The SEC and Omnipresent Enforcement

more+
less-

A key part of the new “get tough” enforcement doctrine is omnipresence – that is, creating the impression that the SEC’s Division of Enforcement is everywhere all the time. This theory, a variation of the “cop on the beat” approach, posits that if would-be law violators believe the SEC cops are everywhere, then they will refrain from violating the law. Deterrence will be achieved.

Clearly the SEC cannot, in actuality, achieve omnipresence. This is particularly true in this age of limited resources, although the Commission has never really had a budget equals to it very significant obligations. To overcome this chronic lack of resources, various techniques are being employed, according to the SEC Chair. Those include “broken windows,” that is, prosecuting violations large and small; focusing on select areas such as Operation Broken gate which targets gatekeepers such as auditors based on the theory that if professionals are conscripted violations can be halted or at least identified earlier given the access of accounts and lawyers; and leveraging resources by working with other regulators and SROs to identify and halt violations at an earlier point.

An early return from this approach may be the action brought by FINRA and BATS Global Markets, Inc. against Citigroup Global Markets Inc. for illegal short selling. Specifically, the Citigroup was charged with violating Rule 105 of Regulation M with respect to five offerings. The Rule prohibits selling short the securities of a firm during a specified period prior to a secondary offering and then purchasing shares in that distribution.

Here Citigroup purchased more than 1.5 million shares from late May 2009 through September 2010 after selling 313,890 shares short in the window prior to five offerings. To resolve the violations the firm was ordered to pay disgorgement of $538,000 plus interest and about $559,000 in fines. Citigroup was also ordered to update its written supervisory procedures with respect to Rule 105.

Rule 105 is one of the areas targeted under the new enforcement approach. Last fall the Commission announced the filing of twenty-three Rule 105 actions in a group to underscore the point (here). Since then other, similar actions have been filed. Equally noteworthy is the fact that FINRA and the exchange BATS investigated and brought this action, permitting the Commission conserve its resources while actions are brought in a targeted area. If the Commission can continue to effectively leverage its resources to extend its enforcement presence in areas it deems critical, it may not result in omnipresence, but the agency could move forward with an effective enforcement program.

Topics:  Citigroup, Enforcement Actions, FINRA, Regulation M, Rule 105, SEC

Published In: Business Torts Updates, Finance & Banking Updates, Securities Updates

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.

© Dorsey & Whitney LLP | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »