SEC’s Cox defends approach

Christopher Cox, the embattled chairman of the Securities and Exchange Commission, is defending his restrained approach to the financial crisis, saying he has provided steady leadership as Wall Street’s main regulator at a time when other federal regulators have responded precipitously to upheaval in the markets.

During his tenure, the SEC has watched as all the investment banks it oversaw collapsed, were swallowed up or exited their traditional line of business. The agency, meanwhile, was on the sidelines while the Treasury Department and Federal Reserve worked to bail out the financial sector. And the SEC, by its own admission, failed to detect an alleged $50-billion fraud by Bernard L. Madoff that may be the largest Ponzi scheme in history.

But in his first interview since the Madoff scandal broke, Cox said that he was not responsible for the agency’s failure to detect the alleged fraud and that he had responded properly to the broader financial crisis given the information he had. Confronted with a barrage of criticism from lawmakers, former officials and even some of his staff, Cox said he took pride in his measured response to the market turmoil.

“What we have done in this current turmoil is stay calm, which has been our greatest contribution -- not being impulsive, not changing the rules willy-nilly, but going through a very professional and orderly process that takes into account unintended consequences and gives ample notice to market participants,” Cox said. This caution, he added, “has really been a signal achievement for the SEC.”


Taking a swipe at the shifting response of the Treasury and Fed in addressing the financial crisis, he said: “When these gale-force winds hit our markets, there were panicked cries to change any and every rule of the marketplace: ‘Let’s try this. Let’s try that.’ What was needed was a steady hand.”

Cox said the biggest mistake of his tenure was agreeing in September to an extraordinary three-week ban on short selling of financial company stocks. But in publicly acknowledging for the first time that the ban was not productive, Cox said he had been under intense pressure from Treasury Secretary Henry M. Paulson Jr. and Fed Chairman Ben S. Bernanke to take the action and did so reluctantly. They “were of the view that if we did not act and act at that instant, these financial institutions could fail as a result and there would be nothing left to save,” Cox said.

Though Cox speaks of staying calm in the face of financial turmoil, lawmakers across the political spectrum counter that this is actually another way of saying that his agency remained passive during the worst global financial crisis in decades. And they claim that Cox’s stewardship before this year -- focusing on deregulation as the agency’s staff shrank -- laid the groundwork for the meltdown.

“The commission in recent years has handcuffed the inspection and enforcement division,” said Arthur Levitt, SEC chairman during the Clinton administration. “The environment was not conducive to proactive enforcement activity.”

Cox, 56, a former Republican congressman from Orange County, became chairman in mid-2005 and plans to step down early next year before his full five-year term expires. President-elect Barack Obama has nominated Mary L. Schapiro, a former SEC commissioner, to replace Cox.

Cox said the SEC’s emphasis on enforcement was as strong as it had ever been. “We’ve done everything we can during the last several years in the agency to make sure that people understand there’s a strong market cop on the beat,” he said.

“That’s why Madoff is such a big asterisk,” he added. “The case is very troubling for that reason. It’s what the SEC’s good at. And it’s inexplicable.”

Cox contended that the agency has carefully defined responsibilities and that it was unfair to blame it for every problem on Wall Street.


“The public might not understand that that wasn’t the SEC’s job,” he said, adding that the agency was not responsible for preventing investment banks from collapsing but rather for sheltering their securities trading units from problems in the broader corporation. “The SEC is not a safety and soundness regulator.”

Cox said that when he took office he emphasized the importance of simplifying the rule-making process and increasing transparency. Outside experts say he has succeeded.

“He’s made it a lot easier for the public to get information and made strong attempts at better disclosure,” said Lee A. Pickard, a former director of the SEC’s division of market regulation. “He unfortunately has had a couple of hurricanes that have evolved on this watch, like the credit crisis and the Bernie Madoff situation. But I’m not sure you can point to him as responsible for either one of those.”

But former officials said enforcement suffered during his tenure. A pilot program begun last year required enforcement staff to meet with the commissioners before beginning settlement talks in certain cases involving nonfinancial firms. Some former officials said the change was just one example of new bureaucratic impediments that slowed enforcement work. The commissioners also made clear that they thought staff members were being too aggressive in some cases, the officials said.


“I think there has been a sentiment communicated to rank-and-file staff, lawyers and accountants that you don’t go after the establishment,” said Ross Albert, a former special counsel in the enforcement division.

The agency’s overall staff also began to drop during Cox’s tenure, from 3,773 full-time employees in fiscal 2005 to 3,442 in fiscal 2008, according to agency data. The agency’s budget over that time has increased 2%, from $888 million to $906 million, an amount that the National Treasury Employees Union, which represents SEC staff, says is far too small.

“There just hasn’t been enough resources or staffing over the years for the SEC to oversee the number of companies it is responsible for,” said Colleen M. Kelley, the union’s president. “Cox needs to take responsibility that he failed as the leader of the agency to ask for what was needed.”

Cox defended his record on enforcement and risk assessment. His aides said risk assessment is done by staff spread throughout the agency and that the total number focused on it over Cox’s tenure has increased from 26 to 37 people. Cox also said that the 671 enforcement actions brought last year were the second-highest number in the agency’s history.


Though the statistics look good, former SEC general counsel Ralph Ferrara said, “they put a huge bottleneck in the ability of that enforcement division to function. Cases would linger for months or years because they didn’t have the guidance to get the cases done.”

An analysis by law firm Morgan, Lewis & Bockius showed that the SEC’s actions against broker-dealers, who serve as intermediaries in financial trades, dropped about 33%, from about 89 cases in fiscal 2007 to 60 cases in fiscal 2008.


Paley and Hilzenrath write for the Washington Post.


Writers Binyamin Appelbaum and Neil Irwin contributed to this report.