Securities and Exchange Commission leadership and staff members addressed the public on February 20-21 at the annual “SEC Speaks” conference in Washington, D.C. Common themes among the numerous presentations included the Commission’s increasing use of data analytics, the Commission’s focus on gatekeepers such as accountants and attorneys, and the Commission’s still incomplete rulemakings mandated by both the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Jumpstart Our Business Startups Act.
From a litigation and enforcement perspective, key takeaways from the conference include the following:
- SEC Chair Mary Jo White described the Commission’s significant accomplishments from 2014, including the adoption of Regulation Systems Compliance and Integrity, new rules governing money market funds, and new rules applicable to over-the-counter derivatives and credit rating agencies. Chair White also mentioned the consolidated audit trail, which she described as a “game changer” for the Commission’s efforts to monitor and oversee markets. Chair White asserted that in 2014 the Commission “brought the highest number of cases in the history of the Commission, 755, and obtained over $4.1 billion in monetary relief offered – also an agency record.” She mentioned cases that “expanded [the SEC’s] enforcement footprint” such as cases against high frequency trading firms, a whistleblower anti-retaliation case, and the Commission’s “first emergency action to halt a fraudulent muni-bond offering.” As for 2015, she said that the Commission will focus on, among other efforts, enhancing the transparency of alternative trading system operations, understanding of “broker routing decisions,” and mitigating “market stability concerns.” Chair White also described her vision for “fundamental reforms” in 2015 to include addressing and planning for systemic risk and providing new ways for small issuers to raise capital.
- Commissioner Michael Piwowar articulated his priorities for making the SEC more fair, orderly, and efficient. With respect to fairness, Piwowar said that the Commission should always provide “sufficient information” to market participants before the Commission acts, and emphasized that the staff’s conduct in examinations and enforcement actions should never serve as “de facto rule amendments.” He particularly noted that the enforcement program “could benefit from a look through the lens of fairness” and criticized the program for bringing more matters through Commission administrative proceedings, where the administrative judge is an employee of the Commission, rather than through federal court proceedings which are overseen by an Article III federal district judge. Piwowar noted that this shift in strategy, particularly as to insider trading cases, came after the Commission suffered two high-profile losses in federal court and “regardless of whether this is linked,” it has “the appearance of the Commission looking to improve its chances of success by taking it in-house.” He asked the Commission staff to implement and publish guidelines for determining which cases will be brought in federal court, and which will be brought in an administrative proceeding. Similarly, Piwowar expressed his view that there should be an established policy that will allow a party to determine whether it will be eligible for a waiver from certain automatic disqualification provisions. As for how to make enforcement more “orderly,” Piwowar suggested that a “broken windows approach does not work” and asked the staff to decline to “unnecessarily shackle activity” and to use investigative discretion to complement the goals of the Commission rather than “serve as an independent source of policy.”
- Commissioner Luis Aguilar stressed that the Commission has “not finished its work on many ongoing issues” and laid out his priorities for 2015. Those included completing the rulemakings mandated by Dodd-Frank thereby alleviating the current state of “regulatory limbo,” continuing to make progress implementing the JOBS Act, and bringing more enforcement actions that have a “real impact” and create the “strongest message of deterrence.” To that end, Aguilar stated his view that the enforcement staff should focus more on individual accountability and be more aggressive in seeking permanent bars from serving as an officer or director of a public company, or bars from appearing before the Commission under Rule 102(e). Aguilar stressed that a Commission enforcement action “should not be viewed as the cost of doing business” and that the Commission needs to “take fraudsters out of the industry” permanently. Aguilar also criticized the Commission’s diversity, stating that “The SEC still has much to do” to make the agency’s racial and gender diversity reflect the makeup of American society.
- Commissioner Kara Stein spoke at length about technology and how it can be used to improve disclosure. Stein said that she foresees an upcoming “fundamental shift in disclosure” driven by technology and access to dynamic data. She encouraged the Commission and public companies to focus on ways to make information contained in public filings “more accessible to investors.” Stein also made a point of stating her view that automatic statutory disqualifications, or “bad actor bars,” are “not intended to be used as punishment” and instead provide a “forward-looking or prophylactic tool, designed to deter and prevent recidivism and restore trust in the markets.” She rejected the approach of “automatically” granting waivers to these bars and noted that she has been urging the Commission to consider, when evaluating waiver requests, the “degree to which those at the top knew or should have known about a violation or a failed culture of compliance.”
