SEC Chair: It Will Be A Busy Year For Enforcement

by Dorsey & Whitney LLP
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SEC Chair Mary Jo White outlined the 2014 agenda for the SEC in recent remarks. SEC Chair Mary Jo White, 41st Annual Securities Regulation Institute, Coronado, California (Jan. 27, 2014)(here). Portions of the agenda focused on technology and rule making initiatives. A key segment focused on Enforcement, promising a “very busy” year.

Beginning with new technology and related issues, Ms. White discussed NEAT, MIDAS and operational integrity. NEAT stands for “National Exam Analytics Tool.” The Quantitative Analytics Unit of the National Exam Program developed this tool. It permits the staff to quickly analyze massive amounts of data. Thus, for example, in “one recent exam, our exam team used NEAT to analyze in 36 hours literally 17 million transactions executed by one investment adviser.” In 2014 this tool will permit the staff to “identify signs not only [of] possible insider trading, but also front running, window dressing, improper allocations of investment opportunities, and other kinds of misconduct.”

MIDAS–the Market Information Data Analytics System—is another recently developed tool. It permits the staff to collect huge amounts of trading data and is available on the Commission’s website. In 2014 “we are expecting to post further staff analysis of off-exchange trading, a review of research on high-frequency trading, and a data series on depth-of-book liquidity,” Ms. White noted.

Ms. White also discussed operational integrity for exchanges, reviewing her meeting with the leaders of the equities and option exchanges last August following the outage in Nasdaq listed securities. In 2014 the Commission’s rule making agenda will include Regulation SCI –Systems Compliance and Integrity – which will put “new, stricter requirements for the use of technology by exchanges, large alternative trading systems, clearing agencies, and securities information processors.”

Ms. White also promised to move forward with the rule making agenda for the Commission. In this area the agency will move forward with implementing Dodd-Frank and completing proposed rules for money market funds and securitization as well as evolving new paths to capital formation. As part of this agenda Ms. White stated that “we should rethink not only the type of information we ask companies to disclose, but also how that information is presented, where and how that information is disclosed, and how we can take advantage of technology to facilitate investors’ access to information and make it more meaningful to them.”

Turing to the enforcement program, Chair White stated that “[t]he coming year promises to be an incredibly active year in enforcement, as we continue to vigorously pursue wrongdoers and bring enforcement actions across the entire industry spectrum.” Part of that robust program will focus on the continued use of admissions which are designed to achieve greater accountability and build public confidence. Thus “in 2014, you will see more cases involving admissions. When and how we decide to require admissions will continue to evolve and be subject to further articulation in the cases we bring and as we discuss it publicly,” Ms. White stated.

The focus of enforcement will shift, as its division’s docket of major investigations for the financial crisis draws to a close. In fact that shift began last year with the formation of the Financial Reporting and Audit Task force. This group, Ms. White noted, “is pursuing a number of goals, including building a deep understanding of the state of financial reporting – not just why it happens, because there is plenty of learning on that question, but how it happens and in what specific areas.” That effort will also look closely at auditors and senior executives of companies. “The message is that critical accounting issues are the responsibility of all those involved in the preparation and review of financial disclosures” the Chair noted.

Market integrity will also be a 2014 enforcement priority. Over the past two years the Commission has “tried to send a strong enforcement message to the exchanges and alternative trading systems” that they must operate fairly and within the rules. Moving forward market structure integrity actions will continue to be a priority. Likewise “FCPA, insider trading, and microcap fraud” will be priorities in 2014. Overall it will be “a very busy year in enforcement,” Ms. White reiterated.

 

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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