of investor disclosure within the first hundred days of your administration, specifically the right of investors to propose and vote upon resolutions asking a company to evaluate how specific risks may affect the company’s business. From the creation of the SEC in 1934, it has been recognized that investors stand in a unique position to monitor the companies in their portfolios, and to guard against certain risks to stock price, and to society, by encouraging responsible decision-making by management. We strongly encourage you to strengthen the ability of investors to play this important role, by both increasing the obligations of public companies to disclose data on their social and environmental performance, and by strengthening the role of shareholder resolutions in addressing these issues. In particular, we believe that restoring the ability of institutional investors to use the shareholder resolution process to probe companies on certain areas of investment risk is an important initial step. These include the kind of credit risks associated with the mortgage crisis, as well as an array of environmental and social issues which we believe may have large financial implications, e.g., climate change and product toxicity.

The letter specifically calls for a reversal of Staff Legal Bulletin No. 14C (June 28, 2005).  In that Bulletin, the staff indicated that companies could exclude proposals to the extent they called for some type of internal assessment of risks or liabilities faced by the company as a result of the practices.  They were, however, permitted to include the proposals if they were limited to calls to minimize or eliminate operates that could adversely affect the environment or the public's health.

It is no big surprise that investors are focusing on the strictures of Rule 14a-8.  It is not governed by the Delaware courts so investors have relatively clear and enforceable rights.  The provision will come under increasing pressure, particularly as shareholders seek greater access to the company's proxy statement for their nominees. 

As we pointed out on this Blog, the anti-access group was remarkably short sighted in opposing access.  The proposal put out by the Republican dominated Commission was almost useless, providing access to shareholder nominees only in those companies that first passed a bylaw requiring the practice.  With regime change, pressure will grow to provide large shareholders with direct access, eliminating the need for a special bylaw.  Look for reform of Rule 14a-8 to remain front and center under the new administration.

The letter is posted on the DU Corporate Governance web site.

She knows the SEC and the CFTC and from her current perch as CEO of FINRA, she knows regulated industries (read Madoff).

Of course, before she can be appointed chair, there will need to be a vacancy on the Commission.  Right now all five seats are full.  As a result, the next shoe to drop should be an official announcement that Chairman Cox is stepping down from the Commission. 

• In response, after consultation with the Commission, I have directed a full and immediate review of the past allegations regarding Mr. Madoff and his firm and the reasons they were not found credible, to be led by the SEC's Inspector General. The review will also cover the internal policies at the SEC governing when allegations such as those in this case should be raised to the Commission level, whether those policies were followed, and whether improvements to those policies are necessary. The investigation should also include all staff contact and relationships with the Madoff family and firm, and their impact, if any, on decisions by staff regarding the firm.

This is a highly disappointing response.  First, the implication is that the Commission will look into whether the Madoff problem was a result of wrongdoing.  Why else charge the Inspector General with the task of looking into the matter?  As we have noted, however, the main problem is structural.   The main office responsible for overseeing these inspections (the Office of Compliance Inspections and Examinations) is not structurally set up to catch these types of frauds. 

Other than noting that the Inspector General will also look into "improvements" to existing policies, the Chairman's approach ignores these structural issues.  Of course, were structural issues to be the focus, there would be questions about why the Commission didn't act sooner.  As a result, this approach is designed to deflect blame. 

Second, by unleashing the Inspector General, Chairman Cox has all but made certain that any recommendations will be issued after he has gone from his present position.  In other words, the act creates the appearance of action but in reality is a mechanism for avoiding any hard decisions in the present. 

Third, this is not  much different than the GM board becoming more active only after the debacle in Washington when the CEO asked for a bailout without a plan and flew back in a private jet.  We asked on this Blog about the whereabouts of the board before the debacle since nothing about the trip to Washington changed the troubled financial circumstances of the company.

We ask the same question about Chairman Cox.  Is there a need for structural reform within the Commission?  The evidence suggests that there is.  The inspection process failed terribly in connection with the supervision of investment banking firms.  The Division of Enforcement has taken some black eyes, with the report by the Inspector General on the Bear Stearns investigation demonstrating weaknesses in the investigatory approach.  While the Madoff affair certainly highlights weaknesses in the investigatory process, it is not really news.  We can therefore ask why these problems weren't pushed to the front and center earlier.

