Bates Research - 03-15-17
Former SEC Enforcement Chief Discusses How Big Data Drives Investigations and Prosecutions
During the January 26th 2017 SIFMA-Bates Group Leaders and Experts Forum: Managing Regulatory Investigations and Enforcement Matters in the Big Data-Driven Age, former Chief of the SEC Complex Financial Instruments Unit, and current partner in Simpson Thacher’s Government Investigations Group, Michael J. Osnato, Jr. discussed how big data is changing the way the SEC investigates and prosecutes misconduct. Mr. Osnato shared insights gleaned from his then-recently completed tenure at the agency, a period he termed the “golden age of enforcement.”
Mr. Osnato discussed that the agency, under leadership of former prosecutor and Chair Mary Jo White, changed dramatically in three distinct ways. First, there had been a “revolution” in hiring that has led to a better understanding of the broader market and the “growth of specialized markets.” Second, there had been a profound change in culture at the agency from a long-held perception that it was a “collection of slow-footed lawyers who didn’t understand the markets” to a “proactive, entrepreneurial spirit around how we think about our cases.” And third, there had been a recognition of the importance and use of analytics. He said: “as we become more sophisticated with our markets, we have developed really complex internal expertise for using big data to find risk, to streamline investigations and to bring cases.” Taken together, the changes are “transformative.”
Big Data Is Now a Driver of Agency Action
In response to a series of questions posed by moderator Leonard J. Amoruso, partner, Murphy & McGonigle, about the broad impact of big data on SEC enforcement activity, Mr. Osnato offered this perspective:
"The agency, fundamentally, is a giant intelligence collection agency in the financial markets. Every day, right now, it’s sucking in trading data; it’s sucking in filings from issuers; it’s pulling in PF Form… data; from private equity Form ADV; it’s pulling in – on the enforcement front – subpoenaed information from thousands of investigations…so the SEC is, itself, big data."
The fundamental changes in the agency over the past several years reveal the ways in which the SEC is responding to the “challenge of finding ways to stitch together [many] different sources.” Organizationally, the SEC developed an “architecture” around big data. The Division of Economic and Risk Analysis coordinates all analytics across the agency. Every SEC division has formed groups of “specialized quants;” and at the subgroup level, hires are made to provide focused data analysis and support. In addition, the SEC relies on third-party vendors to provide sophisticated software that can navigate through multiple types of data sets.
These resources are now embedded in the agency’s overall efforts—not only providing new tools for old methods of enforcement, but also providing strategic tools that are creating new mechanisms for risk assessment, lead generation and case prosecution. To make this point, Mr. Osnato described the latest qualitative “textual analytics” tools that are identifying patterns in communications among participants within certain markets. He noted, for example, the scouring of instant messages (IMs) of traders who tend to talk in ways that may provide cues to regulators of “precursors to potential fraud.”
The Future of Big Data in SEC Enforcement
Mr. Osnato expressed confidence that data analytics is now firmly embedded at the staff level and throughout the agency. He was confident that the SEC will be able to compete effectively in the market for in-demand quant talent, though he acknowledged the ongoing challenge. He also suggested that, with more standardized and broadly accessible information (e.g., the Consolidated Audit Trail), the capabilities of SEC big data processing and analytics will continue to improve. As to the political climate, he expressed his expectation that enforcement will remain a bipartisan issue and he advocated for the continuity of the current approach.
Big Data panelists, which included Bates Group Experts Shane Shook and Rajeev Bhattacharya, observed that the data analytics landscape has drastically changed from just a decade ago and emphasized the need for financial services firms to keep pace with the regulators’ powerful analytics capabilities.
Scott Lucas, Managing Director of Bates Group’s Regulatory and Internal Investigations Practice and panelist on the Forum’s Regulatory Investigations Panel, remarked, “As regulators increasingly rely on big data analytics to bring forward cases, Bates is now routinely called upon to conduct the same type of big-data-driven review in responding to investigations. It’s a trend we expect to see continue.”
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