In a recent speech to the Securities Enforcement Forum, SEC Chair Mary Jo White fleshed out the Commission’s plan to pursue all violations of federal securities laws, “not just the biggest frauds.” She also addressed the looming question of whether this approach makes the best use of the agency’s limited resources.
Chair White compared the SEC’s strategy of pursuing all forms of wrongdoing, no matter how big or small, to the “broken window” theory of policing, which was largely credited for reducing crime in New York City under Mayor Rudy Giuliani. According to the “broken window” theory, a broken window which remains unfixed is a “signal that no one cares, and so breaking more windows costs nothing.” On the other hand, a broken window which is fixed indicates that “disorder will not be tolerated.” Chair White postulated that the same theory applies to the US securities markets: minor violations that go ignored may lead to larger violations, and may foster a culture where securities laws are treated as “toothless guidelines.” Characterizing the SEC as the investors’ “cop,” she declared that the SEC needs to be a “strong cop on the beat,” understanding that even the smallest securities violations have victims.
While acknowledging that the SEC’s resources are finite, Chair White suggested a four-pronged approach through which the agency can pursue a broader range of cases:
• First, the agency plans to expand its reach to make its presence felt in additional fields. This will involve increased utilization of the agency’s National Exam Program, enforcement teams, and technology to monitor developing industry trends which may warrant investigation. The SEC will also continue to utilize its whistleblower program to provide incentives to individuals and companies to report misconduct, and it will collaborate with the DOJ, FINRA, and state securities regulators to bring more actions.
•Second, the agency will pursue more actions against “gatekeepers,” including auditors and investment company boards.
•In addition to casting wider enforcement nets and going after “gatekeepers,” the SEC plans to focus more attention on smaller violators by streamlining its investigations to bring cases and reach settlements more quickly. Chair White highlighted the SEC’s recent actions against two dozen alleged violators of Rule 105, which bans firms from improperly participating in public offerings after their short sale of the same stocks. She also reaffirmed that the SEC will continue to focus on microcap fraud, through the recently created Microcap Fraud Task Force.
• Finally, Chair White made clear that the agency does not intend to pursue smaller cases at the expense of bringing large, complicated cases. To the contrary, the SEC will continue to prioritize high-profile cases against corporations and individuals, seek settlements which have a deterrent effect, and demand more admissions. However, as highlighted by the recent verdict against the SEC in its insider trading case against Mark Cuban, losses by the agency in high-profile matters that it takes to trial could undermine its “tough cop” image.