OCIE was created back in 1995 under Chairman Levitt.  While any number of reasons have been offered for the creation of the office, the removal of inspection authority (primarily from the Division of Investment Management and Market Regulation) and its insertion into a separate, independent office created a system of inspections less beholden to an operating division and, presumably, less likely to be subject to industry influence and capture.

But independence came with costs.  For one thing, it separated the inspectors from the operating divisions in the SEC with the expertise over the relevant industries.  The result was likely some loss of understanding of the business by OCIE which in turn made the inspections less effective. 

For another, the Office has been something of a step child within the agency.  Most division directors stay a few years in the agency then parlay the post into a lucrative private practice.  It provides both an incentive to attract the best and an opportunity for turn over that can be both dislocating but also a way to introduce new ideas and energy.  Lori Richards, the head of the office, is the first and only director of the office, having been appointed back in 1995.

The office also, in many ways, has an impossible task.  On the one hand, it can be criticized if it allows most brokers/advisors to remain uninspected (there are 6700 brokers alone in the US).  As a result, the office produces a high volume of inspections.  As Chairman Cox recently described:

• In FY 2007, SEC examiners in our Office of Compliance, Inspections and Examinations conducted more than 2,400 examinations of investment advisers and investment companies, broker-dealers, transfer agents, and self-regulatory organizations. Overall, 75 percent of investment adviser and investment company examinations and almost 82 percent of broker-dealer examinations revealed some type of deficiency or control weakness. Importantly, most examinations resulted in improvements in the firms' compliance programs.

While large firms are given "enhanced focus," the reality is that much of the inspection process focuses on technical compliance, a relatively easy thing to monitor through checklists and other objective measures. 

To drill down far enough to uncover frauds like the one apparently perpetrated by Madoff (and, presumably, one that was actively concealed), OCIE would need enhanced resources and increased expertise.  Among other things, this would require a staff that had the time, the understanding of industry and, ultimately, a thorough knowledge of the business that was subject to the inspection.  It might even require enhanced credentials.  A law degree is not required to become a compliance examiner.  Without legal training, recognizing signs of illegality, including fraud is likely more difficult.

Unlike Enforcement, this is a pro-active office.  It inspects with or without evidence of violations.  It is therefore in a position to uncover significant problems before they occur.  But to do so means that the office must have the resources and the staff necessary to accomplish the task.  As with so many things at the Commission these days, this type of reform will need to await regime change.

The topic is conceptually an interesting one.  As the US government invests increasing amounts into the private sector, the question of an exit strategy becomes very real.  Moreover, Chairman Cox has a unique perch from which to consider the issue.  This is true both because he is chair of one of the agencies at least tangentially involved in the current crisis but also because the SEC received an explicit role in TARP as part of the Oversight Board.  The Chairman is a member of the Financial Stability Oversight Board. 

With that in mind, his remarks are really not at all about an exit strategy.  Instead, its really a criticism of government involvement in the first instance.  Thus, he notes:

• But beyond that, beyond ideals of freedom, the national preference for private ownership is also based on the most basic practicality: it works. America's rise from New World outpost to global superpower was fueled by the dramatic growth of our free enterprise economy into the world's largest. Free enterprise has produced spectacular results. Compared to other national economies with substantial government ownership and central planning, America's economy has been more creative, resilient, and dynamic. We've found that decentralized decision-making, in which millions of independent economic actors make judgments using their own money, results in the wisest allocation of scarce resources across our complex society. And we've found the market to be more reliable in heeding price signals and meting out discipline to failing enterprises than government could ever be.

In other words, this is largely a paean to the market and opposition to government involvement in general.  Moreover, even accepting the value of the market to make the millions of economic decisions (as most do, including this Blog), the Chairman's approach only resonates if he can show that in fact government involvement has interfered with theis process.  Given that government involvement has been mostly in the form of loans and non-voting preferred stock, the bailouts so far have not involved any real interference in day to day management.  In other words, government involvement has not resulted in much interference with those millions of decisions.  In fact, that's one of the problems recently identified with Treasury's approach under TARP.  Huge capital infusions are being made without asking anything in return, including increases in lending. 

But the Chairman does identify some specific problems.  He notes that Treasury and the Fed have been involved in assorted acquisitions.  As he notes:

• On several occasions during the past year the Treasury and the Fed took on the unusual role of negotiators and principals in merger and acquisition transactions that normally would have been arranged by private parties. Even in these extraordinary cases, however, it remained the role of the SEC to regulate these transactions for the protection of investors. We took pains to stay at arms length in these cases, but our close collaboration with these same government agencies has made this truly terra incognita.

But this is an entirely different matter from capital infusions.  First, there is no reason to believe that Treasury and the Fed now view themselves as a necessary party to all acquisitions.  In other words, there is no need for an "exit" strategy.  Second, in the instances when these agencies were involves (the merger of Bear Stearns, for example), they had the safety and soundness of the financial system to consider.  Indeed, the non-involvement in Lehman and its ultimate failure probably acted as a catalyst for much of the current turmoil.  Said another way, Treasury and the Fed's failure is not involvement but an inadequate level of involvement.  Finally, while the number of transactions requiring Treasury/Fed attention is greater than in the past, this is a reflection of the magnitude of the current turmoil.  But in the past these agencies have always been involved in potential failures that could destabilize the financial markets.

He does make one effort to tie government involvement with capital infusions.  He counsels about the need to take great care in the handling of Fannie and Freddie Mac, both seized by the federal government. As he describes:

• The Federal Housing Finance Agency established the conservatorship for five stated reasons. First, both Fannie and Freddie were operating in an unsafe and unsound manner. Second, the current market conditions were deteriorating. Third, the financial performance at each company was poor. Fourth, the companies were unable to access the private capital markets for regulatory capital. Fifth and finally, they were critical to supporting the residential mortgage market in this country. But recent political pressures have added a new dimension. As the economic slowdown continues, and more homeowners risk losing their homes, it has become a political priority to reduce the number of foreclosures. Toward that goal, the government, as the functional owner of Fannie and Freddie, has committed both entities to ambitious plans to reduce foreclosure. The goal of reducing foreclosures, however, does not necessarily align with the goal of returning both entities to fiscal stability and solvency.

But Fannie and Freddie are in many ways unique, having started as government agencies that were only privatized to reduce government deficits in the 1960s.  Of course they deserve special consideration and of course they involve competing goals.  Their solution, however, will be unique reflecting their unique history.  They are not symptomatic of what's going on in the market or of a new found involvement by the government.

This is a topic that requires serious consideration.  But these discussions are less about the complexities of the issue and more about opposition to the policies of increased government involvement in the first instance.

DONALD M. HOERL NAMED REGIONAL DIRECTOR OF SEC’S DENVER REGIONAL OFFICE

Washington, D.C., Dec. 2, 2008 – Securities and Exchange Commission Chairman Christopher Cox today named Donald M. Hoerl as the Regional Director of the SEC’s Denver Regional Office. The Denver office conducts examination and enforcement activities in Colorado, North Dakota, Kansas, South Dakota, Wyoming and New Mexico.

Currently serving as Acting Regional Director, Mr. Hoerl is also the Associate Regional Director for Enforcement in the Denver Regional Office, a post he has held since 1997. Mr. Hoerl succeeds George Curtis, the previous head of the Denver office, who was appointed to a Deputy Director position in the SEC’s Division of Enforcement in Washington, D.C.

Chairman Cox said, “Don has been a champion of investors throughout his distinguished career with the Commission. In his previous role in charge of the SEC’s enforcement program in the Denver Regional Office, and more recently as Acting Director of that office, Don has initiated a number of important cases that have made our markets safer for investors. America’s investors are fortunate to have a person of such high caliber and talent in this position of leadership at the SEC.”

