On Aug. 5, 2009, Robert Khuzami, the Director of the SEC’s Division of Enforcement (the “Division”), announced several new initiatives resulting from the Division’s self-assessment during his first 100 days as Director. Those initiatives include creating dedicated units focusing on asset managers, structured products, and foreign corrupt practices. Other changes are designed—and can be expected—to reduce the delays that in the past have preceded the Division’s staff’s obtaining subpoena power and initiating enforcement actions.
Mr. Khuzami announced that the Division will create five national specialized units dedicated to particular complex areas of securities law and the securities industry. Each specialized unit will be headed by a “Unit Chief” who will supervise staff from around the country. Mr. Khuzami explained that the goal in creating these specialized units is to permit the Division to be more proactive in deciding where to focus investigations and to make it less likely that investigators will be misled by complex transactions. The five new units will be:
- The Asset Management Unit, which will focus on investment advisors, investment companies, hedge funds and private equity funds. Working closely with the Office of Compliance Inspections and Examinations, this unit will address issues including disclosure, valuation, portfolio performance, due diligence and diversification, transactions with affiliates, misappropriation, and conflicts of interest. This initiative demonstrates that Mr. Khuzami, like his predecessor, continues to focus the Division on the hedge fund community, and that increased scrutiny and regulation of hedge funds will continue to be high on the SEC’s priority list.
- The Structured and New Products Unit, which will focus on complex derivatives and financial products, including credit default swaps, collateralized debt obligations, and other securitized products, which have been under increased legislative and regulatory scrutiny since the beginning of last summer’s financial crisis.
- The Foreign Corrupt Practices Act Unit, which will focus on new and proactive approaches to identifying violations of the Foreign Corrupt Practices Act, including being more proactive in investigations, working more closely with foreign counterparts, and taking a more global approach to violations.
- The Market Abuse Unit, which will focus on large-scale market abuses and complex manipulation schemes by institutional traders, market professionals and others.
- The Municipal Securities and Public Pensions Unit, which will focus on offering and disclosure issues, tax and arbitrage-driven activity, unfunded and underfunded liabilities, and “pay-to-play” schemes.
Mr. Khuzami also announced that the Division will streamline its management structure and internal processes. Procedural and management changes will include:
- All branch chiefs will be redeployed to investigative work.
- The power to issue formal orders of investigation, and the associated subpoena power, will be delegated to senior officers throughout the Division.
- The power to approve all routine case decisions, which currently resides in the Deputy Director of the Division, will be delegated to senior officers located throughout the country.
- All tolling agreements will now require the approval of the Director, Mr. Khuzami, personally, and tolling agreements will become the “exception, not the rule,” he added.
- Internal memoranda prepared by the staff to the SEC recommending specific enforcement actions will be shorter, subject to fewer reviews and will require a quicker turn-around time.
- An Office of Market Intelligence, newly created by the Division, will be responsible for collecting, analyzing and referring tips, complaints and referrals according to internally developed risk criteria, and making connections between and among the tips received from different sources.
- Increased incentives for cooperation, which are meant to reward “extraordinary cooperation.” These incentives include: (i) the creation of a public policy statement—like the “Seaboard Report” for entities—that will set forth the standards to evaluate cooperation by individuals in enforcement actions; (ii) delegating to the Director the authority to submit immunity requests to the Department of Justice; (iii) exploring ways in which they can provide oral assurances to cooperators early in the course of an investigation that the SEC does not intend to file charges against those individuals; and (iv) recommending to the SEC that the agency enter into deferred prosecution agreements.
Practical Implications and Conclusions
Overall, the sweeping structural and procedural changes announced by Mr. Khuzami can be expected to usher in a new era of increased enforcement activity for the Division, including an increased number of enforcement actions. Indeed, even prior to implementation of the new initiatives, the Division’s pace of activity appears to have increased in the post-Madoff world. Mr. Khuzami noted that, since the end of January of this year, the Division has opened 10% more investigations than during the same period last year, has been granted 118% more formal orders, and has filed 147% more temporary restraining orders and nearly 30% more actions. Much of the increased activity, he explained, has focused on mortgages and the credit crisis, Ponzi schemes and misconduct encompassing two or more of the equity, fixed income and derivatives markets.