- Commissioner Daniel Gallagher commented on the fact that the Commission is “not even halfway done implementing our Dodd-Frank mandates” and reiterated prior comments calling Dodd-Frank a “monstrosity that is in substantial part untethered to the cause of the crisis.” But the bulk of his speech was devoted to attacking the Department of Labor’s proposal to define the term “fiduciary” for purposes of the Employee Retirement Security Act of 1974. While Gallagher has not seen the Department of Labor’s proposal, he claimed to have an “educated guess at what might be included” based on a leaked White House memorandum. That memorandum, which he called “thinly-veiled propaganda designed to generate support for a widely unpopular rulemaking,” suggests a definition of “fiduciary” that Gallagher claimed would include “every professional engaged in selling securities to investors.”
- During the Division of Enforcement workshop panel, Deputy Director of Enforcement Stephanie Avakian said that insider trading cases continue to trend upwards, and added that the Commission’s continued emphasis on large-scale data analytics has allowed the Enforcement Division to analyze trading data spanning several different accounts and traders. Avakian also discussed the impact of the Second Circuit’s recent decision in United States v. Newman—in which the Second Circuit held that in an insider trading case against an individual who receives an insider “tip” any “tippee” must have known that the “tipper” received a personal benefit from the tip—calling it a “very significant” decision that could have a significant impact on “certain cases” where the Division “thinks that there was illegal insider trading.” While Avakian added that Newman will not affect most of the SEC’s cases, she also said that the enforcement staff will be “mindful” of the decision’s potential impact as it conducts investigations going forward. In addition, Avakian discussed the financial reporting and audit task force and identified core areas on which the task force is focused, including revenue recognition, expense recognition, faulty valuations, and faulty asset impairment conclusions. She also said that the task force will focus on internal controls cases, even in cases that do not include a fraud claim.
- Chief Litigation Counsel Matthew Solomon touted the SEC’s record at trial and said that in 2014 the Commission tried 30 cases nationwide, which was the highest number in ten years. He reported that the SEC has won 10 of its last 12 federal jury trials, and added that the only two losses came in “circumstantial insider trading cases.” On that point, he added that if the Commission is “not losing some cases” then it is not “being aggressive enough.”
- Daniel Hawke, Chief of the Market Abuse Unit, discussed the Commission’s enforcement efforts in the area of market structure. In particular, he mentioned the Commission’s focus on dark pools and other market structure concerns first raised by the publication of Michael Lewis’ Flash Boys. He added that in market structure cases the line between “regulatory issues” and “enforcement issues” is hard to discern, and therefore the unit brings very few scienter-based charges. Hawke referenced some of the Commission’s recent cases against “alternative trading systems” and said to expect “several more cases” to come in the coming months.
- David Glockner, Regional Director of the Chicago Regional Office, spoke about the SEC’s whistleblower program. He mentioned the first-ever whistleblower retaliation action that was brought in 2014 and said that the Commission is “actively and regularly looking for” potential retaliation against whistleblowers. He warned that the Commission “will bring those actions as we find them,” and noted that the staff is focused on looking at efforts by companies to discourage whistleblowing activity through severance and employment agreements.
- Regional Director of the Ft. Worth Regional Office David Woodcock and Margaret McGuire, Senior Counsel to the Director, discussed the Financial Reporting and Audit Task Force. They said that the task force continues to be a priority for the Enforcement Division and noted that the first-ever task force-related case was brought in 2014. They noted the marked decrease in restatements and revisions in recent years and suggested that companies, board, and auditors are “more in tune to risks related to financial fraud.” The task force is focused on using data analytics to identify problematic issuers earlier in the lifecycle of a fraud.
- Chief of the FCPA Unit Kara Brockmeyer described an uptick in FCPA cases and predicted there will be an increase in the number of FCPA actions brought against individuals. She said that the Commission is continuing to see small and medium-sized companies entering international markets for the first time. Those companies, Brockmeyer suggested, can be at risk of failing to identify the risks that they face when entering into new markets and, as a result, fail to develop adequate internal controls. Brockmeyer also outlined her view on the keys for companies seeking to obtain cooperation credit: real-time reporting of investigative findings, providing translations of foreign-language documents, bringing foreign employees to US or other friendly jurisdictions for Commission interviews, letting the Commission know ahead of time prior to terminating an employee of interest, and “thinking creatively” about getting around data privacy issues in foreign jurisdictions “rather than using them as a block.”