SEC Director of Enforcement Linda Chatman Thomsen stated, “Don brings to this job a long record of accomplishment. Since his first days at the Commission, he has carried out his responsibilities with care, intelligence and effectiveness. Don is a very talented attorney who has played a critical role in the Commission’s investigation and litigation of numerous complex enforcement matters. I am sure that the Denver Regional Office will continue to flourish with Don at the helm.”

Lori Richards, Director of the SEC’s Office of Compliance Inspections and Examinations, added, “Don has demonstrated an appreciation for the importance of the regional office’s examination staff and the contribution they make to the overall effectiveness of the Denver office. I know he will be an asset to the Commission’s oversight of securities firms in the region.”

Mr. Hoerl said, “I am honored that Chairman Cox has named me as Regional Director of the Denver Regional Office. I am privileged to have the opportunity to lead its dedicated and talented staff in meeting the many challenges facing the Commission and the investing public in these difficult times.”

Mr. Hoerl began his career with the Commission in 1982 as a Trial Counsel in the Denver Regional Office. He has also served as the head of the SEC’s Philadelphia office for four years, and as the District Administrator of the Commission’s Salt Lake office for six years. Before joining the SEC, Mr. Hoerl was an Assistant United States Attorney in Denver for more than five years. He received his B.A. degree from the University of California, Los Angeles and his J.D. degree from the University of Colorado School of Law.

• Gary Gensler, a former Goldman partner and Undersecretary of Treasury under President and who heads the transition team studying the SEC, although he would apparently prefer a position in Treasury; 

• Mary Schapiro, the CEO at FINRA who has had experience as a commissioner at the SEC (including acting chairman) and as chairman at the CFTC and might be the right person to engineer a merger of the two agencies; and

• Sheila Blair, chairman of the FDIC, who has made quite a name for herself as an advocate for failing homeowners. 

• Bill Brodsky, the chairman and CEO of the Chicago Board Options Exchange who has also served as president and CEO of the Chicago Mercantile Exchange.

• Nancy Smith, vice president of AARP Financial Inc., a registered investment adviser and subsidiary of the seniors’ lobby. She’s also been director of the SEC Office of Investor Education and a New Mexico securities commissioner.

• Mellody Hobson, president of Ariel Investments, a financial contributor on Good Morning America, a director of Starbucks and two other companies and a former Princeton University trustee.

• Bob Pozen, chairman of MFS Investment Management. He’s the former vice chairman of Fidelity Investments and president of Fidelity Management & Research Co. and was on President George W. Bush’s Commission to Strengthen Social Security in 2001 and 2002. In 2003, he served as secretary of economic affairs to then-Massachusetts Gov. Mitt Romney.

• Bill McLucas, chairman of the law firm WilmerHale’s Securities Department and a longtime member of the SEC’s Division of Enforcement, serving as its director for eight years.

• Harvey Goldschmid, a Columbia Law School professor and former SEC commissioner (2002-2005) and General Counsel (1998-1999).

• Damon Silvers, associate general counsel for the AFL-CIO and a member of the Public Company Accounting Oversight Board standing advisory group, among other corporate governance task forces.

Former Treasury Under Secretary for Domestic Finance Gary Gensler who will lead the review.  Gensler worked for Goldman, becoming a partner by the age of 30, and advised Paul Sarbanes on SOX.  The SEC team also will include former Federal Trade Commissioner Mozelle W. Thompson and William "Thomas" Dohrmann, a partner at McKinsey & Co.

As the Transition Team website notes:

• The Agency Review Teams for the Obama-Biden Transition will complete a thorough review of key departments, agencies and commissions of the United States government, as well as the White House, to provide the President-elect, Vice President-elect, and key advisors with information needed to make strategic policy, budgetary, and personnel decisions prior to the inauguration. The Teams will ensure that senior appointees have the information necessary to complete the confirmation process, lead their departments, and begin implementing signature policy initiatives immediately after they are sworn in.

The other teams include:

Agency Review Co-Chairs
Melody Barnes
Lisa Brown
Don Gips

Working Group Members
Seth Harris
David J. Hayes
Reed Hundt
Sally Katzen
Tom Perez
Ray Rivera
Sarah Sewall
Louisa Terrell
Michael Warren
Tom Wheeler
Jon Wilkins
Deputy Director Lisa Ellman
Special Assistant Liz Fujii
Special Assistant Joani Walsh

Economics and International Trade Team Leads
Reed Hundt
Michael Warren
Josh Gotbaum
William "Thomas" Dohrmann
James Johnson
Anjan Mukherjee
Gregory L. Rosston
Sylvia Mathews Burwell
Susan Ness
Phil Weiser
Peter M. Shane
Fred P. Hochberg
Ginger Lew
Gary Gensler
Mozelle W. Thompson
Peter Blair Henry
Lisa D. Cook
George Munoz
Nelson Cunningham
Alan H. Fleischmann

National Security Team Leads
Sarah Sewall
Tom Donilon
Wendy R. Sherman
Michèle A. Flournoy
John P. White
Robert R. Beers
Clark Kent Ervin
Gayle E. Smith
Aaron Williams
John O. Brennan
Judith A. ("Jami") Miscik

Justice and Civil Rights Team Leads
Tom Perez
Dawn Johnsen
Alejandro Mayorkas
David William Ogden
Tom Perelli
Theodore M. Shaw
Aderson Bellegarde Francois
Judge Cruz Reynoso
Spencer Overton
Robert Lenhard
Alan W. Houseman
LaVeeda Battle
Kareem Dale
Marilyn Golden

Energy and Natural Resources Team Leads
David J. Hayes
Bart Chilton
Carole Jett
Elgie Holstein
Elizabeth Montoya
Sue Tierney
Cecilia V. Estolano
Lisa Jackson
Robert Sussman
Rose McKinney-James
Keith Harper
John Leshy

Education & Labor Team Leads
Seth Harris
Judith A. Winston
Michael Camuñez
Deborah Jospin
Shirley Sagawa
Thomas A. Kochan
Nancy E. Peace
Phyllis Segal
Joseph Swerdzewski
Edward Montgomery
Cynthia Estlund
Linda A. Puchala
Richard Huberman

Department of Health and Human Services Team Leads
Tom Perez
Anthony Brown
William Scott Gould
Pamela Gilbert
Bill Corr
Nicole Lurie
Roberta Achtenberg
Xavier de Souza Briggs
Bruce Katz
Dr. Susan Daniels
Jim Roosevelt
Jonathan D. Moreno

Science, Tech, Space and Arts Team Leads
Tom Wheeler
Don Beyer
Ralph Everett
Susan Crawford
Ken Werbach
Lori Garver
Roderic ("Roddy") Olvera Young
Bill Ivey
Anne Luzzatto
Clement Price
Jim Kohlenberger
Henry M. Rivera

Executive Office of the President Team Leads
Sally Katzen
Antony Blinken
Ivo Daalder
Mara Eve Rudman
Audrey Choi
Michele Jolin
George Frampton
Thomas Soto
Brad Kiley
Al Lenhardt
Todd Stern
Mark Lindsay
Barbara Chow
Bowman Cutter
Christopher Putala
Donald Vereen
Thomas Kalil
Mario Molina
Anna Gomez
Peter Cowhey
Rick Stamberger

Government Operations Team Leads
Sally Katzen
Martha Johnson
Jane Woodfin
Bruce McConnell
Gloria Parker
Amy Comstock Rick
Elaine Kaplan
Linh Nguyen
Sylvia Bolivar
Stephen Crawford

Transportation Team Leads
Seth Harris
Mortimer Downey
Jane Garvey
Michael Huerta
John Cullather
Carol Carmody

While understanding the sensitive nature of communications about the status of an investigation, we noted that the comment made by Ms. Thomsen was a proper use of her discrection and, frankly, the right thing to do.  We are pleased to see that an adminsitrative law judge at the SEC agrees.  In concluding that no disciplinary action was necessary, the Chief Judge found that "[t]here are no indications that Thomsen's disclosure was committed maliciously or for gain, or was frequently repeated."

