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News November 21, 2005 Issue

Atkins Attacks

It must really be awkward now when they get in the same elevator.

In a scathing speech delivered November 11 before an American Bar Association banking committee conference, Commissioner Paul Atkins accused SEC general counsel Giovanni Prezioso of substituting his own personal judgment for that of the Commission when filing briefs in the U.S. Chamber v. SEC case.

Specifically, Atkins claimed that Prezioso made an "extraordinary decision" to express the SECís positions "without regard for ó or solicitation of ó the views of the current Commission." Instead, he said, the staff "has contented itself to rely on Ďdead-handí authority" and has prepared and filed briefs in name of the Commission without the Commissionís advance review, or, for that matter, any Commission input.

That "dead-hand authority" would be footnote 14 in the SECís revised cost-benefit analysis of the fund governance rules. The one that Prezioso refused to explain to SEC Commissioner Cynthia Glassman during the SECís June 29 open meeting. Remember that "I really canít elaborate"?

According to Atkins, Prezioso has "proclaimed" that "seeking the input of the Commission, his one and only client, would run counter to staff precedent, which purportedly does not provide for circulation of briefs to the Commission when the Commission is a named party, even in cases of great consequence to the Commission and the public." Atkins said Preziosoís decision not to consult with Commissioners is inconsistent with his own past experience and the past experience of others. "Given the diverging views on the Commission, I would have at least expected that our legal counsel would solicit his clientís views before filing briefs in the case."

Prezioso did not respond to a request for comment.

Because the general counsel did not consult any of the SEC Commissioners about the contents of the briefs, said Atkins, "it would be a stretch" to say that the briefs speak for the Commission. Consequently, in his view, the SEC has made misrepresentations in its briefs before the U.S. Court of Appeals for the D.C. Circuit: "It is not true, as our legal counsel in its brief now suggests, that the whole Commission came to the conclusion that it was imperative for the same group of Commissioners who had voted on the original rule to quickly act after the remand," he said. "Also contrary to our legal counselís representation to the Court, it was not the Commission, but the staff in the Division of Investment Management and General Counselís Office, that concluded that the courtís concerns could be addressed on the basis of the record already before the Commission without further notice and comment."

More generally, Atkins criticized the SEC as often having been "too casual in allowing staff-level decisions to be treated as if they have a Commission imprimatur." While he praised the SEC staff, "their excellence and hard work are no substitute for accountability and transparency." He also said that the SEC has "frequently succumbed to using economic analysis as an ex post facto rationale for a decision already taken, instead of as a decision-making tool."

The fund governance rulemaking, said Atkins, was the "poster child" for these procedural flaws. "The process by which the rule was adopted and then readopted and is now being defended by our legal counsel is perhaps even more objectionable than the substance of the rule." Atkins said that he was "confident" that SEC Chairman Christopher Cox "recognizes the problem" and will ensure that future rulemaking actions "are not conducted in such a slipshod manner."

Needless to say, the speech made quite an impression.

"I was listening to the speech [and] all of a sudden there were these amazing statements," said one attendee at the ABA meeting. "I think everybody in the room had the same reaction I did. We kind of looked at each and said, ĎOh my.í"

She described the audience as "surprised" at Atkinsís remarks. "Because we are all used to dealing with the banking regulators, it was very unusual to hear a Commissioner speak the way he did." Later in the day, she added, Atkinsís speech became a source of amusement to conference attendees. "People didnít make jokes about it," she quickly clarified. But, whenever speakers would get up and preface their remarks by saying that their statements represented their own views, not those of their organizations, "everybody sort of chuckled."

Machiavellian minds want to know . . . The day before Atkins delivered his speech, the SEC sent around a one-page flyer announcing that it was holding a general counsel roundtable. Thatís a mere seven-day notice for a meeting of nine of the SECís former and current general counsels, arguably a bit of a historic event. The former general counsels werenít given much lead time, either, with one noting that they had all agreed to come to Washington, D.C. at "a momentís notice."

Hmmm . . . did the hasty scheduling of the roundtable have anything to do with anything?

An SEC spokesperson said that roundtable was a "long time" in the making. "It takes a while to work up those flyers," he quipped.

Elephant? What elephant? Atkinsís speech was posted on the SECís website the day before the GC roundtable. It was the topic of a Wall Street Journal article that ran the morning of. And yet, during the roundtable, the current and former SEC general counsels studiously ignored the elephant in middle of the SECís auditorium.

Chairman Cox, who moderated the roundtable, publicly urged the GCs to "have at it," "let your hair down," and speak freely. "If youíve got something that youíve been concealing, we want to hear it now," he said.

But the GCs stayed away.

At one point, David Becker praised Prezioso for "the job that heís done" with "a sometimes fractious Commission." Aside from that oblique reference, however, Atkins and his speech were not mentioned.

Giovanni, youíre doing a heck of a job. At the beginning of the GC roundtable, Chairman Cox sent a public signal that Prezioso has his support. He noted that Prezioso has served as the SECís general counsel for the past three years. And then, Cox added pointedly: "And heís not going anywhere, not for the time being, because we need him here."