The SEC’s internal controls problems

Larry Ribstein —  11 March 2011

The WSJ discusses yesterday’s testimony by SEC chair Mary Schapiro.  Former SEC GC David Becker, you’ll recall, had a family interest in a Madoff account but nevertheless was allowed to work on Madoff issues, including recommending Madoff victim payouts that directly affected the Becker family.

Ms. Schapiro said the incident had taught her to be more thoughtful about ethics matters.

“I have to be looking around the next corner, looking beyond the horizon and thinking above and beyond what may be appropriate advice from ethics counsel to make sure nothing occurs that raises questions about the commission’s mission or process,” she said.

Ms. Schapiro has directed the SEC’s internal watchdog to conduct an investigation of the matter and has ordered a review of the agency’s conflict-of-interest policies. She said the SEC had made significant strides since she took over an agency reeling from enforcement breakdowns.

Many companies will sympathize with Schapiro about “looking around the next corner, looking beyond the horizon” etc. 

Suppose a company or executive civilly or criminally charged with disclosure or internal control violations after a sudden market decline magnifies risks the company ignored tells the SEC or Justice: “we’re making significant strides on disclosure and we’ll do a better job the next time.”  The SEC or Justice will tell the company:  “We understand.  You have to be looking around the next corner or beyond the next horizon, and that’s very hard.  Just do the best you can.” Something like that.

Maybe it’s time to renew my suggestion, triggered by a previous report of SEC internal controls breakdowns , that Congress “shut down the SEC and turn its work over to the private sector, which is subject to SOX.”

Larry Ribstein


Professor of Law, University of Illinois College of Law

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