SEC as Beat Cop, Enforcing “Our Federal Securities Laws, Big and Small…”

Cop on beat

We recently wrote about some new enforcement principals and strategies of the U.S. Securities and Exchange Commission. But it may have escaped notice that the SEC is apparently not going to focus on potentially significant violations in terms of size or investors affected, but rather intends to police violation of all sizes. We know this because they have told us so.

An Overarching Principle: Cover the Whole Market

Mary Jo White

“One of our goals is to see that the SEC’s enforcement program is – and is perceived to be – everywhere, pursuing all types of violations of our federal securities laws, big and small.”
— SEC Chair Mary Jo White

In fleshing out the comments that the SEC Chair had made a few weeks earlier on the topic of enforcement, there was a repeat of the theme of the Commission as a “strong cop on the beat,” adding that they will not be, “just someone sitting in the station house waiting for a call, but patrolling the streets and checking on things.”

The SEC will therefore not ignore apparent minor violations in favor of the big one that come with media attention. The Chair of the SEC then went on to compare this approach to that of a former mayor of New York City who pursued violations involving “street corner squeegee men to graffiti artists to subway turnstile jumpers to the biggest crimes in the city.”

Resource Allocation

How to be everywhere at all times, especially with resource limitations? The SEC has a four-step plan:

  1. By emphasizing the strength of the SEC’s exam program and combining this with incentives for individuals (whistleblowers) to step forward, then, collaborating with other enforcement agencies combined with the SEC’s technological capabilities.
  2. Focusing on “deficient gatekeepers.”
  3. By not overlooking the small violations to avoid an environment of indifference to the law.
  4. Continuing to highlight the bigger cases by seeking to punish major offenses to act as a deterrence to bad actors while boosting investors confidence.

Incentives for Individuals – aka Whistleblowers

Dodd-Frank established the SEC’s whistleblower bounty program. With the 3rd bounty recently announced, the SEC categorizes the bounty program as, “…a tremendously effective force-multiplier, generating high quality tips and, in some cases, virtual blueprints laying out an entire enterprise, directing us to the heart of an alleged fraud.” Those are strong words.

The existence of the bounty program may be responsible for companies improving the internal audit and compliance function and better treatment for those who report potential wrongful conduct internally. An important note here is that the SEC tells us, “most in-house whistleblowers that come to us went the internal route first.”

Gatekeepers Beware

The SEC’s focus on “delinquent” gatekeepers is a bit chilling. For in addition to certain organizations this group may well include in-house and outside counsel.

Suggested Reading

While our October Alert spoke to “required reading,” this more recent speech from the SEC is certainly worth reading as well: Remarks at the Securities Enforcement Forum.

 

About Ann Longmore

Ann is Executive Vice President of Willis' Executive Risks practice. Based in New York, she has been with the compa…
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