Wrapping up Securities Enforcement Forum 2014

October 15, 2014

I was lucky enough to spend Tuesday at Bruce Carton’s Securities Enforcement Forum 2014.  In three years, it has gone from zero to the preeminent securities enforcement law conference anywhere.  I blogged it hurriedly throughout the day, but here are what I think are the most salient points or comments after some reflection:

“Broken Windows”

Commissioner Michael Piwowar thinks that a “broken windows” approach to securities enforcement does not necessarily work when applied to all regulations and entities the SEC is charged with overseeing.  This point generated discussion later in the day, when Enforcement Director Andrew Ceresney defended his and Chair Mary Jo White’s approach.   He noted that for his Division, the broken windows theory is not about making every regulatory violation into an enforcement action.  OCIE is still out there issuing deficiency letters without enforcement actions.  Still, Section 16(a) of the Exchange Act is an important protective rule, and is designed to prevent larger trading violations.  Ceresney insisted that the SEC was not moving away from important areas such as financial reporting and market structure cases to do trivial work.

Corporate Penalties

Commissioner Piwowar also raised the spectre of the 2006 Statement of the SEC Concerning Financial Penalties.  The statement raises a number of factors for the Commission to consider in deciding corporate penalties.  Piwowar and others, including Commissioner Gallagher, think that large corporate penalties can sometimes hurt, not help, shareholders.  Piwowar also thinks that the 2006 statement is receiving short shrift from some staff.  Ceresney was somewhat dismissive of the statement when the Directors Panel came around.  As he said, the 2006 statement was never binding and is merely a guide.  It provides factors for the staff to consider, and the staff considers them.  But they are not bound by something that never became a rule.

FCPA Monitors

Chuck Duross at Morrison & Foerster noted that companies coming out of FCPA enforcement actions are not being forced to endure compliance monitors for the lengths of times that they used to.  Instead of three year terms, companies are sometimes able to forego monitors entirely or have them for 18 months with the possibility of extension.  The SEC’s FCPA Unit Chief Kara Brockmeyer sees this as a result of companies preparing their compliance systems on the front end, and not requiring the same level of oversight as before.  Still, she doesn’t see monitors disappearing entirely.  In response to a reporter’s question asking what the downsides of having monitors are, Simpson Thacher’s Jeffrey Knox pointed out that corporate monitors are not mere passive observers but corporate policy makers.  If the compliance function is working without them, their presence may not be good for the company or the public.

Administrative Proceedings

The day saw a lot of discussion of the SEC’s post-Dodd-Frank increased use of administrative proceedings in its enforcement matters.  Several senior staff members, including Ceresney, Brockmeyer, and Associate Director Scott Friestad assured the audience that more were coming.  Recently departed Co-Director George Canellos opined that in deciding between filing cases in federal court or as an AP, it wasn’t appropriate for the staff to consider which gave the SEC a better chance to win.  Ceresney didn’t seem to be as sure about that, and Friestad definitely didn’t buy it.  “Should I be filing where I’m most likely to lose?”  For Russ Ryan, at King & Spalding, administrative proceedings after Dodd-Frank have a core, potentially Constitutional problem.  That is, they provide an extremely accelerated process that is well suited for technical, regulatory violations, but is now being applied to enforce punitive sanctions against non-registered entities.  Now, the SEC is acting as both the prosecutor and the judge in a punitive context and in a way that Ryan thinks triggers Separation of Powers concerns.  He also thinks some of the recent challenges to SEC administrative cases are not quite ripe, and have allowed district courts easy outs by saying the respondents have not exhausted their administrative remedies.  This topic will have a way to go before it’s played out.

Practice Suggestions

Steptoe’s Phil Khinda had a few.  For Wells submissions, he said to remember you’re not writing for the Enforcement staff.  You’re writing for the GC’s office and the worriers in the other divisions and offices to create doubt and weakness in the SEC’s case.  The Wells doesn’t need to be written like an attacking opposition brief.  Instead, it should read like an amicus brief, and speak to the staff like they would talk to each other.  Ryan also said he’d seen a recent trend wherein the staff has been more open to frank discussions very early in a case about what they’re looking for and how a subpoena might be kept relatively narrow.  Friestad said that Ryan may have just been lucky, but that he encouraged staff in his group to be similarly forthcoming.  Khinda also said that he tries very hard to build credibility with the staff early in an investigation.  When he gets challenged for a lack of “independence” when he’s acting as defense counsel, “[w]hat I say to the staff is independence is a proxy for intellectual integrity.  If I seem tired it’s because I’ve been running around trying to get at what the issues are.  The staff wants to know that you are thinking about the issues and trying to learn them the way they would.”

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