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What does it take to be unfit to be an officer or director of a public company?

I have a ques­tion for Chris Cox, Chair­man of the SEC. What does it take to be deemed unfit to serve as an offi­cer or direc­tor of a pub­lic com­pany? I ask this ques­tion because I made the mis­take of read­ing the Sar­banes Oxley Act and I am now con­fused. I can’t fig­ure out what it would take for the SEC to enforce Sec­tion 1105 of the Act.

For those who haven’t mem­o­rized the Sar­Box leg­is­la­tion, Sec­tion 1105 is enti­tled “Author­ity of the Com­mis­sion to pro­hibit per­sons from serv­ing as offi­cers or direc­tors.” The text of Sec­tion 1105 states that the SEC has the author­ity to pro­hibit indi­vid­u­als from act­ing as offi­cers and direc­tors of pub­lic com­pa­nies if the SEC deter­mines that the con­duct of the per­son in ques­tion shows an unfit­ness to act as a direc­tor or offi­cer of a pub­lic company.

So, I ask Chair­man Cox and the rest of the SEC, did the behav­ior of the senior and exec­u­tive offi­cers and Boards of Direc­tors of Bear Stearns, Lehman Broth­ers, Fan­nie Mae, Fred­die Mac, AIG and Indy Mac (just to name a few com­pa­nies) demon­strate fit­ness? And, if they aren’t fit, doesn’t that mean that they are unfit?

Sec­tion 1105 isn’t a crim­i­nal statute. Some argue that bad judg­ment and incom­pe­tent behav­ior shouldn’t be crim­i­nal­ized. OK, assum­ing the behav­ior wasn’t crim­i­nal, was it com­pe­tent? Did the var­i­ous man­age­ment teams and boards demon­strate good judg­ment? And, if some of the indi­vid­u­als were com­pe­tent and fit, were all of them? Through inac­tion relat­ing to Sec­tion 1105, is the SEC say­ing that all of the man­agers and direc­tors of the com­pa­nies that sud­denly tanked are fit?

Chair­man Cox, what man­ner of con­duct is required to achieve unfit­ness? Does man­age­ment have to engage in vio­lent crimes or acts of moral turpi­tude for you to act? How about bad dis­clo­sure, appalling deci­sions, incom­pe­tent man­age­ment and non-existent inter­nal con­trols? Do those count for Sec­tion 1105? Tens of bil­lions of losses? Does that demon­strate com­pe­tence and fitness?

Every cou­ple of days for the next few weeks I am going to look at another pro­vi­sion of the secu­ri­ties and bank­ing laws and try to present each of them in an easy to under­stand and com­mon sense fashion.

With a few excep­tions, I don’t believe that the United States needs more laws and reg­u­la­tions, just enforce­ment of the laws and reg­u­la­tions that we already have. So, instead of writ­ing and talk­ing in gen­er­al­i­ties, I am going to try to get spe­cific about where I believe the SEC and other gov­ern­ment agen­cies have failed.

I think that a dis­cus­sion of gov­ern­ment fail­ure is impor­tant because until gov­ern­ment changes and starts to do its job in a dili­gent and com­pe­tent man­ner, con­fi­dence will not be restored to the finan­cial mar­kets. It’s that sim­ple. The reck­less fail­ure of reg­u­la­tors to enforce the “laws of the land” destroys con­fi­dence. If laws are bad laws, the leg­is­la­ture needs to change them. It isn’t the job or right of reg­u­la­tors to pick and choose which laws they will and will not enforce. Leg­is­la­tion through fail­ure to enforce reg­u­la­tion is at the heart of the prob­lem that plagues the econ­omy and can­not continue.

I look for­ward to your com­ments and your thoughts.

Posted in: Chris Cox, Confidence, Executive Fitness, Finance, REGULATION, Regulatory Reform, Sarbanes Oxley, SEC

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