A chronic dilemma for the Securities and Exchange Commission’s Enforcement Division is how best to focus its efforts given resource constraints. Andrew Ceresney, the SEC’s enforcement director, faced lots of questions on how those decisions are made during an all-day meeting of the Commission’s Investment Advisory Committee on Oct. 15.

Nearly two years ago, SEC Chairman Mary Jo White promised a “broken windows” approach to enforcement, focusing on smaller, often technical violations akin to the quality-of-life crimes that police departments face. Ceresney had to explain how that approach has fared.

Georgetown Law Professor Donald Langevoort was one naysayer at last week’s meeting. “I would abolish broken windows,” he said. “The idea that small case enforcement deserves an important place on the agenda is dangerous. Of course you don’t want to create a culture where people think small violations won’t be enforced. On the other hand, broken windows gives longer life to an idea that most social scientists have dismissed.”

Were he in charge, Langevoort “would want a division willing to push big cases and willing to push more complicated cases, fully aware of the opportunity cost question.” Without a greater focus on large firms, “we are going to lag further and further behind,” he said.

Enforcement agencies, the SEC included, rely too heavily on risk planning and determining their odds of success when prioritizing cases, Langevoort continued. “You don’t want to lose cases, but in a world of optimal enforcement it is generally assumed that you should lose about 50 percent of your cases. You should be willing to lose, but of course the publicity and criticism that comes from doing that is obvious.”

Langevoort conceded that a focus on large-cap companies means cases and conduct that can be complex in nature. These firms “are also very well resourced in terms of their ability to defend themselves and can bring political pressure on the Commission to make you stop.” Nevertheless, if the Enforcement Division was gifted with a 20 percent budget increase, he “would be spending it on big-firm, big-cap issues.”

Damon Silvers, associate general counsel for the AFL-CIO, wondered what the right balance of small- and large-company enforcement is. “It’s often lost in the discussion that the big money investor losses are in the big-cap cases, because investor money is overwhelmingly in the large-cap market,” he said.

“There is a perception that if you are a small firm, you end up going after individuals when things go wrong. A big enough company will just pay money to insulate individuals. That is a very corrosive perception.”
Steven Wallman, Chairman, SEC Market Structure Sub-Committee

Steven Wallman, chairman of the SEC’s Market Structure Sub-committee, questioned the growing number of enforcement actions that result from technical violations, and whether the SEC and Financial Industry Regulatory Authority should reconsider the merits of pursuing such cases.

One example: In 2014, FINRA fined Morgan Stanley $5 million for supervisory failures related to soliciting retail customers to invest in initial public offerings. The firm, FINRA said, failed to have adequate procedures and training to ensure that its sales staff distinguished between “indications of interest” and “conditional offers” in its solicitations of potential investors.

“Why is this necessarily an enforcement action in the first place?” Wallman asked. “Somebody made a mistake in terms of terminology. That doesn’t really sound like the sort of thing that should be an enforcement action. It sounds like something where the mistake is fixed and you move on.”

Advisory committee members also mentioned the Justice Department’s new Yates Memo, which vows to pursue individuals more aggressively for corporate misconduct. They questioned how well the SEC takes civil action against individuals and cooperates with other agencies to send egregious offenders to jail.

“When you look at the cases, people who have done the same things over and over again, and are really bad actors, you get a cease and desist or you get an injunction,” Wallman said. “Why aren’t they in jail? Why do we not get more of those folks in jail?”


The following are excerpts from a recap of enforcement statistics for fiscal year 2014 by the Securities and Exchange Commission. Results for fiscal year 2015 are expected to be released later this month.
New investigative approaches and the innovative use of data and analytical tools contributed to a very strong year for enforcement marked by cases that spanned the securities industry. 
In the fiscal year that ended in September 2014, the SEC filed a record 755 enforcement actions covering a wide range of misconduct, and obtained orders totaling $4.16 billion in disgorgement and penalties, according to preliminary figures. In FY 2013, the Commission filed 686 enforcement actions and obtained orders totaling $3.4 billion in disgorgement and penalties.  In FY 2012, the Commission filed 734 enforcement actions and obtained orders totaling $3.1 billion in disgorgement and penalties.
The agency’s enforcement actions also included a number of first-ever cases, including actions  involving the market access rule, the “pay-to-play” rule for investment advisers, an emergency action to halt a municipal bond offering, and an action for whistleblower retaliation.

