U.S. SEC corporate penalty policies delayed cases: GAO

WASHINGTON (Reuters) - Congressional investigators said on Wednesday that the U.S. Securities and Exchange Commission's law enforcement effort was hindered by Bush-era policies that have been partially discarded by the SEC's new chief.

The Government Accountability Office (GAO), investigative arm of Congress, said SEC enforcement managers, investigative attorneys and others agreed the SEC's former and current penalty policies delayed cases and produced fewer, smaller penalties.

The GAO identified other concerns, including a perception that the SEC had retreated on penalties, and had made it more difficult for agency staff to obtain so-called formal orders of investigation, which allow them to use subpoenas to obtain information from companies and individuals.

The GAO report was released a day before a Senate Banking subcommittee hearing on SEC enforcement, and three months after new SEC Chairman Mary Schapiro made major changes.

Early in February, Schapiro ended former SEC Chairman Christopher Cox's pilot program requiring enforcement staff to seek commission approval before negotiating penalties with suspected wrongdoers. She also streamlined the process for SEC lawyers to use subpoenas.

Cox told Reuters on Tuesday that the pilot program was designed to test ways to speed up cases and improve oversight and was tried in only nine of the more than 1,000 cases that were all approved by the SEC. However he said the GAO analysis supports SEC Chairman Schapiro's decision to end the pilot and pursue other approaches.

Another corporate penalty policy implemented in 2006 under Cox's leadership was one that established standards for fining companies, such as whether a penalty would further harm injured shareholders.

The GAO report said the two policies on corporate penalties appear to have had a number of effects at odds with SEC goals or objectives.

"In particular, investigative attorneys reported that they have not sought corporate penalties because of perceived difficulties in winning commission approval of such sanctions," said the GAO.

The 2006 policy, which was adopted by the commission, is still in effect and the GAO has asked the SEC to review whether it is achieving its intended goals.

The GAO said the organizational structure of the SEC's new Office of Collections and Distributions may not be as efficient as it could be because it has a dual reporting structure in which most staff do not report to the office's director.

The report recommended that the agency take steps to ensure appropriate staff participation in policy development and review. It also recommended that the SEC further review the level and mix of resources dedicated to enforcement and assess the impact of the division's internal case review process.

In her written response to the GAO report, SEC's Schapiro agreed with the recommendations and said the agency would take the necessary steps.

Last year, Democratic Senators Christopher Dodd, the chairman of the Senate Banking Committee, and Jack Reed, head of the subcommittee on securities, asked the GAO to look into the SEC enforcement unit's handling of cases.

The senators also asked the GAO to weigh SEC resources. The report identified areas that could hamper enforcement's ability to bring cases, such as the level of administrative and technical support for staff lawyers.

Cox, who was SEC chairman when the Senators requested the report, said he was heartened that the GAO found that enforcement activity has been relatively level in recent years and that the caseload backlogs have declined.

The SEC's new director of enforcement Robert Khuzami has been asked to testify at the Congressional hearing on Thursday, in what will be his first public comments to Congress upset with how the agency handled the Bernard Madoff case.

(Reporting by Rachelle Younglai; editing by Carol Bishopric)