What the SEC’s enforcement numbers really tell us

The Securities and Exchange Commission’s approach to enforcement reflects a workplace adage: What the boss wants, the boss gets.
Last week, the SEC announced it filed a record 755 enforcement actions in fiscal 2014, which ended Sept. 30, and obtained a total of $4.16 billion in disgorgement and penalties. Those numbers are up from fiscal 2013, at 686 actions and $3.4 billion in penalties, and fiscal 2012, at 734 actions and $3.1 billion in penalties.
The activity reflects the emphasis SEC Chairman Mary Jo White has put on enforcement since taking over the agency in April 2013. A former U.S. attorney for the Southern District of New York, she brought prosecutorial zeal to the commission, according to experts.
When the agency sees a problem in the market, it is more apt to address it with enforcement than with other means, such as examinations, rulemaking or legislation, a former SEC lawyer said.
“There’s more emphasis to do more through enforcement than there ever has been,” said Christopher Robertson, a partner at Seyfarth Shaw and a former SEC senior enforcement counsel.
Thomas Potter, a partner at Burr & Forman, attributes the trend to Ms. White’s effort to burnish the agency’s reputation as being tough on Wall St.
“She sees it as part of her mission,” Mr. Potter said. “The signal is loud and clear that they’re out to find and punish violations, and no violation is too small.”
One way the SEC is bolstering its policing is by increasing the cooperation between enforcement and its examination arm, the Office of Compliance Inspections and Examinations.
“The OCIE staff has been quicker to refer matters to enforcement than they may have been in prior years,” said Todd Cipperman, managing principal of Cipperman Compliance Services. “You see enforcement staff showing up much more frequently on exams.”
The trend will affect financial advisers.
“They are interested in maintaining a high number of enforcement actions, and enforcement actions are very firm-damaging, if not firm-killing, depending on the nature of your business, regardless of the penalty imposed,” Mr. Cipperman said.
Robert Plaze, a former deputy director of the SEC’s Division of Investment Management, said there is increasing concern among investment firms that the SEC’s enforcement units get involved before problems can be solved at the regulatory level — a move that forces firms to hire lawyers.
“The costs involved are enormous,” said Mr. Plaze, an attorney at Stroock & Stroock & Lavan. “There needs to be some sensitivity to that.”
It’s difficult to evaluate enforcement based solely on the number of cases filed, experts said. The SEC’s statement last week did not provide detailed enforcement data, which will be included later this year in the agency’s financial report.
SEC member Michael Piwowar recently criticized the agency’s emphasis on pure numbers.
“We need to re-think how we evaluate and describe the effectiveness of our enforcement program,” Mr. Piwowar said in an Oct. 14 speech. “We need to make sure that the focus is on measuring outcomes, not outputs.”
There is always tension between statistics and results, Mr. Plaze said.
“You want an agency working hard, but you also want it to bring good cases and the right cases,” he said. “My sense is that they are balanced” at the SEC.
He pointed out that the five SEC commissioners can influence caseloads.
“There’s a safeguard in the system,” Mr. Plaze said. “Commissioners can vote against cases they believe are meritless.”
In addition to traditional areas, such as insider trading and corporate disclosure, the SEC is pursuing more cases in the investment management sector, Mr. Robertson said, especially as investors age and depend on their nest eggs.
“Anyone who is touching those assets needs to be subject to appropriate oversight, and where the facts warrant, they take action,” Mr. Robertson said of the SEC.
The Asset Management Unit of the Division of Enforcement has been working with the Division of Investment Management to target cases that bolster the latter’s regulatory initiatives, Mr. Plaze said.
“There’s much more of a partnership in bringing the enforcement matters,” he said. “The quality is better and the messaging is better.”

Related Topics: Securities and Exchange Commission