Broken Windows is the enforcement strategy adopted by the SEC as part of its “prosecute every violation big and small” approach in an effort to create “omnipresence” – the feeling of a cop on every corner. It is supposed to deter all violations.
As part of effectuating this approach, the Commission has packaged cases into groups and announced them. For example, Rule 105 violations – a strict liability type of short selling Rule – was used to package together 23 cases into a single announcement (here). Operation “Broken Gate” was used to announce a group of audit failure cases (here). The custody rule, focused on the arrangements of market professionals for holding customer securities, was used as the predicate to announce another group of cases (here).
Yesterday the SEC announced the filing of a 34 proceedings. Each action focused on the failure to file ownership reports. Those included a Form 4, as required by Exchange Act Section 16(a), or a Schedule 13D or 13G, as required by Exchange Act Section 13. According to the Commission, quantitative analytics were used to identify the violators. The actions were brought against:
- Thirteen individuals who were officers or directors of public companies, each of whom settled, agreeing to pay a penalty;
- Five individuals who were beneficial owners of publically-traded companies who settled, agreeing to pay a fine;
- Ten investment firms who settled beneficial ownership claims, agreed to pay a penalty; and
- Six publically traded companies, charged with contributing to filing failures by insiders or failing to report their insiders’ filing delinquencies, each of whom settled and agreed to pay a fine.
By now there should be no doubt that “broken windows” results in significant numbers of enforcement actions which will be counted in the end of the fiscal year statistics. There is also no doubt that these cases represent violations of the securities laws.
Whether filing enforcement actions such as these in groups is effective in creating a “cop on the beat” presence in the market place is more difficult to determine. Whether filing large numbers of cases based a strict liability short selling rule, or auditing proceedings that could (and perhaps should have) been brought by the PCAOB, or grouping together custody rule actions, or filing in bulk actions centered on strict liability filing requirement creates “omnipresence” remains to be seen. And, whether this approach constitutes effective enforcement is an open question. It seems doubtful, however, that rolling up large number of these kinds of cases will deter violations such as insider trading and financial statement fraud by issuers and their executives.