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From Securities Regulation Daily, May 17, 2016

Experts examine enforcement as extension of public policy

By John M. Jascob, J.D., LL.M.

A panel of experts at NASAA’s Public Policy Conference examined the effectiveness of recent SEC and state enforcement efforts in carrying out various public policy goals. Moderated by Utah Securities Commissioner Keith Woodwell, the panel considered the relative importance of deterrence and compensation, the merits of the SEC’s “broken windows” policy, and the need to direct enforcement actions against individuals, among other topics.

Balancing goals. Professor John Coffee of Columbia Law School noted that every regulatory agency must strike a balance between the policy goals of deterring future wrongdoing and obtaining compensation for victims, and that the two goals are often in tension. This tension can be seen perhaps most clearly in settlements of SEC enforcement actions, where the Commission has often obtained large settlements from respondents who neither admit nor deny wrongdoing. For example, Coffee referenced the Commission’s battle with Judge Rakoff in the Southern District of New York, where the court had refused to approve the SEC’s settlement with Citigroup without establishing the “truth” of the allegations. Although the SEC won the battle on appeal to the Second Circuit, the Commission may have lost the reputational war, Coffee said.

Coffee observed that the SEC typically only obtains admissions of wrongdoing in five to six percent of cases. This placement of compensation ahead of deterrence may limit the Commission’s enforcement thrust, as it can lead to a “heads I win, tails you lose” scenario for wrongdoers. Under this scenario, firms may conclude that, at worst, they will likely only have to return the financial gains from their misconduct without incurring disqualifications or criminal sanctions.

Monica Kowal, Vice Chair of the Ontario Securities Commission, stressed the importance of having respondents take responsibility for their actions. This should involve not only compensation for investors, Kowal said, but also having a settlement agreement that “tells the story.” In other words, the facts set forth in the agreement must represent clearly the nature of the misconduct.

SEC Enforcement Division Director Andrew Ceresney generally agreed with Professor Coffee’s comments concerning the tension between obtaining large settlements versus obtaining admissions, but noted that the percentage of cases involving admissions does not take into account number the guilty pleas obtained in parallel criminal proceedings, which are often aided by the SEC’s efforts on the civil side. And while the SEC clearly acknowledges the trade off when settling actions without obtaining an admission of wrongdoing, it simply does not make sense to require admissions in every case. Requiring admissions in every case would increase litigation, with the consequence that bad actors would be more likely to remain in the industry while the litigation was ongoing. In addition, the SEC would also face some litigation risk. Still, Ceresney agreed that admissions can be a powerful deterrent.

Broken windows. With regard to the effectiveness of the SEC’s enforcement efforts, Professor Coffee said that the Commission has achieved tremendous success with its whistleblower program over the past two to three years. In Coffee’s view, state regulators should consider establishing similar programs at the state level. Coffee also said, however, that he would like to see a greater number of cases involving scienter on the Commission’s enforcement docket, as opposed to non-scienter cases such as those involving delinquent filers or follow-on actions. Coffee suggested that the “broken windows” policy touted by SEC Chair White may be good public relations, but the program does not substitute for adequate prioritization of enforcement efforts.

Ceresney countered by saying that 507 out of the Commission’s 807 enforcement actions last year were standalone actions. And while Ceresney agreed that priorities are necessary, he said that the Commission’s broken windows policy does not divert resources from higher priority areas of enforcement. Rather, the effect of the broken windows policy has been to increase compliance in several areas, such with the SEC’s Municipalities Continuing Disclosure Cooperation (MCDC) initiative.

Later, responding to criticisms voiced publicly by Sen. Elizabeth Warren (D-Mass) concerning the SEC’s alleged reluctance to pursue actions directly against individuals, Ceresney said that 80 percent of the Commission’s enforcement actions involved individuals. In addition, nearly every important case concerning financial reporting involved actions against individuals. Ceresney also observed that the SEC was the only financial regulator to bring an action personally against Steven A. Cohen. Ceresney also took issue with some of Sen. Warren’s comments concerning the SEC’s granting of disqualification waivers, at least with respect to the Division of Enforcement. Ceresney said that waivers are not an enforcement issue because the disqualifications that may result from misconduct are not an enforcement remedy, and in any case the determination of whether a waiver is warranted is made by other divisions and by the Commission itself.

State effectiveness. With regard to the effectiveness of enforcement at the state level, New Jersey Securities Bureau Chief Laura Posner said that the states’ efforts, like those of the SEC, should receive a mixed grade. Posner said that the states do a very good job at suspending or revoking the licenses of individual bad actors. Posner also suggested, however, that the states may need to give greater attention to systemic issues that may pervade certain firms. Posner would encourage state regulators to look more closely at firm-wide problems and to continue to devote resources to multi-jurisdictional enforcement efforts.

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