SEC CONGRESSIONAL TESTIMONY – PART II
On three occasions recently, representatives of the SEC have given testimony to Congress. On March 24, 2015, SEC Chair Mary Jo White testified on “Examining the SEC’s Agenda, Operations and FY 2016 Budget Request”; on March 19, 2015, Andrew Ceresney, Director of the SEC Division of Enforcement, testified to Congress on the “Oversight of the SEC’s Division of Enforcement”; and on March 10, 2015, Stephen Luparello, Director of the Division of Trading and Markets, testified on “Venture Exchanges and Small-Cap Companies.” In a series of blogs, I will summarize the three testimonies.
In the first blog in the series, which can be read HERE, I summarized Mary Jo White’s testimony. This second blog in the series summarizes the testimony of Andrew Ceresney and in particular his words on the SEC’s enforcement focus for fiscal year 2016.
Andrew Ceresney, Director Division of Enforcement – Testimony to Congress
Mr. Ceresney began his testimony with a statement on the SEC’s mission and specifically “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” He continues by stating that a vital part of that mission is enforcing the securities laws with a strong enforcement program. In fiscal 2014, the SEC brought 755 enforcement actions, the highest ever, and obtained $4.16 billion in awards. Like Chair Mary Jo White, Mr. Ceresney credits data analytics and technology with assisting in the large volume of enforcement actions and in monitoring the markets.
Mr. Ceresney laid out the current areas of SEC enforcement focus and gave a brief description of each. I have rearranged the order of presentation of Mr. Ceresney’s speech in accordance with the more obvious interests of the small-cap marketplace.
The SEC has been focused on insider trading, filing 590 actions in the last five years alone. The SEC utilizes technology to identify suspicious trading patterns, which now allows them to locate and pursue more insider trading cases.
Microcap Fraud/Pyramid Schemes
The SEC has created the Microcap Fraud Task Force to assist in pursuing enforcement in this area. Areas of focus include recidivists and organized syndicates that use new media such as websites and social media to conduct fraudulent campaigns and manipulate trading. The SEC is utilizing its power to impose more trading suspensions to cut short perceived pump-and-dump schemes. The SEC is also mindful of and monitoring dormant shells that are often used by market manipulators. Moreover, facilitators such as promoters, lawyers, accountants and transfer agents are under more scrutiny. Of recent concern are pyramid schemes such as improper multi-level marketing and network marketing opportunities that are used to manipulate the market.
A priority for the SEC is enforcement actions against gatekeepers including attorneys, accountants, fund directors, board members, transfer agents, broker-dealers and other industry professionals.
Financial Reporting, Accounting and Disclosure
The pursuit of financial reporting and auditing violations has always been a focus of the SEC and continues to be so. Of particular focus has been revenue recognition violation, false management estimates, auditor independence issues and other false and misleading financial disclosures. The enforcement has created the Financial Reporting and Audit Task Force to “develop methodologies and tools for detecting financial reporting issues, identify specific issuers with potential violations, determine whether further investigation is warranted, and refer appropriate matters to investigative staff.”
Investment advisors continue to be an enforcement priority and, in particular, related to conflicts of interest, misrepresentations regarding performance or investment strategy, breach of fiduciary duty and fraud. Moreover, the SEC has recently been attentive to custody rule violations, compliance programs and undisclosed fees, which they historically had not concentrated on.
Market Structure, Exchanges and Broker-Dealers
Enforcement in this area has increased significantly due to the availability of data analytics and technology to both monitor the markets and, on the other side, as a tool for abuse by market participants.
Litigation and Trial
The SEC is committed to showing that they are willing to go the distance and take cases through trial.
Complex Financial Instruments
The increase in complex financial instruments coincided with the recent financial crisis, which cases are coming to an end. However, new and complex financial instruments remain a priority.
Municipal Securities and Public Pensions
Particular areas of concern are misrepresentations in connection with bond offerings, undisclosed conflicts of interests and pay-to-play violations. This past year the SEC brought its first ever emergency action to stop a fraudulent bond offering and obtained its first penalty against a municipal issuer.
Foreign Corrupt Practices Act (FCPA)
Enforcement of the FCPA continues to be a priority as more and more companies are international and the marketplace itself becomes more global.
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