Under the SEC’s current rules, U.S. issuers are required to prepare financial statements in accordance with accounting principles that are generally accepted in the United States. The increasing integration of the world’s capital markets has, however, resulted in roughly two-thirds of U.S. investors owning foreign issued securities that report their financial information using IFRS. Increasing integration has made the establishment of uniform global accounting standards a matter of growing importance. Currently, over 100 countries have adopted IFRS, a common accounting language aimed at giving investors greater comparability and transparency of financial reporting worldwide(a complete, detailed explanation of the differences between GAAP and IFRS can be found here ).

The proposed roadmap lays out a timeframe for use of IFRS by all registrants, anticipating mandatory reporting under IFRS beginning in 2014, 2015, or 2016 depending on the size of the issuer. The roadmap also articulates a number of milestones that must be met by 2011 to allow the proposal to proceed. Some of the milestones include requiring independent funding and greater accountability from the International Accounting Standards Board, which is responsible for the integrity of IFRS. Domestically, the roadmap requires satisfactory integration of interactive data technology to allow for IFRS reporting, as well as adequate training and education of professionals and investors regarding IFRS.

IFRS may not be welcomed by some companies initially, as its conversion is much more than a technical accounting issue. According to the international accounting firm PricewaterhouseCoopers, IFRS may significantly affect any number of a company’s day-to-day operations and may even impact the reported profitability of the business itself. The Conversion experience in Europe, as well as Asia and Australia has been more time consuming than expected, causing some companies to rush and risk mistakes or outsource more work than necessary, driving up costs and hindering the embedding of IFRS knowledge within the company.

The Commission will make a determination in 2011 on whether adoption of IFRS is in the public interest and would benefit investors. A roundtable to discuss potential accounting changes was held on October 29, 2008. More information can be found here.

The SEC’s press release can be found here.

It's unlikely to be a high priority in the short term (although economic reform and reform of the financial markets might be).  Nonetheless, the change in administration is likely to have a profound impact on the debate.

First, Barack Obama has indicated sympathy with some of the issues promoted by shareholders.  He has introduced a bill on Say on Pay in the Senate.  (Shareholder Vote on Executive Compensation Act - S. 1181).  The election will presumably provide new impetus for the legislation.  It has already passed in the House.

Second, Obama will get to appoint a new chairman of the SEC.  Currently, the position is held by Chris Cox, a former Republican congressman.  The president gets to appoint the chairman.  Cox has a seat on the Commission until June 2009 but has indicated that he will step down when the Bush administration expires.  According to one post, Andrew Cuomo and Elisse Walters are names currently being discussed.  Harvey J. Goldschmid is another possibility and has strong support among the unions.  In any event, the choice will likely result in a more pro active, pro shareholder stance for the Commission.  Access will likely return to the top of the agenda.

Third, Obama will appoint a new Secretary of the Treasury.  Some have been bantering around the name of Lawrence Summers, the former Secretary under President Clinton, and Jon Corzine from New Jersey.  Whomever is appointed, he or she will likely take a firmer stance on the enforcement of the executive compensation provisions in the Bailout Bill and will be less likely to take positions designed to damage the interests of shareholders.  It was, after all, Treasury that led the fight to narrow the scope of Rule 10b-5 in Stoneridge and ultimately succeeded in prevailing upon the Solicitor General to file a brief opposing the extension of the antifraud provision to vendors.

We will have further thoughts as the days progress but the interests of shareholders are likely to receive a higher priority with the new administration.

The Report concluded that "relevant information was imparted to representatives of Morgan Stanley by both Berger and Thomsen regarding the nature of the evidence that the Enforcement Division had aagainst Mack in connection with the Pequot investigation."  With respect to Thomsen's representation that the disclosure was appropriate "given the potentially disruptive effects on the markets of information concerning the potential CEO of a large institution like Morgan Stanley," the Report observed:

• the information she and Berger imparted (i.e. the lack of evidence against Mack) only served the interests of John Mack personally and Morgan Stanley.  This was not a situation where Morgan Stanley and the larger financial markets would have been adversely affected by Enforcement not advising Morgan Stanley that they were poised to bring an Enforcement action against the person chosen to be their new CEO.  In fact, the only danger in Enforcement not sharing with Morgan Stanley that Enforcement did not have substantial evidence against Mack while Morgan Stanley was considering Mack for the CEO position was that Mack may not have not obtained the position, and Morgan Stanley would have to find another candidate.

