SEC Enforcement: Is the Swagger Back?

SEC Enforcement: Is the Swagger Back?

 The swagger is back according to SEC enforcement officials. Presumably that comment is meant to say that an enforcement program which once was viewed as among the best in government has returned to that rarified echelon. To be sure there is a lot of positive buzz about the program. New Chair Mary Joe White has in recent weeks addressed enforcement priorities (here), market structure (here) and last week what might be called enforcement omnipresence. But the swagger? Consider Ms. White’s most recent remarks at the Securities Enforcement Forum, Washington, D.C. (Oct. 9, 2013) (here).

Remarks

The focus of Ms. White’s remarks last week was omnipresence, that is, SEC enforcement will be like the 24/7 news cycle everywhere, all the time brining every case. While that is clearly not possible, the goal is to make it seem possible. The theory is simple: A cop on every corner brining charges for every violation no matter how small prevents wrongful conduct thereby making investors feel safe. As Ms. White stated: “I recognize the SEC cannot literally be everywhere, but we will be in more places than ever before. Our aim is also to create an environment where you think we are everywhere – using collaborative efforts, whistleblowers and computer technology to expand our reach, focusing on gatekeepers to make them think twice about shirking responsibilities, and ensuring that even the small violations face consequences.”

There are four building blocks to the omnipresent strategy. The first is expanding the reach of the agency by leveraging its resources. This means utilizing resources like the National Exam Program to help uncover potential violations. Whistleblowers also become a key component since they can give Enforcement Division critical leads. All of this is supplemented by working with partners such as the DOJ, FINRA and state authorities.

Technology can also help expand the reach of the agency. Specialized programs, coupled with big data, can aid enforcement efforts while expanding the horizon. In some instances the Commission is using analytics and related technology to conduct what the SEC Chair called “predictive analysis” to identify trends and streamline investigative efforts. In others specialized programs such as the Advanced Bluesheet Analysis Program for insider trading cases are used. That program “analyzes data provided to us by market participants on specific securities transactions. It identifies suspicious trading before market moving events. It also shows the relationships among the different players . . . “ said Ms. White.

A second pillar of the strategy is to expand the focus on gatekeepers. One example of this focus is actions involving the boards of investment companies Those boards have a critical role in overseeing funds. Another is Operation Broken Gate, a recent initiative that focuses on auditors. Ensuring that gatekeepers fulfill their critical role, can help prevent violations of the law.

The third facet of the approach centers encouraging respect for the law through what Ms. White called the “broken window.” If a window is broken an later repaired it demonstrates a commitment to the rules. If it is not, that fact suggests the opposite. To implement this approach the SEC will bring even small cases. A recent example it the series of strict liability actions based on short selling in violation of Regulation M.

Finally, the agency will prioritize large cases. Here Ms. White pointed to the Financial Reporting and Auditing Task Force created earlier this year. The task force “brings together an expert group of attorneys and accountants who are developing state-of the-art techniques for identifying and uncovering accounting fraud.” Those cases are complex, resource intensive and time consuming, meaning it is essential that the agency prioritize them. By tying this point to the others, the SEC will endeavor to create the appearance of being “everywhere” to enhance enforcement.

Analysis

Putting a cop on every corner – or creating the appearance that there is one – is a proven law enforcement approach. The omnipresence formula is thus not new or novel. Neither are its building blocks. Leveraging resources has long been an approach used by the resource-short Commission. Focusing on gatekeepers is a theory that traces to the earliest days of the Enforcement Division. Prioritizing large cases is not so much a strategy as a necessity given the limited resources available to the SEC.

The critical point here is how the building blocks are blended together. If the agency can effectively implement the theory it may become an effective enforcement approach. If omnipresence becomes an effective program it may be entitled to swagger. For now, however, it is all much like the poem Ode on a Grecian Urn penned long ago by the English poet John Keats’ – potential, in the offing and possible.

For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

For more information about LexisNexis products and solutions connect with us through our corporate site.