SEC Enforcement Update - The SEC Speaks in 2014: Beware the Data Crunchers


Even more notable to securities practitioners than the attendance of Mark Cuban at this year’s SEC Speaks event (held in Washington, D.C. on February 21 22, 2014) was the start-to-finish focus of the Enforcement Division on data, data, data. Beginning with Chair Mary Jo White’s kick-off address, and extending throughout the two-day event, the Commission and its staff lauded the SEC’s increasing efforts to identify “trends,” “aberrations,” “areas of risk,” and investigative leads from the vast troves of public company disclosures and trading data the SEC routinely collects. Particularly when it comes to financial reporting, public companies—along with their executives, attorneys, and auditors—are likely to find themselves at increased risk of Enforcement scrutiny if their financial statements stand out from the pack.

Touting a record $3.4 billion in disgorgement and civil penalties ordered during the SEC’s 2013 fiscal year, Chair White highlighted Enforcement’s relatively new Financial Reporting and Audit Task Force (“FRA Task Force”). This task force was formed “to look at trends or patterns of conduct that are risk indicators for financial fraud, including in areas like revenue recognition, asset valuations, and management estimates.” It is reminiscent of an earlier effort developed by Enforcement’s Asset Management Unit that focused specifically on identifying what the SEC viewed as “aberrational” hedge fund performance. One former SEC Commissioner described this so-called Aberrational Performance Inquiry as “an analytical model that uses performance data to identify hedge fund advisers worthy of further review.” She warned, for example, that “if an equity fund consistently outperforms similar funds over a period of years or as suspiciously consistent, positive results, it would be identified and examined.”

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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