In its zeal to apply a free market philosophy to the Securities and Exchange Commission, the Bush administration created an environment where the agency's enforcement staff was unable to take definitive policy positions or bring enforcement actions, according to Mercer Bullard, associate professor of law at the University of Mississippi School of Law.Testifying on May 7 at a Senate Banking subcommittee hearing, Mercer said that the problems at the SEC reflect a state of "deregulatory capture," where the commission was unaware of and unable to respond to many enforcement matters before they surfaced.

The enforcement division's effectiveness has been compromised by "a lack of resources and poor leadership by the commission itself," said Bullard, adding that the Commission has abdicated its policymaking responsibilities to state regulators and private litigants in a number of areas. "The result has been a decline in public confidence in the markets, a reduction in investor protection, and an increase in uncertainty regarding applicable legal standards."

Examples where the SEC failed to act include excessive mutual fund fees, the failure of the auction rate securities market and the options backdating scandal, he said. "Indeed, the current liquidity crisis in fixed-income instruments is partly the result of the SEC's failure to push more aggressively for the development of liquid debt markets," Bullard told the subcommittee.

While the problem of lack of resources at the SEC remains unsolved, Bullard said that SEC Chairman Mary Schapiro "has demonstrated a solid commitment to a vigorous and effective enforcement program" and has already taken some steps to end practices that have hindered the enforcement division.

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