In remarks at the New York University law school’s program on corporate compliance and enforcement, SEC Chair Mary Jo White suggested possible approaches to deter what she described as a persistent, post-financial crisis pattern of corporate wrongdoing at major financial institutions. One idea is the approach taken under the U.K’s senior management regime which makes it easier to hold individuals accountable for offenses committed by their employees. Another idea, which has been promoted by the president of the Federal Reserve Bank of New York, would permit an executive’s deferred compensation to be used to pay civil or criminal fines imposed on the entity for actions that occur within the executive’s area. It may be time to expand the reach of U.S. laws in order to strengthen deterrence and bring about true change in the culture and behavior at financial institutions, according to White.
Investigate to litigate philosophy. White provided a broad overview of the SEC’s enforcement program, which has included a number of one-of-a-kind cases across the spectrum of securities laws. She said a new enforcement model governs the way the SEC identifies misconduct. It also changed the SEC’s investigative processes, and instituted a tougher settlement approach. She described an "investigate to litigate" philosophy which emphasizes the need to be trial-ready with the cases the SEC brings. The enforcement program cannot be strong unless the SEC can prove its cases in court, and White said the agency’s trial record is impressive. The SEC has not lost a jury trial in federal district court in two and a half years, she reported, and the wins have been significant.
Data analytics. White said the agency’s use of data and data analytics has transformed its ability to detect and investigate misconduct. The whistleblower program has also increased the data available to the SEC and has been the key source of a number of significant cases. She added that it is not easy to be a whistleblower and the SEC has taken steps to protect them from retaliation, including through enforcement actions against companies with confidentiality or severance agreements that interfered with employees’ ability to collect awards for reporting misconduct.
Holding individuals liable. Holding individuals liable for wrongdoing has a strong deterrent effect, in White’s view, and the SEC has made that a priority, including those involved in financial reporting cases. She said the SEC brought over 200 issuer reporting actions and charged over 245 individuals in fiscal years 2015 and 2016. In that same period, it also brought 104 accountant proceedings against 157 respondents, including 121 individuals.
Admissions. Another change that White brought to the Commission when she became the chair was to its longstanding policy of settling all cases that did not involve a criminal component on a no admit, no deny basis. In a first for a civil financial regulator, the SEC began to require admissions as a condition for settlement in certain cases involving egregious conduct, obstruction of the investigation, or significant harm to investors or the market. Since this policy was instituted, the SEC has obtained admissions from 30 individuals and 47 entities. White said other civil financial regulators are following the SEC’s lead and have begun to require admissions in some of their cases, which strengthens the impact of civil law enforcement generally, in her view.
New enforcement options. White said the U.S. should study the U.K. senior manager regime to see what it can teach about implementing a stronger enforcement regime for holding executives accountable. There would be no lack of will by law enforcement to use new tools to hold executives accountable, she added. Another less controversial idea is to increase the SEC’s penalty authority. In White’s view, current laws too narrowly limit the amount the SEC can seek and recover. Bipartisan legislation has been introduced in Congress a number of times that would allow the SEC to seek either three times a defendant’s ill-gotten gains or the amount of investor losses, whichever is greater. This provision is currently a component of a bill that she said includes worrisome provisions to roll back much of the Dodd-Frank Act.
White also urged Congress to update the Electronic Communications Privacy Act in a manner that does not interfere with the SEC’s ability to protect citizens from securities fraud and pledged to fight efforts to roll back the SEC’s authority to use administrative proceedings as an alternative forum to district courts for adjudicating securities law violations.
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