FOR STARTERS, LET’S RID OURSELVES OF THAT FALSE DICHOTOMY – AND THE TOTALLY STUPID DEBATE ABOUT ‘RULES-BASED’ VS. ‘PRINCIPLES–BASED’ REGULATION: While principles are great – and we should all have ‘em – we all need RULES for the really important stuff. The fact is – as every parent knows, and as every regulator should know - one can rationalize, and excuse almost anything “in principle”… But “rules are rules”.

DON’T BLINK ON MARKING TO MARKET: Talk about another area where the politicians and other know-nothings took over what should have been a rational debate - totally confusing ‘cause’ and ‘effect’, as usual, while looking to lay blame (as usual) for the credit crisis!!! Fortunately, wiser heads seem to have won the day here, but PLEASE hang tough, and on the side of LOGIC, even while recognizing that “market values” of instruments with severely impaired markets ARE going to be subjective to a degree.

MAKE THE SEC FOLLOW SOX RULES:

  • For starters, how about making senior executives on the Commission sign-off and attest to the fact that they have “reasonable controls” and “reasonable control measures” and “reasonable tests as to reasonableness” in effect where their own systems, procedures and public pronouncements are concerned - on which we, the SEC “stakeholders” can rely? (A really strong argument, we think, for restructuring the SEC to look and work more like a corporate model).
  • Make sure the SEC isn’t allowed fudge, or otherwise dress-up its numbers: The INFORMER, in the 12/8/08 issue of Forbes magazine, for example, blew the whistle on no less a luminary than the SEC’s own enforcement chief, Linda Chatman Thomsen (no real surprise to regular Chatman Thomsen watchers) for issuing a press release that bragged about “The second highest number of enforcement actions ever.” On closer inspection, the Forbes reporters discovered that 56 administrative cases - revoking the registration of tiny companies that had not filed documents for two years, and many of which were defunct - were in the SEC count of 671 “enforcement actions”…vs. only 2 such cases in the number-one year for enforcement…which was 2003! Eerily like a pre-SOX earnings release, we’d say. And how’s this for some real FACTS, courtesy of the Jan. 6, 2008 New York Times; SEC fraud prosecutions have fallen by three quarters since 2002.
  • Let’s be sure too that all senior officials - just like “independent corporate directors” are required to do under SOX - can make a credible showing as “totally disinterested parties in all the matters that come before them…hence, the proposed three-year cooling off period before SEC staffers can take an industry job.
  • As we also learned, post-SOX, senior SEC officials need to have controls in place to be sure that no “waivers” of the rules can be granted…like the rul-ing the SEC made in favor of the Madoff brokerage firm, exempting it from the SOX requirement that brokers be audited by a PCAOB- registered firm…on the grounds that Madoff was ‘privately held’. Or how about the waiver on trading rules they issued, that was actually called “the Madoff exception” by the SEC staff.

TUNE-UP THE WHISTLEBLOWER PROCESS AND PURSUE EVERY ‘WHISTLE’ RIGOROUSLY: Here’s a truly excellent SOX reform - albeit one that seems more honored in the breach in D.C. – and especially at the SEC - than in the observance:

  • Log every “whistle” in – just as SOX requires. subject matter and disposition of each kind of “case”…just like SOX requires…and that the reasons for dropping the investigation pass the sniff test.
  • Get rid of the attitude - just like most public companies still need to do – that whistles are mostly blown by NUTS and MALCONTENTS…(This may actually be RIGHT, but that’s all the more reason to listen, we say! If you aren’t nuts – and malcontented – over some of the stuff we’ve seen, you are REALLY nuts!)
  • Make sure that whistle-blowers are properly protected from reprisals, as SOX also mandated: Remember the whistleblower who was FIRED in 2005 by the SEC - just weeks after receiving an excellent performance review - when he wouldn’t back away from the Pequot Capital mess, as his ‘superiors’ told him to do???
  • Enforce the rules without ‘exceptions’: When the Inspector General says “censure” – don’t ignore it, as if you’d never asked, or been told what to do! Remember what happened next in the whistleblower story, where the SEC’s own Inspector General ruled that one of the most senior SEC staff members (you guessed it, Linda Chatman Thomsen, the SEC’s ‘enforcement chief’) should have been censured for tipping off a lawyer for Morgan Stanley that John Mack would probably escape any scrutiny in the Pequot mess…but she wasn’t? Guess she was granted a “waiver”.

INCREASE, AND PUBLICIZE WHISTLEBLOWER BOUNTIES: Hey! Money talks! Just think how much we’d be willing to pay NOW…if only someonehad halted Bernie M before he bilked all his best friends and favorite charities for $50,000,000,000.00!!

MAKE THE SEC RULEMAKING AND ENFORCEMENT PROCESSES MUCH MORE TRANSPARENT…AND MUCH MORE RESPONSIVE TO INFORMED OPINIONS FROM THE PUBLIC AT LARGE: We’ve written almost a dozen long, and (we still think) thoughtful, and fact-filled and example-filled letters to the SEC over many years…all strictly pro-bono. And we have never received a written response to a single one. Once, we had a phone call from a staffer, asking for a bit of info…and ONCE, an investigator actually asked if we would visit, to explain the “mechanics” of a scam we were whistle-blowing about to his staff. (We were rarin’ to go, but he left in disgust soon afterward, thanks to the roadblocks to the investigation the SEC headquarters staff threw up). And, btw, we’re still seething over the fact that the SEC has never once responded to written petitions from the Business Roundtable, the Society of Corporate Secretaries, NIRI, the STA, five of the largest U.S. technology firms…and numerous others…including US… for a review of the proxy system.

TWO REALLY BIG FIXES THE SEC – OR SOMEBODY - STILL NEEDS TO TACKLE:

  1. FIX THE PUBLIC ACCOUNTING INDUSTRY PRONTO: Frankly, this isn’t part of our core expertise, but one thing seems crystal clear: Someone – or some entity - that is truly trustworthy, and truly diligent, and that has the assets to withstand a suit for gross negligence needs to actually “count the beans” at public companies, and to do so with regularity. (Just look at the recent revelation that Price Waterhouse failed to discover that ‘cash in the bank’ was short by a billion dollars, while accounts receivable were overstated by a half billion dollars at Indian outsourcer Satyam, and that real profits were only 10% of what they reported…to know the current system ain’t fixed!)
  2. FIX THE RATING-AGENCY FIASCO – PRONTO! We could hardly believe our own eyes when the proposed SEC solution to over-reliance on over-inflated bond ratings was for companies to do their own research! Yikes! This is perhaps the most nit-witted thing the currently nit-witted SEC has ever put out!

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