S.E.C. - Deploying the Full Enforcement Arsenal

  • By: James Bone, President-Global Compliance Associates, LLC
  • Date: October 10, 2013
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In a speech to the Council of Institutional Investors in Chicago this fall Chair of the S.E.C, Mary Jo White, effectively threw down the gauntlet on future enforcement action describing a more aggressive and creative agency. As a former U.S. Attorney, Chair White does not mince words and is setting a new tone on many enforcement fronts the Commission is taking. In the nine years as U.S. Attorney for the Southern District of New York, Chair White specialized in prosecuting complex securities and financial institution frauds and international terrorism cases.
Below is a summary of the highlights of White’s speech:
  • Commission Priorities – the S.E.C. will be seeking feedback on an aggressive set of Congressionally-mandated rules stemming from Dodd-Frank and JOBS Act. In addition to Dodd-Frank and JOBS Act, new rules will be proposed to reform money market funds and adopt changes to financial responsibility rules for broker-dealers including, improved capital requirements, customer protection and recordkeeping requirements. Finally, new proposed Regulation SCI may require new resilient measures for exchanges and large alternative trading systems.
  • Enforcement Principles – instilling a robust enforcement program exemplifies fulfilling the mission of the S.E.C. Chair White describes the behaviors and actions that demonstrate the principles of being a “effective cop on the beat”.
    • Be aggressive and creative – detect wrongdoing and seek legal avenues to pursue it
    • Settlements with teeth and deterrence – aggressive use of penalty authority, seek additional penalties for repeat offenders, and in egregious cases determine how widespread the conduct and whether the firm cooperated.
    • Settlements involving systems control failures – consider mandating new policies and procedures as well as independent compliance testing of controls
  • Demand Accountability - in 2012 the S.E.C. changed its “no admit; no deny language” in cases where settlements included guilty pleas in related cases with disclosures referenced in these settlements. Chair White suggests using a tool she first used as U.S. Attorney called a “Deferred Prosecution Agreement (“DPA”) where the Government would file a criminal charge but defer prosecution pending good behavior and terms of an agreement that may include financial penalties, enhanced compliance, outside monitoring, and potentially public admission or confession of wrongdoing. 
  • Pursue Individuals – S.E.C. staff have been instructed to look hard at whether a case against an individual can be brought. 
  • Cover the whole market – implement new technologies to give the impression of being everywhere to detect and pursue violations, encourage tips from whistleblowers, increase use of quantitative data, and conduct sweeps to uncover wrongdoing.
  • Win at trial – recognizing the increased demands for getting admissions Chair White believes that the S.E.C.’s chances of winning in court have been proven. 
The S.E.C.’s new Chair appears to bring the credentials and toughness needed to help restore investor confidence to the markets. It is clear that “Tone at the Top” must be more than rhetoric with evidence of behavior that dictates robust organizational controls.
Chair White’s speech should be viewed as an opportunity for Compliance professionals to evaluate the impact of new regulations, modernize existing internal controls, and start discussions with its peers in oversight groups and company leadership on ways to better coordinate resources in this new environment. Audit, risk, HR, compliance, IT, and legal all have a role to play in defining an integrated approach to managing regulatory compliance. Compliance may lead this discussion but a full team is needed on the field to execute a comprehensive compliance program.

About the Author
James Bone is the founder of Global Compliance Associates, LLC, a consulting firm that specialized in operational risk management, compliance internal controls, risk frameworks, and information technology risk management best practices. James is a contributing writer for Compliance Week, Corporate Compliance Insights, and contributes to publications specializing in Governance, Risk, & Compliance. James has over 20+ years experience in financial services with firms such as Merrill Lynch and Fidelity Investments.

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