I’m attending a conference sponsored by IA Watch: Coping with Regulatory Change. These are my brief notes.
William McLucas, Mark Schonfeld and Frank ______ spoke on what is happening on the enforcement side of the Securities and Exchange Commission.
The Madoff fraud and the 2008 financial crisis are still driving forces for SEC enforcement. The SEC still feels the sting of the inquiries coming out of those two events.
The panel thought that the SEC is not willing to let cases go because of the fear that there is a missed, bigger problem. The panel also thought the SEC has taken a disproportionate blame for the 2008 financial crisis. “Why hasn’t the SEC put any bank executives in jail for crashing the economy?” Of course, because the SEC can’t bring criminal actions. The Enforcement Division is much more focused on investment management. The division works closer with OCIE in exams and uses exams for enforcement investigations.
The panel thinks what were considered minor deficiencies in the past are now blowing up into bigger enforcement actions. There is little incentive to close cases. More of the enforcement division attorneys have come from the Department of Justice. They are less afraid to go to court. The government use the threat of action to extract settlements. The SEC has much more access to data for bringing actions. The courts have given the SEC much more deference to its own interpretation of its own rules. The SEC has a broader ability to create law.
Investigation has a cost to the business beyond the direct costs of legal fees and fines. Investors are skittish. They have lots of options. Institutional investors have their own fiduciary responsibilities to their constituents. Enforcement does not always take this into account. They key is to avoid attracting enforcement during an SEC exam.
The SEC did have one of its swords taken away. The Newman decision will make it harder to bring insider trading cases. The government will need to prove the benefits in the tipping relationship. The personal benefit standard from the Dirks case has been heightened. To go after the remote tippee, the government needs to prove a benefit to the tipper, and that the remote tippee knew of the benefit. The SEC thinks is can still prove cases because its civil standard is merely “preponderance of the evidence” as opposed to the “beyond a reasonable doubt” standard in a criminal action. In end, Newman will not reduce the number of insider trading cases, but there may be more civil cases and fewer criminal cases.
CCO liability is generally only when there is a wholesale failure by the COO, at least according to the SEC staff. However, “wholesale failure” is in the eye of the beholder. The panel disagrees that the SEC is only bringing the most egregious examples. The panel thinks the SEC is dis-incentivizing CCOs from getting involved is bad situations. Obviously, a CCO stealing and trading on inside information is fair game. The panel does not think the SEC should be naming CCOs except for those situations. The SEC has gone too far. CCOs do need to worry.
