Archives: SEC Structure

Two Securities and Exchange Commissioners – the agency’s two newest members – offered contrasting views of the commission’s use of its enforcement powers.  http://www.sec.gov/News/Speech/Detail/Speech/13705404038989#.Uo_nqCda-JQ(Stein)http://www.sec.gov/News/Speech/Detail/Speech/1370540400457#.Uo_nvidA-JQ(Piwowar).

Among other issues, one said the agency has delegated too much authority to its enforcement staff, while the other hailed the “incredible work” done by the SEC staff on a daily basis.  The anti-Enforcement Commissioner sharply questioned the commission’s delegation of authority in 2009 to the Enforcement Director to issue formal orders of investigation, and noted that, historically, formal orders were approved by the Commission.  The other Commissioner stated the Enforcement Division “was passionately working to protect investors,” and using “all of the tools in its toolbox.”

With teamwork like this, much work is sure to be accomplished.

Now that 2014 is here, it is a good idea to understand what the Enforcement Division might focus on this year.  In a recent article that appeared in the BNA, David Marder, a partner with Robins, Kaplan, Miller & Ciresi identified fifteen things to expect in the coming year. 

The fifteen things he noted to expect include: 

  1.             Increased use of whistle-blowers;
  2.             Increase requiring defendants admit guilt in settlements;
  3.             Increasing the use of available technology;
  4.             Increase the number of easier to prove cases;
  5.             Push self-reporting of securities violations;
  6.             Increased focus on microcaps;
  7.             Continued focus on gatekeepers;
  8.             An emphasis on financial reporting;
  9.             Protection of market structure and integrity;
  10.             Increase the activity of specialized SEC units;
  11.             Continue attacking insider trading;
  12.             Investigate misconduct at hedge funds, private equity funds and mutual funds;
  13.             Increase the size of the trial unit to avoid losing at trial;
  14.             To further leverage the exam program; and
  15.             Increase administrative proceedings.

 Although this certainly seems like a robust agenda, expect the SEC under the leadership of Chair Mary Jo White to pursue it with particular vigor.   

It seems like the SEC has a lot to prove; in part, to justify it budget.  The question is whether the industry is adequately prepared to deal with a bulked up and more aggressive SEC.  Time will tell . . . .

Although the SEC is undergoing a period of transition with a new Chairman and co-heads of the Enforcement Division, the message is the same.  That is, its day-to-day priorities remain the same, and it will bring more cases.

In particular, the private equity area is “ripe for action” given the way funds are structured and the current challenging economic conditions.  Further, enforcement actions against investment advisers will only become more rigorous in the years ahead. Over the last two years, there has been a significant increase of actions against investment advisers.  The SEC’s institutional focus on asset management firms, its whistleblower and cooperation initiatives, and the Enforcement Division’s new emphasis on “proactive detection.”  In the private equity space, this activity all translates into more enforcement actions.

Thus, SEC actions will continue in these areas.

The SEC has been routinely criticized for not completing its administrative work under the Dodd-Frank Act.  Despite this criticism, the SEC stated that it had only 4 remaining initiatives it must complete.  http://www.sec.gov/new/studies/2013/sec-organizatinal-reform-recommedations-043013.pdf and http://www.sec.gov/new/studies/2011/967study.pdf.

The SEC must, now, reorganize the Offices of Administrative Services, Financial Management, and Human Resource, as well as create the Office of Chief Data Officer.  The SEC evaluated how its operations could be restructured to improve its use of resources and internal communications, key technological systems and employ staff with “high-priority skills” to enhance its ability to police markets and protect investors.

The SEC believes it has responded to these concerns, and claims to continue to improve its operations.

The SEC’s 2010 restructuring of its Enforcement Division has resulted in the agency taking on more complex cases with a new level of expertise. 

The SEC has hired specialists, including highly educated analysts who understand quantitative and high-frequency trading to assist the SEC with its enforcement investigations.  The experts act in both the SEC’s enforcement and examination functions, and have assisted the SEC in not only in developing new cases but also providing insight into existing, very complicated investigations over many areas.

However, resources have been tightened at the SEC.   In 2002, the agency could devote 25 examiners to each $1 trillion in assets under management; today, that figure has shrunk to 10 examiners for about every $1 trillion in assets. 

Given resource restraints, the SEC is trying to bring more timely cases to increase its impact.  In any event in 2012, the SEC brought 29 separate actions involving alleged misconduct occurring during the financial crisis that named 38 individuals, including 24 chief executive officers and chief financial officers.  Approximately 117 defendants were involved in alleged illegal activity during the financial crisis, leading to about $2.2 billion in monetary relief.

In short, the SEC claims it has not missed a beat – one wonders if the evidence bears it out.

The SEC’s Division of Investment Management has publicly stated that it will review the regulations relating to the Investment Advisers Act of 1940 given the large influx of new RIAs as a consequence of the registration of hedge and private equity fund managers.

These new RIAs, now, account for roughly 40% of all RIAs.  IM is looking to determine if it needs to change or adapt the Advisor’s Act to deal with these new investment advisers.  Although the SEC is routinely criticized for not adapting to market changes, it seems that the SEC Staff is actually taken a pro-active approach with this issue.

