Andrew Ceresney, Director, Division of Enforcement (the “Division”), Securities and Exchange Commission (“Commission”), recently spoke at Compliance Week 2014 regarding the Division’s accomplishments over the past year and its priorities for the remainder of 2014.1 Of particular interest to our financial services and investment management clients, Mr. Ceresney indicated that in 2014 the Division has been focusing on certain market structure issues, taking new approaches to settlements and litigation, implementing new technology and bringing cases against legal and compliance professionals, as discussed below.
Focus on Market Structure
The Division has brought a number of market structure and financial reporting cases over the last year and Mr. Ceresney indicated that the Division is, in particular, looking into:
- Reg ATS violations
- Violations of the Market Access Rule by broker-dealers
- Issues regarding high-frequency and automated trading
- Misconduct related to microcap securities
- Broker-dealers’ anti-money laundering regulations
- Recidivist brokerage firms
Of note, Mr. Ceresney indicated that the Division now has a Broker-Dealer Task Force that “is liaising closely with the broker-dealer program within the [Office of Compliance Inspections and Examinations (“OCIE”)], as well as the Division of Trading and Markets, to develop initiatives that can be implemented division-wide.”
Requiring Admission of Violations/Bringing Cases to Trial
Mr. Ceresney discussed the Commission’s new policy requiring firms to make admissions in certain cases rather than permitting firms to settle matters without admitting or denying the allegations and noted that thus far eight firms have made admissions in enforcement matters. Mr. Ceresney noted that admissions were made in a variety of cases ― “against firms and individuals; against regulated and unregulated entities; and in scienter-based, as well as non-scienter, controls-based cases.” Mr. Ceresney believes that the admissions policy has strengthened its program and given the Division an additional “tool” in their cases.
The Commission has also brought a number of cases to trial this year and Mr. Ceresney noted that the Commission has won its last five jury trials.2 Mr. Ceresney noted that due to the increase in cases going to trial, the Commission has had to devote more resources towards preparing for such trials.
Developing Technology to Detect Violations
In the past the Commission has heavily relied on referrals from the Financial Industry Regulatory Authority and Options Regulatory Surveillance Authority to detect insider trading, but has now developed an Advanced Bluesheet Analysis Program within the Commission to “identify suspicious trading patterns that would suggest relationships among different traders who may be sharing inside information.” The Commission has also launched a Center for Quantitative and Risk Analytics to help “develop technologies to analyze trading and other types of data available to [the Commission] from a wide variety of venues.”
Going After Legal and Compliance Officers
Mr. Ceresney warned that the Commission has not, and will not, hesitate to bring actions against legal and compliance officers when they, among other things, “have affirmatively participated in the misconduct, when they have helped mislead regulators, or when they have clear responsibility to implement compliance programs or policies and wholly failed to carry out that responsibility.” The Division, in conjunction with OCIE, launched a Compliance Program Initiative “to identify and bring actions against investment advisers that fail to adopt or implement adequate compliance programs after being notified repeatedly of deficiencies by examination staff.” Mr. Ceresney also noted that companies that have a culture of compliance tend to follow effective practices.3 Mr. Ceresney noted that those legal and compliance officers who enforce a culture of compliance across their organizations are the Division’s partners and that the Division wants to use its enforcement capabilities to support their efforts.
What to Expect for the Remainder of 2014
Based on Mr. Ceresney’s comments and the actions we have seen thus far in 2014, it appears that the Commission is going to continue to bring a large number of cases and will not hesitate to bring actions against legal and compliance officers whom it deems to be failing “to carry out their clearly assigned responsibility to implement necessary policies.” We also expect to see more cases arising from the specialized units and task forces.