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Ten Changes to Expect from the SEC’s New Enforcement Program

By Jon N. Eisenberg, Partner at K&L Gates.

Investors, borrowers, financial institutions, and the economy were not the only casualties of the financial crisis. Regulators were casualties too, and the SEC was one of the hardest hit. Two Harris Polls—one conducted in 2007 before the financial crisis and the other in 2009 after much of the damage had been done—tell the story. Between 2007 and 2009, favorable ratings of the SEC dropped from 71% to 29%, while the percentage of the public rating it fair or poor rose from 25% to 72%. “By a wide margin,” the Harris organization stated, “[this was] the biggest change in an agency’s ratings since these questions were first asked in 2000.” Indeed, the SEC’s 29% positive rating was a full 15 points worse than even the second-lowest rated agency in the survey. Congress attacked the Commission as well, as when Long Island Representative Gary Ackerman burst out in a hearing, “Whose job is it to protect the investors? Because I wanna tell them that they suck at it.” And the press was also merciless, as when reporter Charlie Gasparino urged, “the SEC should be disbanded.”

Fast forward. Mary Schapiro becomes SEC Chair. In short order, she brings in former criminal prosecutors to head the Enforcement Division, the Northeast Regional Office, and the Miami Regional Office; eliminates an entire level of review (branch chief positions) and moves them into line investigative positions; delegates authority to the staff to open formal investigations and issue subpoenas without Commission approval; commits to work even more closely with criminal prosecutors; requests major increases in funding for the enforcement staff; ends the Corporate Penalty Pilot Program; creates a new Office of Market Intelligence to build state-of-the-art data collection, surveillance, and analytics; establishes a new Division of Risk, Strategy and Financial Innovation; and creates specialized investigative groups dedicated to high-priority enforcement areas (market abuse, structured and new products, asset management, FCPA, and municipal securities and public pensions). She tells the staff “we are going to act like our hair is on fire.” The Commission acts like its hair is on fire and sues virtually every major financial institution for a role in the financial crisis.

But the drumbeat of criticism continues. Judge Rakoff rejects the first high-profile settlement under the new enforcement regime, and essentially criticizes the Commission as too soft. His decision is later reversed, but the spectacle of a federal judge criticizing the new enforcement regime is damaging. National Magazine Award winner Matt Taibbi publishes a widely read piece in the Rolling Stone in which he writes, “It’s by now been well-established that the SEC’s performance in policing Wall Street before, after, and during the crash has been comically inept.” Various pundits weigh in, completely unfairly in this author’s view, that the SEC is a paper tiger afraid to take on the big guys. No one weighs in against the danger of government overreach.

Fast forward again. Mary Jo White, the former U.S. Attorney for the Southern District of New York, becomes the first former prosecutor and litigator to chair the Commission. She knows the Commission’s reputation is improving, but she also knows it has not fully recovered. So what does she say? Let’s look. Because her words are the best roadmap to what you can expect from the Commission’s enforcement program now and at least over the next few years:

Going after the Big Guys

“In many ways, the most visible face of the SEC is what we do to enforce the law. After all, most Americans do not see how well our experts examine a financial firm, review a regulatory filing, or conduct economic analysis on a complex rule. But they do pay attention when we bring a major enforcement action against a major financial institution, when we charge a hedge fund executive with insider trading, when we freeze a suspected Ponzi schemer’s assets, or when we charge a CEO with fraud.”

“[W]e are continuing to prioritize the bigger cases—pursuing and punishing major offenses by significant and high-profile market participants, sending a strong message of deterrence to the industry and boosting the confidence of investors.”

Targeting Gatekeepers

“[W]e are focusing on deficient gatekeepers—pursuing those who should be serving as the neighborhood watch, but who fail to do their jobs.”

Bringing Enforcement Cases for Even Minor, Unintentional Infractions

“Investors do not want someone who ignores minor violations, and waits for the big one that brings media attention. Instead, they want someone who understands that even the smallest infractions have victims, and that the smallest infractions are very often just the first step toward bigger ones down the road. They deserve an SEC that looks at its enforcement mission in exactly that way.”

“This approach is not unlike the one taken in the nineties by then New York City Mayor Rudy Giuliani and police Commissioner Bill Bratton….They essentially declared that no infraction was too small to be uncovered and punished.” [The Commission will pursue] “[n]ot just the biggest frauds, but also violations such as control failures, negligence-based offenses, and even violations of prophylactic rules with no intent requirement….”

Suing More Individuals

“Another core principle of any strong enforcement program is to pursue responsible individuals wherever possible…. Individuals tempted to commit wrongdoing must understand that they risk it all if they do not play by the rules. When people fear for their own reputations, careers, or pocketbooks, they tend to stay in line…. I want to be sure we are looking first at the individual conduct and working out to the entity, rather than starting with the entity as a whole and working in.”

Imposing Harsher Financial Penalties

“And when we resolve cases, we need to be certain our settlements have teeth, and send a strong message of deterrence. That is why in each case, I have encouraged our enforcement teams to think hard about whether the remedies they are seeking would sufficiently redress the wrongdoing and cause would-be future offenders to think twice…. [W]e must make aggressive use of our existing penalty authority, recognizing that meaningful monetary penalties—whether against companies or individuals—play a very important role in a strong enforcement program.”

Mandating More Undertakings

“Expect to see more such mandatory undertakings in future cases so that we are not just punishing past wrongs, but also acting to prevent future wrongs.”

Demanding More Admissions

“Candidates potentially requiring admissions include:

  • Cases where a large number of investors have been harmed or the conduct was otherwise egregious.

  • Cases where the conduct posed a significant risk to the market or investors.

  • Cases where admissions would aid investors deciding whether to deal with a particular party in the future.

  • Cases where reciting unambiguous facts would send an important message to the market about a particular case.”

Coordinating More Closely With Examination Teams

“We also will be closely coordinating our enforcement teams and our examination teams, both to ensure that exams are properly focused and that when misconduct is uncovered it is referred for possible enforcement action.”

Using the Commission’s Enhanced Surveillance Tools

“This broad focus demands that we use all available means to detect and pursue violations. So we will be taking advantage of tips from whistleblowers, using quantitative data available to us, and conducting sweeps and other means of uncovering misconduct.”

Trying More Cases

“If, in fact, a result of our change in settlement policy results in more trials, one clear winner will be the administration of justice, which will always fare best in the open for the public to see and to take stock of what a defendant did and what its government is doing.”


In short, now and over the next few years, financial institutions can expect an even more aggressive enforcement program, a greater focus on individuals, tougher penalties for both small and large infractions and for both companies and individuals, new demands for admissions, closer coordination between enforcement and the examination team, a greater ability by the Commission to use its enhanced tools to uncover potential misconduct, and a greater willingness by the Commission to try tough cases. Good compliance and adequate resources are critical in all environments, but in this one especially. Government overreach is a significant danger as the Commission continues efforts to restore its own reputation. Unfortunately, the only check against overreach, apart from staying out of trouble, is a willingness of firms to litigate when the Commission insists on bringing weak cases or seeks penalties out of proportion to what the cases merit. Historically, that’s not been the path that firms have chosen.

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