On September 22, 2010, Robert Khuzami—Director of Enforcement at the Securities and Exchange Commission—testified before the United States Senate Judiciary Committee. In prepared remarks entitled “Investigating and Prosecuting Fraud after the Fraud Enforcement and Recovery Act,” Khuzami focused on several recent accomplishments and developments at the SEC, particularly in light of its recent internal restructuring and the new authority granted to it by the Dodd-Frank Act.
Khuzami noted the Enforcement Division’s high level of enforcement activity to date in 2010, as well as its emphasis on “areas relating to the recent financial crisis.” At the time of Khuzami’s testimony, the SEC had filed 634 enforcement actions in 2010 and had obtained orders for the disgorgement of $1.53 billion in damages and the payment of penalties of $968 million.
Khuzami also highlighted several unit-based initiatives, which center around the five national specialized units created as part of the Enforcement Division’s recently completed reorganization. The Market Abuse Unit is developing the capability to systematically search the SEC’s “bluesheet” database—the database housing information about individual trades reported to the SEC by clearing firms—for suspicious trading activity, an ability that the SEC has previously lacked. The Asset Management Unit has created several initiatives “targeting disclosure, performance and valuation by funds and their advisers,” including a “Bond Fund Initiative” (focused on developing analytics to identify disclosure and valuation issues in mutual fund bond portfolios), a “Problem Adviser Initiative” (focused on the detection of problem investment advisers through risk-based investigation of advisers’ representations to investors) and a “Mutual Fund Fee Initiative” (focused on developing analytics to determine whether mutual fund advisers are charging excessive fees to retails investors). Khuzami explained that the Mutual Fund Fee Initiative is “expected to result in examinations and investigations of investment advisers and their boards of directors concerning duties under the Investment Company Act.” The SEC’s Municipal Securities and Public Pensions Unit is involved in the creation of new rules governing municipal advisers. Additionally, the Structured and New Products Unit is developing initiatives relating to the review of a variety of complex securities products, while the FCPA Unit is coordinating with other law enforcement organizations to pursue significant violations of the Foreign Corrupt Practices Act.
In addition to the unit-based initiatives, Khuzami announced the SEC’s “Whistleblower Program,” which is intended to generate leads about serious securities law violations by offering substantial rewards to individuals providing information leading to successful enforcement actions. The program is authorized by the Dodd-Frank Act and is being developed by the SEC’s Office of Market Intelligence. According to Mr. Khuzami, the Office of Market Intelligence is also working to enhance the SEC’s capacity to collect, track and analyze the numerous tips, complaints and referrals it receives.