Charged more than 135 parties with violations relating to reporting and disclosure. 

Filed several actions to halt international investment frauds, including those that spread through social media and targeted, among others, immigrant communities. 

Brought first-ever actions under a rule requiring firms to establish adequate risk controls before providing customers with market access.

Brought first-ever action under investment adviser “pay-to-play” rule.

Filed first action arising from a focus on fees and expenses charged by private equity firms. 

Charged three investment advisory firms with failures to maintain adequate controls on the custody of customer accounts.

Held attorneys, accountants and compliance professionals accountable for the important roles they play in the securities industry.

Charged 80 people in cases involving trading on the basis of inside information.

Demanded and obtained acknowledgements of wrongdoing under the admissions policy announced in the previous fiscal year. Staff considers requiring admissions in cases where the violation of the securities laws includes particularly egregious conduct, where large numbers of investors were harmed, where the markets or investors were placed at significant risk, where the conduct obstructs the Commission’s investigation, where an admission can send a particularly important message to the markets, or where the wrongdoer poses a particular future threat to investors or the markets.
Source: SEC.

Critics argue that big firms tend to escape all but trivial punishment and fines, while smaller firms are disproportionally punished. “There is a disconnect with regard to the cases being brought and the results,” Wallman said. “There is a perception that if you are a small firm, you end up going after individuals when things go wrong. A big enough company will just pay money to insulate individuals. That is a very corrosive perception.”

Ceresney for the Defense

Not surprisingly, Andrew Ceresney defended the Enforcement Division’s strategy. “We cannot abandon what I think is one of our core missions, which is to protect investors and collect money and return it to investors if we can and bring people to justice,” he said, and added that the mission applies to small fraudsters just as much as it does large corporations. He described the enforcement efforts as “pretty well-balanced.”

On the Yates Memo, Ceresney boasted that the Enforcement Division has had a similar policy to prosecute individuals (or to explain why not to SEC commissioners) for several years.

Ceresney also defended the broken windows strategy, arguing that financial reporting lapses—a recurrent theme of that approach—are hardly trivial. “Part of the problem is a misconception of what we mean by ‘broken windows,’ ” he said. “What we mean are repeated violations that we see often. These are important violations. We would all think that insiders should be filing when they transact. It is an important rule. When we see repeated violations we try to target those with limited resources, but in bundles where we can send a strong message.”

Those efforts, he said, are working. Every time the SEC bundles multiple violations into an enforcement push, fewer of them are discovered.

On Oct. 14, for example, enforcement actions were announced against six firms, including more than $2.5 million in fines, as part of a crackdown on violations of Rule 105 of Regulation M. That rule prohibits firms from participating in public stock offerings after selling short those same stocks.

Through a Rule 105 initiative first announced in 2013, the Division of Enforcement has taken action on nearly every such violation that has come to its attention. As a result the SEC has seen “a dramatic decrease,” of more than 90 percent, in these violations, Ceresney said.

“You can see a significant drop in that type of activity,” he said. “Not every violation is going to be an enforcement action, but if we see repeated violations we are going to package them together, use minimal resources to settle them, and send a broad message. I think it has worked very well.”

Even Langevoort acknowledged the difficulties the SEC faces in vigorous enforcement. “The SEC, DoJ, and others are woefully under-sourced and, as a result, enforcement decisions are, and always have been triaged,” he said. “Resources have to be deployed strategically, looking privately at the strength of your case and deciding whether it is better to fight or to hold your powder and pitch some other place to do your enforcement. That is unfortunate, but it is the state of affairs today.”