We have charged firms for having compliance failures even where there were no underlying violations. We want to send a message that businesses have to have controls in place in order to prevent fraud. Preventing wrongdoing in the first place is much better than after-the-fact enforcement, which more often than not is not going to fully compensate investors for the harm they have suffered.
I think this is fairly significant. The SEC has a lot of front-line investigative staff, and it’s hard to stand out in the crowd. One way to get noticed is to lead the charge on some of the larger cases like the ones I noted above. But there aren’t so many of those. Most of the cases the SEC brings don’t have the same PR impact that those do.
Still, the compliance-based cases the SEC has done in the last year are quite meaningful in their own way. They require real expertise to get into the weeds of statutes that aren’t as frequently handled by the Enforcement Division. These cases also have the potential to get out in front of smaller problems before they become bigger ones. In the last year, the SEC has brought cases addressing the safe handling of nonpublic information at investment advisers (Buckingham Capital) and broker-dealers (Janney Montgomery Scott), investment adviser supervision (at AXA Advisors), and trading huddles at Goldman Sachs. If these cases prevent larger issues down the road, they will be well worth the effort.
To have Khuzami talking up these cases publicly is a signal to the SEC staff, and real encouragement to pursue them more vigorously. We might be seeing more in the future.