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How the SEC plans to be 'everywhere': despite limited resources, the agency is leveraging its strengths to zero in on advisors' smallest infractions.

Securities and Exchange Commission Chairwoman Mary Jo White recently warned advisors and broker-dealers that one of the agency's top goals is to ensure that its enforcement program "is--and is perceived to be--everywhere, pursuing all types of violations of our federal securities laws, big and small."

Retail investors in particular, White stressed at the Securities Enforcement Forum in Washington in early October, "need to be protected from unscrupulous advisors and brokers, whatever their size and the size of the violation that victimizes the investor."

The approach of going after "even the smallest infractions," White said, is not unlike the one taken in the '90s by then New York City Mayor Rudy Giuliani and Police Commissioner Bill Bratton, back when White was the United States Attorney for the Southern District of New York.

"The same theory can be applied to our securities markets. Minor violations that are overlooked or ignored can feed bigger ones and, perhaps more importantly, can foster a culture where laws are increasingly treated as toothless guidelines," White said.

As a former federal prosecutor, White's focus on bolstering the agency's enforcement division shouldn't come as too much of a surprise. However, with the agency lacking adequate funds and exam staff, one has to wonder how the securities regulator can achieve such an ambitious goal of being "everywhere" and, as White also noted, "expanding" the agency's reach. Help from a self-regulatory organization (SRO) possibly?

Former SEC Chairwoman Mary Schapiro, who's now a managing director and chairman of Promontory Financial Group's governance and markets practice in Washington, told me in an email message that the SEC "clearly needs additional resources and certainty of funding," and an SRO "can leverage the agency's capabilities and is an obvious option to respond to [the SEC's] resource constraints."

Steve Crimmins, a partner with K&L Gates in Washington, who served for eight years as the SEC's Deputy Chief Litigation Counsel, told me recently that while it remains to be seen if the idea of naming FINRA as a self-regulatory organization to help the SEC examine advisors will regain political steam next year, "SROs have long been the SEC's partner in identifying possible violations."

White has herself conceded that the SEC's resources "are not infinite. Indeed, they are not nearly sufficient to the enormity and scope of the responsibility we have." But, she said in her early October comments, the agency is "making better and better use of our resources."

The co-heads of the SEC's enforcement division, George Canellos and Andrew Ceresney, White said in her comments, "are working to build upon the strength of the division by ensuring that we pursue all types of wrongdoing."

Ceresney noted at the same event that part of the division's strength are the five specialized units that were created by his predecessor, Robert Khuzami. The specialized units are "a wonderful innovation that has worked extremely well," said Ceresney, who was appointed co-director along with Canellos by White in April.

Schapiro said helping to ensure that the agency could "remain vigilant" in enforcing securities laws "was one driver for our creating specialized units in enforcement and cross-agency task forces."

While the division will retain the units--which include asset management, market abuse, foreign corrupt practices, municipal securities and public pensions, and structured products--they will likely be "retooled." For instance, Ceresney said that the structured products unit was recently renamed the complex financial products unit, as "structured products are less prominent" now.

Indeed, Crimmins noted that the asset management unit has been "aggressive" in bringing investment management cases--146 such cases in 2011 and 147 in 2012.

Yet another measure being used by the SEC to be "everywhere" is the enforcement division's compliance initiative, which Stephen Cohen, the associate director of the division, said recently is aimed at bringing enforcement actions against investment management firms lacking effective compliance programs.

Cohen said the initiative is a joint effort of the National Exam Program, the Investment Management Division and enforcement's asset management unit. "To date, the commission has brought six actions arising out of this initiative, which is particularly timely because hundreds of private fund advisors have recently registered with the commission" under the Dodd-Frank Act.

Cohen said there are more such actions in the pipeline. He said that quality compliance programs will reduce penalties and the likelihood that the SEC will bring charges.

Crimmins with K&L Gates also told me that he sees the SEC increasing exams "sweeps," much like the one that agency just completed regarding short selling abuses under Rule 105.

"As the SEC strives to bring enforcement cases involving small and technical violations, the SEC's sweep dealing with Rule 105 short selling issues [in September] will likely provide at least one model we will see used," Crimmins said.

The SEC, he said, "will send simple and direct requests for information to quickly gather the evidence it needs from a number of different entities without significant use of SEC resources." The agency will then "offer a template settlement that is scalable to the size of the violation but otherwise non-negotiable. Many entities will be reluctant to litigate with their regulator, particularly if the evidence is relatively clear."

David Tittsworth, executive director of the Investment Adviser Association in Washington, says the SEC is using various methods--such as technology, better coordination between inspections and enforcement staff, and leveraging its whistleblower program--to ensure that it can cover more territory under limited resources.

Indeed, Crimmins said that the SEC's recent award of a whopping $14 million to a whistleblower will "get peoples' attention" and will serve as a "game changer" for that division in terms of the number of tips it receives.

The Takeaway

* The SEC has pledged to pursue any violation, no matter how small

* The enforcement division will retain its five distinct units to help enforce penalties against rule breakers

* Exam 'sweeps' are being used to target small infractions without exhausting too many resources

RELATED ARTICLE: SEC fiduciary rule 'major focus'.

Securities and Exchange Commission Chairwoman Mary Jo White said in early October that developing a fiduciary duty rule for brokers remains a "major focus of our efforts."

After her remarks at the Securities Enforcement Forum in Washington, White told reporters that while she couldn't predict "time-wise when we reach [a rule proposal], it's very important to work on and resolve where we are going on it."

Indeed, former SEC Chairwoman Mary Schapiro, who struggled for years to get a fiduciary duty rule passed during her term, told IA that she's confident that "progress can be made on the uniform fiduciary duty" rule.

In hopes of pushing the SEC's fiduciary rulemaking along, a subcommittee of the agency's Investor Advisory Committee has drafted a proposal that would put brokers under fiduciary standards that advisors adhere to.

Under the draft proposal, the subcommittee says that a fiduciary duty for investment advice should include, "first and foremost, an enforceable, principles-based obligation to act in the best interest of the customer."

In approaching this issue, the subcommittee says that the SEC's goal "should be to eliminate the regulatory gap that allows broker-dealers to offer investment advice without being subject to the same fiduciary duty as other investment advisors but not to eliminate the ability of broker-dealers to offer transaction-specific advice compensated through transaction-based payments."

Barbara Roper, director of consumer protection for the Consumer Federation of America, who chairs the SEC's Investor as Purchaser Subcommittee that issued the proposal, told IA that the subcommittee's hope was that "by weighing in early in the [fiduciary rulemaking] process, we can help to shape the form that commission rulemaking takes."

In reaction to White's comments, Roper said that the subcommittee "recognizes that the commission has a very full agenda of mandated rules under both Dodd-Frank and the JOBS Act, so discretionary rules have to fight for their share of a very limited bandwidth."

The subcommittee "appreciates that Chair White views this issue as a priority and hopes that the commission can move forward with a strong, pro-investor rule in the not-too-distant future," Roper added.

The subcommittee's proposal was scheduled to come up for a vote at the Investor Advisor Committee's mid-October meeting, but that was postponed because of the government shutdown. Roper said that "assuming that [the proposal] is eventually adopted by the full committee, perhaps our recommendation can help to provide further support for commission action."

Washington Bureau Chief Melanie Waddell can be reached at
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Title Annotation:THE PLAYING FIELD
Author:Waddell, Melanie
Publication:Investment Advisor
Date:Nov 1, 2013
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