SEC Director of Division of Enforcement Ceresney Discusses SEC Enforcement Initiatives
At Compliance Week 2014, SEC Director of the Division of Enforcement (the "Division") Andrew Ceresney delivered a keynote address in which he discussed recent SEC enforcement initiatives.
According to Mr. Ceresney, "it is a great time to be in the Enforcement Division." He stated that, while the SEC generally has been successful in addressing misconduct over the past five years, areas of significant concern for the future are related to five specialized units created recently: (i) the Asset Management Unit, (ii) the Municipal Securities and Public Pensions Unit, (iii) the FCPA Unit, (iv) the Complex Financial Instruments Unit and (v) the Market Abuse Unit.
Additionally, Mr. Ceresney noted that, in response to technological changes in the markets, the Division has increased its focus on bringing actions against exchanges, broker-dealers and other key participants for failures in control and the use of manipulative trading strategies. He stated that, since over one-third of all trading occurs off-exchange, the Division has expanded its presence in this realm. Mr. Ceresney mentioned that the Division has already brought actions against two dark pool operators in recent years and will continue to pursue Reg. ATS violations. Additionally, he noted, the Division will continue to focus on enforcement actions under Exchange Act Rule 15c3-5 ("Risk Management Controls for Brokers or Dealers with Market Access"), or the Market Access Rule, to ensure that broker-dealers have reasonably designed controls and procedures to manage the risks of having market access.
Mr. Ceresney also mentioned recently created task forces, such as the Financial Reporting and Audit Task Force and the Microcap Task Force, as well as task forces to help enforce some of the SEC's rules, such as the JOBS Act Task Force. He also spoke briefly about how the SEC has implemented technology to detect and investigate fraud, particularly a new in-house Advanced Bluesheet Analysis Program to identify suspicious trading patterns that would suggest insider-trading behavior.
Mr. Ceresney concluded by stating that he hopes to use his current role to further promote a strong legal and compliance presence at firms, and will continue to bring action against legal and compliance officers when appropriate.
Lofchie Comment: It is noteworthy that the Director specifically referenced violations of Rule 15c3-5 (which are, as a practical matter, technology failures) as the focus of SEC enforcement action. A technology failure is not the moral equivalent of a fraud or other crime of dishonesty. It is questionable policy to treat these violations as equivalent. Rather than assuming technology failure as grounds for punishment, the SEC might do better to treat such failure as a learning opportunity. That is, technology failure could serve to highlight the limits of the system, to educate market participants as to the reason for the failure and to have the market share intelligence about how the failure can be avoided. By assuming that a technology problem is a crime, the SEC discourages market participants from sharing the discovery of problems and limits or prevents group discussions that could result in the development of better practices.