On Monday, September 15, 2014, through its partnership with the SEC Historical Society, Bingham held its sixth annual Bingham Presents event. The event featured a distinguished group of panelists who are all well versed in the topic of discussion, Current Issues in Broker-Dealer Enforcement. The panel consisted of Andrew Ceresney, the Director of the SEC’s Division of Enforcement; Eric Grossman, the Chief Legal Officer at Morgan Stanley; Joaquin “Jack” Sena, the Associate General Counsel for Bank of America; and Timothy Burke, the co-chair of Bingham’s Financial Institutions Regulatory, Enforcement and Litigation Group and practice group leader of the firm’s Broker-Dealer Regulatory practice. The discussion was moderated by Eric Roiter, currently a lecturer in law at Boston University School of Law and formerly the general counsel to Fidelity Management & Research Company.
While the discussion touched on many topics, this alert will focus on three: (1) the SEC’s policy towards requiring admissions of liability or wrongdoing in settlements; (2) the SEC’s “broken windows” enforcement strategy; and (3) how technology or “big data” is impacting the SEC’s approach to enforcement. A recording of the complete audio broadcast is available at www.sechistorical.org.
SEC’s “Admissions” Policy Post Citigroup Global Markets, Inc.
In June 2014, the Second Circuit1 overturned the November 2011 opinion of Judge Rakoff that refused to approve a consent decree entered into by the SEC because it lacked admissions of wrongdoing or liability. In light of the Second Circuit’s decision, Mr. Ceresney was asked about the SEC’s view towards seeking admissions in the settlement process. He agreed with the Second Circuit’s decision that the SEC has the discretion to decide whether or not to seek admissions.2 However, he did not think the court’s ruling would change the SEC’s approach toward admissions, noting that the SEC has “asked for [admissions] in the right cases where it increases accountability and acceptance of responsibility and where it’s an important facet of the case.” He went on to list several factors that might spur the SEC to seek admissions, such as harm to large numbers of investors, egregious conduct, obstruction of the SEC’s investigation, or significant risk to the markets where the conduct was such at that admissions or unambiguous facts would enhance the message of the case. He admitted that these judgments can be subjective, but he feels that seeking admissions is “an important additional tool in [the SEC’s] arsenal.”
Mr. Ceresney cited two cases involving broker-dealers as examples of their policy in action: the Convergex settlement from December 20133 and the Scottrade settlement from January 2014.4 Mr. Ceresney noted that the conduct in the Convergex case spanned a number of years and characterized it as “egregious,” and said that Scottrade’s systemic failure to produce blue sheet information “impacted the SEC’s ability to investigate the cases.” Notably, he also pointed to the Scottrade case as a reflection of the scope of the cases in which the SEC will seek admissions, as “we’re not just talking about scienter-based violations, we’re talking about controls violations, too, in the right sort of circumstances.”
“Broken Windows” Enforcement Policing
During the event, Mr. Ceresney also provided his take on the so-called “broken windows” strategy to enforcement. In October 2013, Chairperson Mary Jo White gave a speech where she stated that one of the SEC’s 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.”5 She likened this to the approach taken in the 1990s in New York City by Mayor Rudy Giuliani and Police Commissioner Bill Bratton where the “NYPD pursued infractions of law at every level.”6 The theory is that “when a window is broken and someone fixes it — it is a sign that disorder will not be tolerated. But, when a broken window is not fixed, it ‘is a signal that no one cares, and so breaking more windows costs nothing.’”7
Regarding this strategy, Mr. Ceresney said that “what we’re really trying to do here is focus on areas that we see as lacking in compliance or focus over the recent past.” The Enforcement Division’s approach is to use “big data” to find violations in an efficient manner, and then bring streamlined investigations and streamlined settlement approaches that often involve multiple, unrelated respondents. He feels that this has allowed them to “target violations that haven’t received much attention before without taking up many resources.” He cited the SEC’s recent settlements regarding Section 16 reporting violations with 34 respondents as an example of this policy.8 The day after the event, the SEC announced settlements with 20 respondents for Rule 105 violations.9 These are the types of cases where, as Mr. Ceresney noted, the SEC was “able to expend minimal resources and obtain significant settlements.”
While Mr. Ceresney refuted the notion that every infraction, no matter how minor, could now be turned into an enforcement case, he stressed that the strategy is aimed at bringing increased focus to areas that “have not received sufficient attention.” He also deflected the criticism that the focus on relatively minor violations might distract the SEC from larger or more important matters, as he feels that the SEC has been “as aggressive as we can be” in its pursuit of “larger scale frauds.” He noted that the Enforcement Staff has already had almost twice as many trials this year as they had all of last year, which he attributes to their “aggressiveness both in terms of bringing the cases, but also in terms of the remedies we’re seeking.”
Big Data’s Role in Enforcement
“Big data” ties in to the SEC’s “broken windows” approach. The increased volume of data available to the Enforcement Division, and increased technological capabilities, allow the SEC to identify potential violations in a far more efficient manner than ever before. Mr. Ceresney believes that increases in the volume of data, and the utility of the tools that analyze the data, have been “transformative in the last five to ten years.”
He cited trading violations as a particular area where big data has enhanced the Enforcement Division’s capabilities. On the insider trading front, the SEC is now doing their own analysis of trading data to find “patterns in terms of traders who trade in unison, [which] allows [them] to work backwards and then find the source for the information.” He also noted that, in some examinations, OCIE is asking for trade blotters listing every transaction for the last three or four years, and that their tools allow them to “look for patterns of activity that are problematic, [such as] cherry-picking, front-running, etc.” in a manner that is much more comprehensive than ever before. As Mr. Ceresney said when describing a particular tool at the SEC’s disposal:
“[I]t really processes the data in a way that allows you to see the patterns and to see the issues much more quickly. It takes minutes what previously would have taken you months. It’s very exciting.”
Contacts
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Burke-Timothy1 SEC v. Citigroup Global Markets, Inc., 752 F.3d 285 (2d Cir. 2014).
2 Mr. Ceresney gave the familiar disclaimer that his remarks reflect his own views, and not those of the Commission or its Staff.
3 Securities Exchange Act Release No. 71128 (Dec. 18, 2013).
4 Securities Exchange Act Release No. 71436 (Jan. 29, 2014).
5 Mary Jo White, Chairperson, Remarks at the Securities Enforcement Forum (Oct. 9, 2013) (transcript available at http://www.sec.gov/News/Speech/Detail/Speech/1370539872100#.VCss_uMWPTo).
6 Id.
7 Id
8 See http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542904678#.VCssH-MWPTo.
9 See http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542963767#.VCssIeMWPTo.
This article was originally published by Bingham McCutchen LLP.