Change, however, is not as quick.

One of the more anticipated and debated outgrowths of the Dodd-Frank Act was the designation of a self-regulatory organization responsible for investment advisers.  Yet, it has recently been reported that this issue is dead for the current Congressional session, although likely to come back again.

The only consensus thus far is that the SEC is ill-equipped to be the SRO.  The primary disagreement has focused on who should be the SRO for investment advisers: a new entity, FINRA or an enhanced SEC funded by user fees.

Regardless of the outcome of the Presidential election, this issue is likely to percolate once again in the next Congressional session.  The SEC is clearly not currently constituted to serve in the capacity as the SRO and, at the same time, there is a push for investment advisers to be subject to better oversight.

In the short-run, this means that investment advisers will still be subject to SEC examinations, which historically have resulted in very few examinations on a yearly basis relative to the number of investment advisers.  In the long-run, the debate will continue and it is likely that, at some point, there will be an SRO for investment advisers.  The most like SRO would, in my view, be an enhanced SEC as it already serves in an oversight role over investment advisers.  The question becomes whether any of us will be alive to see this happen.

In a speech by SEC Commissioner Elisse B. Walter, the SEC, apparently, is indicating a significant shift in its view of cross-border cooperation. 

Over many years, the SEC has been viewed as the nearly primary global regulator of the securities markets.  Although this sentiment is not always shared by our brethren overseas, it has been, frankly, a fact. 

However, Commissioner Walter’s speech indicates that the SEC is shifting this perspective in noting that it has enforcement sharing agreements with more than 80 jurisdictions and that it regularly shares information across borders.  Although these sharing agreements are not new, the juxtaposition of them with the SEC’s work across borders presents a new format.  Essentially, Commissioner Walter was arguing that the SEC has rejected the belief it should solely act as a regulatory sovereign, embracing cooperation on many different levels across many different jurisdictions. 

In sum, the SEC’s approach seems to be that regulators should be connected and open in an effective manner.  Thus, this interconnection would be permit for a hightened regulation and ability to ensure continuing efforts to monitor the markets. 

Apparently, despite the Inspector General change, the SEC continues to be beset by problems with its internal operations that its Inspector General has recently pointed out.  The OIG has detailed in several reports problems relating to privacy violations as well as building security issues, among other areas.  Additionally, the OIG has indicated that it will be releasing several other reports in the near future.  What other tales will be told???!!!! 

Essentially, it is probably a safe assumption that the SEC will never be “perfect.”

Despite the fact people are still unemployed, the drought rages and farmers suffer, and the deficit continues to grow, Congress seems to float absurd legislation across the partisan divide to regulate the regulators and the market.

In particular, the House passed a bill that would tighten the cost-benefit analysis for both the SEC and CFTC rule process.  This proposed legistlation would require the consideration of certain mandatory factors in these agencies’ cost-benefit analysis of promulgated rules.  This legislation merely generates sadness from my perspective.  Why, you ask?  Well, it shows a glaring failure of those representatives in Congress to understand the regulation process in the securities industry.  You think after almost 80 years, someone in Congress would get it!!

Securities regulation is not simply a dollars and sense proposal, any ability to place such a cap as passed by the House misses the point.  In fact, if you follow through on this ridiculous proposition, no regulation would ever be imposed and the market would be allowed to freely do whatever it wants, including, among other things, allowing fraudulent practices to occur continuously.  Please keep in mind that all regulations require costs, and it is not a simple business proposition.  For example, if you follow the House’s proposal and applied it to the SEC’s work, the SEC may propose a rule to stop certain fraudulent activity, requiring market participants to implement certain controls and procedures.  Of course, the preparation and implementation of these procedures would cost market participants money.  However, given that the activity may only effect part of the market, the House legislation would require the SEC to drop the rule because it would “cost” too much money for the market participants to implement.  As a result, investors could lose money (that could have been avoided if the proposed rule had been implemented), but, according to the House legislation, those individuals and their potential losses are not important enough to require the enactment of the rule given the House’s proposed cost-benefit analysis.  Essentially, under the House legislation, one could argue that Exchange Act Rule 10b-5– the lynchpin of criminal and civil securities fraud enforcement– would not have been enacted today because it would cost the industry too much money!!!  Truly, the silly season is upon us!!   

Equally silly is the bill introduced in the Senate that would significantly enhance the penalties that the SEC may seek.  In typical legislative fashion, it is believed that the more you raise fines or prison sentences, it will somehow deter people’s conduct.  Unfortunately, time and time again, such approaches have failed.  Despite the fact that criminal penalties and civil sanctions have been increased exponentially over time, people continue to commit securities fraud.  If this legislation were to pass, it would only engender more unpaid fines that the government already does not collect.  Interestingly, this piece of legislation, unlike the House legislation, actually has bipartisan support and has a chance of passage.  I suppose everyone wants to pile on, and make themselves look tough on fraud.  However, such actions are merely an act of rushing to the bottom.

In short, neither position espoused by either party seems to make much sense or have the ability to improve our securities and capital markets.