In a speech on October 9, 2013, Mary Jo White described a broad expansion of the SEC’s enforcement program to reflect her desire “to see that the SEC’s enforcement program is—and is perceived to be—everywhere, pursuing all types of violations of our federal securities laws, big and small.”
The Chair said that “[i]nvestors do not want someone who ignores minor violations, and waits for the big one that brings media attention. Instead, they want someone who understands that even the smallest infractions have victims, and that the smallest infractions are very often just the first step toward bigger ones down the road.”
That said, from all indications the SEC’s enforcement staff is perennially most interested in pursuing the high-profile, high-dollar amount violations, at least in part in response to pressures from Congress, the press and other sectors of the public to bring to justice those responsible for the financial crisis.
Moreover, it has proven difficult for the SEC’s enforcement attorneys to shift gears between high-profile cases and small matters, and increased enforcement of minor violations without abandoning the large cases would require an increase in resources. SEC enforcement staff have made no secret of their concerns about the lack of sufficient resources to do the job they currently have.
Chair White’s description of actionable minor violations was a bit fuzzy. A good analogy in the securities industry to broken windows that allow crime to grow unchecked would involve inadequate supervisory procedures, weak supervision and deficient recordkeeping and reporting. It is not clear, however, that the SEC views those types of violations as minor. Indeed, some cases involving systemic failures to supervise or recordkeeping have led to seven- figure fines. In other cases, the SEC will not bring a case based on deficient procedures because the federal securities laws require an underlying violation in order to name a firm for a failure to supervise; investigating the underlying violation likely would take the case out of the broken windows realm.
How the SEC approaches the broken windows initiative will be apparent as the enforcement staff opens and brings new cases. It is reasonable to conclude, given the Division of Enforcement’s complete restructuring in recent years, that a shift to pursue more minor cases will be more incremental than dramatic. In any event, this policy announcement is likely to increase the angst of broker-dealers, investment advisers and independent directors of investment companies who already are concerned that the Commission has been turning up the heat through increasingly aggressive enforcement campaigns.