SEC Executives Testify on Expanded Regulatory Responsibilities (with Delta Strategy Group Summary)

In testimony before a Subcommittee of the Financial Services Committee ("FSC"), SEC Division of Economic Risk and Analysis ("DERA") Director and Chief Economist Mark J. Flannery, Office of Compliance Inspections and Examinations ("OCIE") Director Marc Wyatt, Office of Credit Ratings ("OCR") Director Thomas J. Butler, and Office of the Whistleblower ("OWB") Chief Sean McKessy outlined the responsibilities and recent developments of their respective organizations.

Mr. Flannery emphasized that DERA supports the SEC in the following "ever-increasing range" of activities:

• Rulemaking and Policy Support. DERA provides economic analyses of new policy and SRO rulemaking, particularly through its white papers.

• Risk Assessment. DERA provides financial and risk modeling, which in turn assists the SEC in prioritizing and establishing the scope of examinations.

• Litigation Economics. DERA identifies securities law violations, quantifies whatever harm is done to investors and calculates violators' "ill-gotten gains."

• Data Oversight. DERA designs data structuring approaches for required disclosures, taxonomies, validation rules, data quality assessments and data dissemination tools. It also manages several SEC databases on a daily basis.

Mr. Wyatt noted that recent legislative changes by the Dodd-Frank Act and the Jumpstart Our Business Startups ("JOBS") Act have expanded OCIE's responsibilities to include examinations of (i) security-based swap dealers, (ii) security-based swap data repositories, (iii) major security-based swap participants, and (iv) securities-based swap execution facilities and crowdfunding portals. He asserted that OCIE assists the SEC in the following areas:

• Risk-Based Examination Approach. The OCIE Office of Risk Assessment and Surveillance aggregates and analyzes data from SEC filings by registrants and individuals in order to identify activity that may warrant examination, which augments OCIE's ability to identify operational red flags throughout entire industries.

• Data Analytics. The OCIE Quantitative Analytics Unit has improved the National Exam Analytics Tool and is developing technologies to help examiners detect suspicious activity in areas such as money laundering and high-frequency trading. The OCIE Risk Analysis Team identified potentially problematic behavior across multiple firms – including unsuitable recommendations, misrepresentations, inadequate supervision, churning, reverse churning and load waivers – through the use of technology.

• Enhanced Transparency. OCIE improves industry compliance with federal securities laws and promotes better industry risk-management practices through its educational program events and risk alerts.

• Priority Initiatives. OCIE has launched (i) a multi-year examination initiative that focuses on retirement-based savings, (ii) examinations that identify cybersecurity risks and assess cybersecurity preparedness among broker-dealers and investment advisers, and (iii) examinations of the liquidity controls of advisers to mutual funds, exchange-traded funds and private funds.

Mr. Butler highlighted the following OCR activities:

• Examinations. Pursuant to the Dodd-Frank Act, OCR examines nationally recognized statistical rating organizations ("NRSROs") annually to review their (i) implementation of policies and procedures to assess their compliance with the rules, (ii) selected ratings files in connection with ratings issuances and surveillance activities, (iii) internal controls and governance activities, and (iv) internal compliance reports.

• NRSRO Monitoring and Constituent Monitoring. NRSRO monitoring and constituent monitoring groups gather, analyze and assess data and identify trends across the industry in order to provide input for determining the scope of examinations, determining and communicating best practices for NRSROs, and guiding the direction of any future rulemakings that are related to NRSROs.

• Policy and Rulemaking. The OCR Policy and Rulemaking Group develops rule recommendations and reviews requests for SEC exemptive relief or staff no-action relief from existing rule requirements.

In describing developments at the OWB, Mr. McKessy made the following observation:

Because of the information and assistance provided by the 27 whistleblowers who received awards under the [whistleblower] program, the [SEC] was able to bring successful enforcement actions where over $400 million was ordered in sanctions, including over $325 million in disgorgement for harmed investors. Over $350 million has been collected in connection with these [SEC] actions as well as successful related actions.

Mr. Flannery, Mr. Wyatt, Mr. Butler and Mr. McKessy testified before the U.S. House of Representatives Committee on Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises.