The SEC chairman spoke about legal developments and data analysis at the Mid-Atlantic Regional Conference.
In a keynote address presented to a regional conference held in Philadelphia, SEC Chairman Jay Clayton bemoaned some recent legal decisions that went the wrong way for the SEC, notably the Supreme Court’s holding in Kokesh v. SEC that disgorgement is subject to a five-year statute of limitations. Clayton also addressed the contribution of data analytics to efficiency and effectiveness, especially during a recent hiring freeze and government shutdown.
Legal developments. In examining legal developments affecting the SEC—mostly negative—Clayton focused his remarks on the 2017 Kokesh decision. He said that while statutes of limitation "serve many important functions" and enforcement authorities should bring action swiftly, he was "troubled" by the substantial losses that the SEC will forego in disgorgement cases. Clayton noted that only about $5 million of the $35 million in disgorgement sought in Kokesh fell within the five-year limitations period, and the Commission could forego an estimated $900 million in disgorgement for fiscal year 2018 because of the ruling.
Clayton, who has testified before Congress on the impact of Kokesh, said he is monitoring legislative initiatives on this issue, such as a Senate bill introduced by Mark Warner (D-Va) and John Kennedy (R-La) that would explicitly authorize federal courts to order disgorgement in SEC cases. Although not mentioned in Clayton’s keynote, a petition has been filed with the Supreme Court challenging that authority under existing law.
Of Lucia v. SEC, which invalidated the SEC’s manner of appointing administrative law judges, the chairman commended the Enforcement Division and Office of General Counsel for making what could have been a long-term issue just a "speed bump." About 200 administrative proceedings were assigned to new ALJs, and most of those have been substantially resolved, but Clayton did say that the remaining reassigned proceedings may still require substantial resources. More generally on the topic of administrative proceedings, Clayton observed that the SEC can bring many of its cases in district court and said he is committed to reserving the administrative forum only for appropriate cases.
Another speed bump for the Commission was the D.C. Circuit’s holding in The Robare Group, Ltd. v. SEC that an investment adviser does not willfully omit material facts under Section 207 of the Advisers Act if the adviser acted negligently. Clayton said that while this does not affect the more general, longstanding judicial standard, it will require the agency to consider the appropriate standard in Advisers Act cases given the language of Section 207.
Clayton ended his discussion of legal developments on a positive note, celebrating the holding in Lorenzo v. SEC, where the Supreme Court ruled that a person can be liable under the antifraud provisions for disseminating false or misleading statements that he or she did not make. The chairman said the decision will help the agency enforce violations, especially in private placements and schemes involving offshore actors. Finally, Clayton highlighted the factors the Enforcement Division uses to evaluate its performance and said that by those measures the Division is succeeding.
Data analytics. Shifting from legal constraints to operational ones, the chairman noted that the agency was until recently subject to a hiring freeze and affected by a government shutdown. These challenges make the SEC’s work in data analytics even more important, he said, while stressing that "human capital" is the agency’s most important resource. Clayton also assured that the SEC must be mindful of the volume and sensitivity of the data it collects.
Clayton highlighted the work of the Office of Compliance Inspections and Examinations and the Division of Enforcement. OCIE’s 3150 completed examinations in fiscal year 2018 represented a 10 percent increase over the prior year. The office’s National Exam Analytics Tool allows examiners to collect and analyze large sets of trading records to identify potential problems and better understand a firm’s business. OCIE also developed the High-Frequency Analytics Lab, which produces reports on registrant and market behavior down to microseconds. The reports help identify potentially unfair market practices and shed light on major market events.
On the enforcement side, SEC staff trace digital asset transactions on the blockchain, which has been critical to several actions, including two in which the SEC obtained preliminary injunctions. The agency this year charged nine defendants with hacking into EDGAR to obtain nonpublic information for use in trading. The case required analysis of trading in the window between when the information was extracted and when it was disseminated publicly.
The Enforcement Division also helped establish the Retail Strategy Task Force and the ATLAS initiative. The Task Force develops analytical strategies for identifying harmful practices in the securities market and collaborates on retail investor advocacy and outreach. ATLAS allows Commission staff to evaluate multiple streams of data, such as evaluating activity prior to an equity transaction for possible insider trading; researching historical securities prices for litigation; and assessing a blotter for serial insider trading. ATLAS generated leads that the SEC used to identify over 80 million erroneous blue sheet reports by three firms, resulting in over $6 million in penalties.
Finally, Clayton returned to the topic of responsibly collecting and safeguarding data. While the Consolidated Audit Trail will allow easier tracking of trading activity by putting everything into a single database, there have been serious concerns about protecting investors’ personally identifying information. The SEC supports eliminating the requirement to maintain social security numbers in the CAT and created a new role, Senior Policy Advisor for Regulatory Reporting, in which Manisha Kimmel will oversee the creation and implementation of the CAT.
Clayton also said that work remains on cybersecurity in the wake of the 2016 hack of EDGAR. The agency now has a Chief Risk Officer and a Senior Advisor for Cybersecurity Policy, but no system can be 100 percent safe from intrusion, Clayton said. As part of any data-sharing arrangement with state and federal partners, the Commission should ask whether best efforts are being used to safeguard the data; to what extent personally identifying information is needed; whether there are safeguards in place to protect the confidentiality of information; and how the parties to the agreement can work together if there is an unauthorized disclosure.
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