2012 New England Securities Conference: SEC Chairman Mary L. Schapiro Discusses Evolution of SEC Enforcement Program, Calls on Congress to Provide SEC with Enhanced Power to Impose Monetary Penalties on Violators of Securities Laws

On October 11, 2012, Securities and Exchange Commission (“SEC”) Chairman Mary L. Schapiro gave a speech to the New England Securities Conference in which she discussed the evolution of the SEC’s Enforcement Division, highlighted recent activities and successes of the Enforcement Division, and called upon Congress to provide the Enforcement Division with more clout to punish those who violate federal securities laws, all with the overriding goal of protecting investors.

Chairman Schapiro said that she has worked to re-shape the Enforcement Division into a more proactive, technologically advanced, and collaborative organization that is able to “take on any wrongdoer, whoever they may be” and “allow the outgunned and vastly out-spent…Enforcement [Division] to go toe-to-toe with enormous financial institutions and to win.” 

Chairman Schapiro stated that the SEC’s encouragement of “aggressive and entrepreneurial” enforcement actions and elimination of bureaucratic hurdles has led to clear and definite results; specifically, the initiation of a record number of increasingly complex and varied actions “[resulting in] more than $2.2 billion in monetary relief…[and] dozens of orders barring individuals from the financial industry.”  Chairman Schapiro further highlighted the SEC’s re-structuring of its Enforcement Division into five specialized units in order to build “pools of expertise.”  One result of this re-structuring was the proactive identification by one of these units of “potentially massive fraud” by an Illinois-based investment advisor through the use of social media.  This proactive identification allowed the SEC to end the fraud “before any investors had lost a dime.”

Chairman Schapiro also emphasized the SEC’s implementation of more modernized technology systems such as its e-discovery and Tips, Complaints, and Referrals system, which allow SEC staff to better analyze, centralize, follow up on, and integrate data and tips into its enforcement and examination activities.  Chairman Schapiro highlighted the SEC’s Automated Bluesheet Analysis Project (“ABAP”), under which Enforcement Division personnel “[use] newly-developed analytics to identify suspicious trading patterns and relationships among multiple traders and across multiple securities, generating significant enforcement leads and investigative entry points.”  The ABAP has already paid dividends, allowing the SEC to take down an insider-trading scheme that had been running for 20 years.  This scheme had previously been undetected because the principals communicated with a middleman using public telephones and prepaid disposable mobile phones; ABAP allowed the SEC to conduct parallel analysis of Bluesheet trading data to identify and trace the scheme back to the principals.  Finally, Chairman Schapiro described the newly-created Aberrational Performance Inquiry team, which utilizes SEC- developed risk models and technology to analyze investment performance data of hedge funds to determine which funds warrant further review into their practices.

Chairman Schapiro noted the continuing need for cross-agency cooperation, particularly with regard to Dodd-Frank’s shifting of the oversight of smaller hedge fund advisers from federal to state agencies.  Chairman Schapiro stated:

[t]he coordination of state and federal action maximizes our reach, supports rapid and effective action, and helps to ensure that victims have a better opportunity to recover some of their funds.  And by presenting a coordinated front, we minimize the chances that a wrongdoer will be able to arbitrage different jurisdictions in an effort to minimize or escape liability.

Finally, Chairman Schapiro spoke to the issue of penalties, reminding her audience that the SEC’s ability to levy monetary penalties was nonexistent for quite some time.  While the SEC now has this ability, Chairman Schapiro stated that “the punishments [the SEC] can impose are not significant enough” to provide a real deterrent to securities laws violators because the SEC cannot base its penalties on investor loss.  Chairman Schapiro spoke of her hope for the passage of a bipartisan bill, currently in the Senate.  This would increase the SEC’s clout with regard to penalties, allowing the SEC to impose per-violation penalties of up to $1 million for individuals and $10 million for institutions.  It would also allow the SEC to penalize a violator up to “three times the size of the ill-gotten gain – or up to the full amount of investor losses.”

Chairman Schapiro concluded her speech by recapping the Enforcement Division’s evolution and stating that more change and improvement was still to come.

The primary materials for this speech may be found at the DU Corporate Governance website.