Bates Research - 11-01-17
SEC Enforcement Leadership Sets Priorities
Co-Directors of the SEC Division of Enforcement, Stephanie Avakian and Steven Peikin, addressed enforcement priorities at a Securities Forum held in Washington, D.C. last week. Ms. Avakian’s formal remarks emphasized that the SEC will refocus its enforcement efforts toward the protection of retail investors and on a new integrated approach to cyber-related crime. Mr. Peikin, in widely-reported comments, described a shift in enforcement tactics, while also acknowledging resource constraints. Here are the details.
Protecting Retail Investors and Combatting Cybercrime
Co-Director Avakian provided detail and insight on two initiatives announced by the SEC in late September. As described by Ms. Avakian, the Retail Strategy Task Force and the SEC Cyber Unit embody the shift in enforcement priorities.
Prioritizing the Retail Investor
“When we talk about retail,” Ms. Avakian said, we are “thinking about conduct that occurs at the intersection of investment professionals and retail investors.” To describe the scope of the mandate of the new initiative, she gave examples of the kinds of misconduct the Task Force will track, including professional advisers who inadequately disclosed fees and who recommend wholly unsuitable strategies and products. She noted recent cases of fraud that would now fall under the jurisdiction of the Task Force, including the sales of high-fee mutual fund share classes when less-expensive share classes were available in the same fund, transparency issues in wrap-fee programs, and churning of accounts, to name a few.
Ms. Avakian touted the Task Force’s ability to use data analytics and technology to identify misconduct. She explained that SEC experts are “increasingly able to identify threats to retail investors – everything from registrant-based threats to microcap-based threats – through the use of data analytics.” (See Bates coverage anticipating this approach.)
The Task Force is charged with other responsibilities as well. Ms. Avakian said the Task Force will work with other SEC divisions and groups to analyze trade and data from “the more than 16,000 tips, complaints and referrals” reported annually. That said, the Task Force will not conduct investigations or prosecute cases themselves, but will instead refer them to the Enforcement Division. Finally, the Task Force is charged with improving investor outreach and working with the OIEA to enhance investor education.
Housing Cyber Enforcement in One Unit
Ms. Avakian explained that the idea of a Cyber Unit arose from the “increasing frequency with which we are seeing cyber-related misconduct affecting the securities markets.” She listed perpetrators as “foreign and domestic hackers, traders and others who traffic in stolen market-moving information, prospective market manipulators, state-sponsored actors, and others.” Further, she said the advent of the dark web and digital currency “make it harder to track the flow of funds involved in cyber violations.”
Ms. Avakian said the Cyber Unit will focus on several types of misconduct. These include cases where technology is used to gain some sort of unlawful market advantage, such as hacking to gain access to and trade on nonpublic information, brokerage account intrusions (account takeover hacks), and disseminating false information through electronic publications. The Cyber Unit will also take on misconduct that involves failures by businesses to take appropriate steps to safeguard personally identifiable information.
In its own category, malfeasance associated with initial coin offerings and other applications of digital currency and blockchain technology would also fall under the jurisdiction of the Cyber Unit. Ms. Avakian asserted that the Cyber Unit will “aggregate” existing SEC experience, technology skills and investigative techniques for a “consistent, thoughtful approach” to these issues.
De-Prioritizing Wall Street?
Ms. Avakian attempted to reassure critics that the SEC’s “enhanced” focus on retail investors and cyber-crime would not affect current enforcement of financial fraud or “policing Wall Street.” “The premise that there is a trade-off between 'Wall Street' and 'Main Street' enforcement is a false one," she said.
At the same conference, however, the Wall Street Journal reported that Co-Director Peikin alluded to dropping the “broken windows” strategy of pursuing corporate cases over smaller legal violations. Mr. Peikin also suggested that the agency may “pull back from trying to make some companies admit to wrongdoing as a condition of settling with the SEC,” which the Journal described as “a signature element of the SEC’s enforcement program over the past four years.”
Further, Mr. Peikin went on record noting the resource constraints facing SEC enforcement, stating, "we don't have hiring authority to backfill people who leave…I expect we will probably be down as much as maybe 100 spots by the time this budgetary constraint eases." (For additional concern over whether the SEC is easing off of corporate enforcement, see this report.)
What Does This Insight Tell Us?
The Retail Strategy Task Force and the Cyber Unit are new entrants into the enforcement machinery of the SEC and, as such, it is difficult to predict the effect on enforcement priorities, especially given the advisory and non-prosecutorial nature of the Task Force.
The Cyber Unit, however, does reflect a new focused approach to cyber security. This is a concern that hits particularly close to home given the SEC EDGAR system breach in 2016. (See Bates coverage here.) The fact that the Cyber Unit has also consolidated jurisdiction over initial coin offerings, blockchain and other applications of digital currency suggests that the Cyber Unit could play a major role in related enforcement actions. Ultimately, how the Cyber Unit is staffed and funded will be an indicator of the role that it will take. Bates will continue to keep you apprised of ongoing developments.
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