Finally, the Report recommended that appropriate "disciplinary and/or performance-based action" be taken against Linda Thomsen, the clarification of the Commission's policies on the disclosure of nonpublic information, and a reassessment and clarification of the practice of allowing outside counsel the opportunity to communicate with counsel above the staff attorney level when they have disagreements or issues.  

On this point we take strong objection to the Inspector General's conclusions.  First, it is true that the information involved the hiring of John Mack as CEO of Morgan Stanley.  But to imply that it was about an ordinary personnel matter at Morgan Stanley understates the importance of the decision.  Mack had been with Morgan Stanley before losing out in a battle for CEO.  In replacing Phillip Purcell, Mack stepped into a business that to some degree was in turmoil.  His return had a quick effect. 

• "Morale has already improved in anticipation of his return," Byron Wien, a senior investment strategist at the firm, said before the announcement. "He has proven that he can bring harmony to disparate factions."

In other words, the entire firm and, to some degree, the market, had an interest in the decision. 

Second, as we have noted, there is some discretion to release non-public information to the public.  Linda Thomsen essentially informed Mary Jo White that, at that particular stage of the investigation, Mack was not a target.  At the same time, however, she made it abundantly clear that the circumstances could change and that his testimony would likely be necessary.  To reveal facts about an investigation that implicate others is one thing.  To reveal facts about an investigation that suggest that the SEC is not targeting someone is to prevent the existence of an investigation from unnecessarily impugn reputation.

The decision was Thomsen's to make.  She made the right one.

A redacted version of the Report is posted.

Some officials noted that "this practice is not actually that uncommon."  Indeed, Mary Jo White noted that it was "known to the securities bar" that "if you've got an issue and you do not think you are getting a fair hearing on something . . . pick up the phone, you know, we have an open-door policy."  Others in the Division raised concern about the practice, according to the Report, labeling it as something that would "undercut" the staff attorney on the case and that it was a "cheap trick" that irked the investigators on the case.

The Inspector General's Report questioned the practice.

• In addition, there are some questions about the appropriateness of the current common practice in Enforcement that allow (and even encourage) outside counsel the opportunity to contact those above the line attorney level on behalf of their clients when they have issues or disagreements with the line attorneys. . . . This practice could also result in greater access by former Commission lawyers who had established relationships with high-level Enforcement officials prior to going into private practice. Greater access could lead to better results, or at least the appearance thereof.

On this one, the Inspector General is wrong.  First, the issue is not truly raised by the discussion in the Report.  Most of the communication above the "line attorney" level were not designed to influence the direction of the investigation but were mostly attempting to elicit information about the possible status of one individual involved. 

Second, while the cases are mostly run by staff attorneys (with tight supervision by branch chiefs), cases can sometimes run amuck.  Lawyers know that they can go over the staff attorney's head to complain but they do so at great peril.  For one thing, the staff attorney won't like it and he or she still has the authority to make thousands of small decisions that can make a potential defendant's life miserable.  For another, the culture within the Division is to back up the line attorneys almost always in the case of an appeal, even when they are wrong.  Any other practice would undercut the role of the staff attorney and encourage a constant stream of appeals to supervisors.  In other words, aside from the inexperienced lawyer, most attorneys representing persons subject to investigation would not take the risk of going over the staff attorney's head. 

There is, therefore, adequate checks on the practice.  At the same time, the ability to sometimes appeal upwards in the hierarchy is a necessary safety valve.  Not only does it provide an opportunity to correct something egregious, all staff attorneys know that if they exceed SEC imposed boundaries in the investigatory process (say through excessively broad and expensive subpoenas), the mistake may well come to the attention of their supervisors.  

The Division of Enforcement is right to let the bar know the avenue is available and the Inspector General has raised nothing in his report that suggests the practice ought to be curtailed.

A redacted version of the Report is posted.