Regulatory failures
The SEC has been criticized "for being too 'tentative and fearful' in confronting wrongdoing on Wall Street", and for doing "an especially poor job of holding executives accountable". [38] [39] [40]
Christopher Cox, the former SEC chairman, has recognized the organization's multiple failures in relation to the Bernard Madoff fraud. [41] Starting with an investigation in 1992 into a Madoff feeder fund that only invested with Madoff, and which, according to the SEC, promised "curiously steady" returns, the SEC did not investigate indications that something was amiss in Madoff's investment firm. [42] The SEC has been accused of missing numerous red flags and ignoring tips on Madoff's alleged fraud. [43]
As a result, Cox said that an investigation would ensue into "all staff contact and relationships with the Madoff family and firm, and their impact, if any, on decisions by staff regarding the firm". [44] SEC assistant director of the Office of Compliance Investigations Eric Swanson had met Madoff's niece, Shana Madoff, when Swanson was conducting an SEC examination of whether Bernard Madoff was running a Ponzi scheme because she was the firm's compliance attorney. The investigation was closed, and Swanson subsequently left the SEC, and married Shana Madoff. [45]
Approximately 45 percent of institutional investors thought that better oversight by the SEC could have prevented the Madoff fraud. [46] Harry Markopolos complained to the SEC's Boston office in 2000, telling the SEC staff they should investigate Madoff because it was impossible to legally make the profits Madoff claimed using the investment strategies that he said he used. [47]
In June 2010, the SEC settled a wrongful termination lawsuit with former SEC enforcement lawyer Gary J. Aguirre, who was terminated in September 2005 following his attempt to subpoena Wall Street figure John J. Mack in an insider trading case involving hedge fund Pequot Capital Management; [48] Mary Jo White, who later served as chair of the SEC, was at the time representing Morgan Stanley and was involved in this case. [49] While the insider case was dropped at the time, a month prior to the SEC's settlement with Aguirre the SEC filed charges against Pequot. [48] The Senate released a report in August 2007 detailing the issue and calling for reform of the SEC. [50]
On September 26, 2016, Democratic senator Mark Warner sent a letter to the SEC, asking them to evaluate whether the current disclosure regime was adequate, citing the low number of companies' disclosures to date. [51] [52] [53]
Inspector General office failures
In 2009, the Project on Government Oversight, a government watchdog group, sent a letter to Congress criticizing the SEC for failing to implement more than half of the recommendations made to it by its Inspector General. [54] According to POGO, in the prior two years, the SEC had taken no action on 27 out of 52 recommended reforms suggested in Inspector General reports, and still had a "pending" status on 197 of the 312 recommendations made in audit reports. Some of the recommendations included imposing disciplinary action on SEC employees who receive improper gifts or other favors from financial companies, and investigating and reporting the causes of the failures to detect the Madoff ponzi scheme. [55]
In a 2011 article by Matt Taibbi in Rolling Stone , former SEC employees were interviewed and commented negatively on the SEC's Office of the Inspector General (OIG). Going to the OIG was "well-known to be a career-killer". [56]
Because of concerns raised by David P. Weber, former SEC chief investigator, regarding conduct by SEC inspector general H. David Kotz, Inspector General David C. Williams of the U.S. Postal Service was brought in to conduct an independent, outside review of Kotz's alleged improper conduct in 2012. [57] Williams concluded in his 66-page Report that Kotz violated ethics rules by overseeing probes that involved people with whom he had conflicts of interest due to "personal relationships". [57] [58] The report questioned Kotz's work on the Madoff investigation, among others, because Kotz was a "very good friend" with Markopolos. [58] [59] [60] [61] It concluded that while it was unclear when Kotz and Markopolos became friends, it would have violated U.S. ethics rules if their relationship began before or during Kotz's Madoff investigation. [58] The report also found that Kotz himself "appeared to have a conflict of interest" and should not have opened his Standford investigation, because he was friends with a female attorney who represented victims of the fraud. [59]
Destruction of documents
