SEC Enforcement Initiatives and Priorities 2013

On July 16, 2013, Andrew Ceresney, Co-Director of Enforcement, U.S. Securities & Exchange Commission, spoke at the SIFMA Compliance and Legal Society monthly luncheon about Enforcement’s initiatives and priorities.

Enforcement Initiatives

Mr. Ceresney opened his remarks by providing a general description of Enforcement’s recent initiatives, including penalties and other remedies, the Center for Risk and Quantitative Analytics, the Financial Reporting and Audit Task Force and the Microcap Fraud Task Force.  The SEC issued a press release on July 2, 2013, relating to these initiatives, which can be found here.  Mr. Ceresney noted that Enforcement intends to become more productive by centralizing and formalizing its initiatives, and that it also intends to be more proactive by leveraging expertise and its ability to act in real time.  He elaborated on these initiatives:

1.  Penalties and other remedies must “reflect the new realities” in the market, and they must be proportionate to the wrongs committed.  The Staff has the ability and intends to be more aggressive with the size and scope of its penalties and other remedies, and penalties will continue to increase to prevent recidivism.  Mr. Ceresney noted that penalties cannot simply be the “cost of doing business,” and that wrongdoers “must feel the pain.”

2.  The Center for Risk and Quantitative Analytics (“CRQA”) takes affirmative steps to detect misconduct in the marketplace and identify potential threats in high-risk areas by using quantitative data and analysis.  For example, CRQA seeks out fraud and insider trading by identifying and monitoring for abhorrent trading.

3.  The Financial Reporting and Audit Task Force focuses on detecting accounting fraud in connection with the preparation of financial statements, issuer reporting and disclosure and audits, with such cases involving various divisions within the SEC in addition to Enforcement.

4.  The Microcap Fraud Task Force investigates and attempts to detect fraudulent activity in the issuance, marketing and trading of microcap securities.  In addition to the brokers who sell microcap securities, this Task Force will focus on “gatekeepers,” including attorneys and promoters, and will have the ability to use “real-time” enforcement tools. 

Enforcement Priorities

Mr. Ceresney further discussed the areas where Enforcement intends to focus its efforts.

1.  Accounting fraud — While the accounting fraud era peaked years ago (e.g., Enron), Enforcement intends to refocus on disclosure cases and the Financial Reporting and Audit Task Force will help uncover fraudulent financial reporting.

2.  Cases relating to investment adviser and investment adviser firms — The focus here will be on traditional areas, such as Ponzi schemes, and new areas, such as Section 15(a) of the Investment Company Act of 1940 relating to shareholder approval of investment advisory agreements.

3.  Market structure and trading related issues, including high-frequency trading, algorithmic trading and dark pools — With recent fines and settlements relating to the NYSE, NASDAQ and CBOE, Enforcement is sending a strong message to exchanges that they must have appropriate controls and oversights of their systems and processes.  Mr. Ceresney explained that an area of focus that will become increasingly active in the coming years is 15c3-5 and the risks arising from automated trading.

4.  Structured and New Products Unit (“SNEWP”) — These are the types of products that contributed to the financial crisis and Mr. Ceresney noted that a large portion of past recoveries by Enforcement came from this area.  Enforcement will attempt to better monitor the next wave of complex financial instruments (e.g., ETFs, RCNs, CLOs, etc.), and will leverage its expertise to bring new cases.

5.  Regulations stemming from Dodd Frank — Mr. Ceresney explained that firms will need to fine-tune their best practices to conform to new regulations.

6.  Foreign Corrupt Practices Act — Enforcement intends to use a two-pronged approach with respect to FCPA, which Mr. Ceresney advised continues to be a hot topic.  The first prong is avoidance through education.  Enforcement, with the U.S. Department of Justice, recently published a FCPA resource guide, which can be found here.  The second prong is deterrence through strong enforcement actions and penalties.  Mr. Ceresney added that the Staff would consider non-prosecution agreements (similar to the recent agreement with Ralph Lauren Corp.) based on the company’s cooperation with Enforcement.

As a general matter regarding cooperation, Mr. Ceresney emphasized that he places a “great premium” on cooperation because it incentivizes parties to be open with Enforcement.  He added, moreover, that it is important for Enforcement to be direct with parties about how much credit they should expect to receive in return for their cooperation.

“Neither Admit Nor Deny” Settlement Policy

Mr. Ceresney explained that the Staff’s practice of settling enforcement cases on a “neither admit nor deny” basis generally makes sense because such settlements function to conserve resources through faster settlements and resolution of cases.  He added that the “neither admit nor deny” policy will remain an important device for Enforcement, and that the language will be utilized in most settlements.

After having reviewed its historical approach to settlements, however, Mr. Ceresney explained that the Commission concluded that some cases involve issues where admissions of guilt are important to the settlement and such admissions, on balance, outweigh the potential litigation risk and resulting conservation of resources that come from having no admissions.

As for cases where admissions might be warranted, Mr. Ceresney pointed to (1) cases involving large numbers or harmed investors, and (2) cases where the recitation of unambiguous facts would be meant to send a message to the market.  Mr. Ceresney added that the Staff has discretion to apply whatever language it deems suitable to a settlement and that settlement language should not be for a court to decide.

Mr. Ceresney advised that Enforcement Staff does not desire to delay settlements and he does not believe that the new policy will change that.  To the extent Enforcement finds itself litigating more often, Mr. Ceresney explained that Enforcement will shift resources accordingly and that he “believes in Enforcement’s trial team.”

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