In remarks to the Securities Enforcement Forum on October 9, 2013, Securities and Exchange Commission (“SEC”) Chairperson Mary Jo White stated that one of the SEC’s goals for its enforcement program is to be “everywhere, pursuing all types of violations of our federal securities laws, big and small.” She likened the approach to the “broken windows” policy pursued during the 1990s by then-New York City Mayor Rudy Giuliani, who regarded no infraction too small to be “uncovered and punished” (the theory being that when a window is broken and is immediately fixed, it signals that disorder will not be tolerated, whereas if it is not fixed, it signals that there is no cost to breaking additional windows). Chairperson White noted that the SEC’s Division of Enforcement would pursue not just the biggest frauds, but also more minor violations such as control failures and negligence-based offenses, among others.
Chairperson White noted that the SEC will expand its reach in a number of ways, including leveraging its National Exam Program; pursuing “deficient gatekeepers” in our financial system; incentivizing individuals to report violations; expanding collaboration with other regulators; and utilizing advanced technologies to identify wrongdoing. With respect to pursuing “deficient gatekeepers,” she emphasized that investment company boards serve as critical gatekeepers and that the SEC intends to focus on ensuring that they are appropriately performing their duties. She stated that “being a director or in any similar role where you owe a fiduciary duty is not for the uninitiated or the faint of heart,” but the SEC “will not be looking to charge a gatekeeper that did her job by asking the hard questions, demanding answers, looking for red flags and raising her hand.” Chairperson White also commented on independent auditors, noting that the SEC will continue to focus on auditors and had recently launched “Operation Broken Gate,” an initiative to identify auditors who neglect their duties and the required auditing standards.
As an example of the SEC’s efforts to target violations and violators regardless of size, Chairperson White noted the nearly two dozen enforcement actions brought by the SEC for violations of Rule 105 of Regulation M, which prohibits improperly participating in public offerings for a period of time after short selling those same securities (a link to a related Ropes & Gray Alert can be found here). She noted that these actions yielded disgorgements ranging from as high as $2.5 million to as low as $4,000. Chairperson White subsequently tempered her comments with regard to minor violations, noting that “it’s not a game of gotcha” and that the SEC does not seek to bring an enforcement action in response to every minor violation, but intends to address such violations through engagement, deficiency letters, and other approaches short of enforcement action.
Chairperson White stated that while the SEC intends to target smaller violations, it will continue to focus significant attention on larger and more complicated cases. She noted that the SEC will strive for settlements “that have a deterrent effect, and where appropriate, the added measure of public accountability that an admission often brings.” Chairperson White’s full speech can be found here.