According to former SEC employee and whistleblower Darcy Flynn, also reported by Taibbi, the agency routinely destroyed thousands of documents related to preliminary investigations of alleged crimes committed by Deutsche Bank, Goldman Sachs, Lehman Brothers, SAC Capital, and other financial companies involved in the Great Recession that the SEC was supposed to have been regulating. The documents included those relating to "Matters Under Inquiry", or MUI, the name the SEC gives to the first stages of the investigation process. The tradition of destruction began as early as the 1990s. This SEC activity eventually caused a conflict with the National Archives and Records Administration when it was revealed to them in 2010 by Flynn. Flynn also described a meeting at the SEC in which top staff discussed refusing to admit the destruction had taken place, because it was possibly illegal. [56]
Iowa Republican senator Charles Grassley, among others, took note of Flynn's call for protection as a whistleblower, and the story of the agency's document-handling procedures. The SEC issued a statement defending its procedures. NPR quoted University of Denver Sturm College of Law professor Jay Brown as saying: "My initial take on this is it's a tempest in a teapot," and Jacob Frenkel, a securities lawyer in the Washington, D.C., area, as saying in effect "there's no allegation the SEC tossed sensitive documents from banks it got under subpoena in high-profile cases that investors and lawmakers care about". NPR concluded its report:
The debate boils down to this: What does an investigative record mean to Congress? And the courts? Under the law, those investigative records must be kept for 25 years. But federal officials say no judge has ruled that papers related to early-stage SEC inquiries are investigative records. The SEC's inspector general says he's conducting a thorough investigation into the allegations. [Kotz] tells NPR that he'll issue a report by the end of September. [62]
SEC and cryptocurrency
On June 5, 2023, the SEC filed 13 charges against Binance entities and its founder Changpeng Zhao, citing allegations of mishandling customer funds and operating without proper registration. [63] [64] The following day, the SEC charged Coinbase for operating as an unregistered securities exchange, broker, and clearing agency, further signaling its intensified scrutiny of major players in the industry. [65] [66]
A key point of contention between the SEC and the crypto industry lies in defining what constitutes a security. The SEC applies the Howey Test, derived from a 1946 U.S. Supreme Court decision, which defines a security as "an investment of money in a common enterprise with profits to come solely from the efforts of others." [67] The agency has classified many crypto assets as securities based on this test, asserting that their value often depends on the efforts of developers or other central parties behind blockchain projects. Critics argue that the test is outdated and ill-suited to the decentralized nature of cryptocurrencies, leaving regulatory definitions unclear and fostering uncertainty. Research by economists found that unpredictable SEC enforcement actions under Gensler, classifying cryptocurrencies as securities without clear guidelines, caused prolonged destabilization in crypto markets. [68] Unclear guidelines raise doubts about the agency's ability to maintain fair and orderly markets.
In December 2025, the Securities and Exchange Commission provided the Depository Trust & Clearing Corporation (DTCC) with a no-action letter that allows the organization to hold and record tokenized equities and other real-world assets on blockchain networks. The authorization enables DTCC to deliver tokenization-related services on approved blockchains for a period of three years. [69]
SEC and Cybersecurity Risk
On July 26, 2023, the SEC adopted the Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure rule to encourage public companies to more transparently and effectively manage and disclose cybersecurity risk. However, according to a CIO analysis of a proposed AI disclosure rule and its connection to the earlier cybersecurity disclosure regime, some experts argue that the cybersecurity rule’s broad, materiality-based thresholds and reliance on company-defined terms create challenges for consistent reporting, as many disclosures have resorted to boilerplate language and offered limited investor insight. [70]
Climate disclosure rule
In 2024, the SEC decided on a climate disclosure rule, The Enhancement and Standardization of Climate-Related Disclosures for Investors. It requires companies to disclose information on their risk to be impacted by climate change and a company's risks to profit by a growing number of climate change regulations, concerning direct and indirect greenhouse gas emissions produced. [71]
