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.