Don't Expect The SEC To Slow Down

Don't Expect The SEC To Slow Down

The SEC announced on Wednesday that Robert Khuzami would be stepping down as director of the agency’s enforcement division, the fourth major departure at the agency since Mary Shapiro announced her resignation as chairman.

Khuzami—who replaced Linda Chatman Thomsen as Enforcement Head in 2009—brought a record number of cases in the past two years, almost 750 in 2011 and 2012, according to the agency. Yet although the agency made no announcements regarding a successor, no one expects his departure to signal a light enforcement year for the SEC.

At any given time, the agency has about 2,000 open investigations, explained Thomas Gorman, a Dorsey partner who once worked for the SEC’s enforcement division. Those investigations still in the works will continue to move forward and bring new charges.

“In the short term, you can expect to continue to see enforcement doing what its doing,” he added, saying that Khuzami had done a lot to turn the program around and put a lasting system in place.

The impact of Khuzami’s departure on the continuity of enforcement action depends on two factors: who is selected as his successor and who is chosen as SEC chairman after Elise Waters expected departure later this years.

If the agency picks a “bad apple,” the decision could unravel many of the advancements Khuzami made to step up the SEC’s enforcement initiatives. But if a competent, experienced successor is chosen quickly; the mechanisms and support staff that Khuzami put in place will continue to flourish.

George S. Canellos—who was named deputy director of the SEC’s enforcement division in April—is a likely candidate to replace Khuzami, said a lawyer who works in the securities enforcement field speaking on the condition of anonymity.

“George is one of the most capable lawyers I know,” the source said, adding that Canellos was an “impressive guy” and very close to Khuzami, making him a prime choice.  

Canellos acted as the director of the SEC’s New York Regional Office for almost three years before assuming the second-in-command position last year. In addition to his experience with the SEC, Canellos served as a federal prosecutor for the U.S. Attorney’s Office for Southern New York for nine years, which oversees the largest concentration of SEC-registered financial institutions.

But Jacob Frenkel, a partner with Shulman Rogers Gandal Pordy & Ecker, warned that speculation of the next enforcement head was fruitless until the next permanent SEC chairman comes in.

A former state and federal criminal prosecutor, as well as a former SEC enforcement lawyer, Frenkel pointed out that the head of the SEC’s enforcement division, like any division head, serves at the pleasure of the chairman.

“The head of any agency civil—like the SEC—or criminal—like the DOJ—determines the investigation and enforcement priorities backed on the market forces and the political priorities set by policymakers,” Frenkel said.

Going forward, Marvin G. Pickholz—a securities and white collar lawyer at Duane Morris—said that he expected the SEC may return to more of a regulatory role, rather than the more prosecution-oriented agency we’ve seen in recent years.

“They need to return to a very regulatory mission,” Pickholz said, adding that the agency's great strength has been its ability to adjust and adapt to what is needed at a point in time. The former assistant director of SEC enforcement said that the next enforcement head should be someone who is very familiar with the markets and who can get out ahead of the curve.

Wednesday’s announcement was the fourth major shakeup in the regulator following Mary Shapiro’s resignation as chairman. Both General Counsel Mark Cahn and Director of the Division of Corporation Finance Meredith Cross also left earlier this month.

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