SEC Commissioner Kara M. Stein sees, through the use of new data tools and technology, an expansion of the SEC's ability to enforce its regulations in the evolving landscape of the financial markets.
Stein presented a keynote address called "A Vision for Data at the SEC" to the Big Data in Finance Conference at Michigan Law in Ann Arbor, Michigan, on October 28, 2016.2 During her speech, Stein addressed the new opportunities that analysis of big data presents to the SEC. One case of the SEC's incorporation of new data tools was discussed in a recent issue of this publication. In September 2016, the SEC instituted administrative proceedings against a broker-dealer, alleging that the broker-dealer's internal training materials used for certain structured notes were insufficient and that supervisors failed to adequately educate and train registered representatives who sold reverse convertible notes.
According to the SEC's findings, the result of the alleged inadequate training led to the sale of reverse convertible notes to retail customer accounts, many of whom had identified themselves to the broker-dealer as having modest reported income and net worth, as well as primarily moderate or conservative investment objectives. The broker-dealer consented to the order without admitting or denying the findings. The order censured the broker-dealer and requires payment totaling over $15 million to settle the charges.
"What made that case unique was that, instead of traditional investigative techniques, it was built on custom analytics," said Stein. "Using this technique, they were able to identify over 8,000 retail customers for whom the investment in the complex debt instruments was inappropriate. A case like this may not have been possible in the past."
Despite the use of the SEC's new data tools, Stein's vision for the future involves a more proactive approach. "I am much more interested in establishing rules of the road that can help prevent crashes than in waiting to deal with the aftermath. Better investor protection is avoiding fraud and misconduct in the first place. The key question is how can we design policies and monitoring systems that support healthy market function and aid in compliance on the front end?" For additional information regarding the SEC's action on structured product training materials, see our firm's Structured Thoughts here.