You may recall this line from the original Batman movie, where Jack Nicholson, playing the role of Joker/Jack Napier in a Golden Globe-nominated performance, shouted in awe at the various gadgets employed by the Caped Crusader. I am not suggesting that the SEC has a Batmobile or Batarang at its disposal, but comments made by SEC Chairwoman Mary Jo White at the 41st Annual Securities Regulation Institute (Institute) held in Coronado, California, on Jan. 27–29, suggest that the SEC is deploying new technology to better carry out the SEC’s mission. Her comments come after the recent rejection of the SEC’s budget request for a 26 percent increase for fiscal year 2014. Though the agency received only a 2 percent increase over last year’s fiscal year budget, the new technological tools described by White now at the agency’s disposal may make up for any staffing shortcomings created by budget expectations. White believes this technology will help the agency “keep pace with this rapidly changing [securities] environment…to harness and leverage advances in technology to better carry out our mission.”
White discussed two new tools now utilized by the SEC to help the SEC work through the seemingly endless amounts of trading data created by firms in today’s digitally driven world.
The National Exam Program has a Quantitative Analytics Unit utilizing an instrument called NEAT (National Exam Analytics Tool), which enables examiners to access and analyze large amounts of a firm’s trading information in considerably less time than the SEC has spent in the past. White provided an example whereby NEAT was used by examiners to analyze in only a day and a half, 17 million transactions executed by one investment adviser. The SEC is using NEAT to compare databases of corporate activity to search for potential securities violations, such as insider trading, front running, window dressing and improper allocations of investment opportunities.
The Market Information Data Analytics System (MIDAS) is another tool the SEC is using to collect and analyze huge amounts of trading data across multiple markets at once, based on both the familiar consolidated tapes (what casual investors usually see across the bottom of TV screens showing every trade of 100 shares or more in listed equities) and separate, proprietary feeds made individually available by each equity exchange. MIDAS allows the SEC to collect one billion records of trading every day, time-stamped to the microsecond — a process that used to take staff members weeks or even months. MIDAS collects posted orders and quotes on national exchanges, modifications/cancellations of those orders, trade executions against those orders and off-exchange trade executions. It also collects and processes data on equity options and futures contracts. The SEC believes this type and amount of trading data may reduce speculation about the behavior of the current market structure, specifically, monitoring and understanding mini-flash crashes, reconstructing market events and developing a better understanding of long-term market trends.
During her Jan. 27 speech at the Institute, White outlined the agency’s plans for “vigorous enforcement” in 2014. She noted the recent change in the SEC’s admissions of wrongdoing policy and provided insight on the types of violations for which the SEC may seek such admissions — which was the subject of an earlier Subject to Inquiry article — in the attempt to achieve greater public accountability while sending a message to the public that the enforcement and safety of our markets are strong. Such admissions may be pursued in cases involving:
- egregious conduct by wrongdoers;
- large numbers of investors harmed;
- market or investors were placed at significant risk;
- wrongdoers pose a particular future threat to market or investors; and
- the defendant engaged in unlawful obstruction during agency actions.
The SEC predicts that 2014 will see an increase in the number of cases involving admissions of wrongdoing.
White also highlighted the formation of the Financial Reporting and Audit Task Force under the SEC’s Enforcement Division. The task force, made up of both accountants and attorneys, strengthens the agency’s goal to identify and prosecute violations of securities laws relating to audit failures and financial reporting. Their efforts include ongoing reviews of financial statement restatements and revisions, analysis of performance trends by industry, and the use of technology-based tools. White noted that enforcement will focus not only on the auditors of every financial reporting case, but also “on senior executives for possible misconduct warranting charges.”
To quote another famous exchange from one of the more recent Batman iterations:
“There’s a storm coming.”
“You sound like you’re looking forward to it.”
This is a bit extreme, of course, but companies must adapt to this new securities law environment, exercise and maintain compliance efforts, and employ their own tools of oversight to identify any ongoing or potential violations. Strong internal controls and training programs for employees are useful in preparing for today’s securities climate. We will continue to use our Bat-Tracer and monitor developments at the SEC, and report back, hopefully with a better movie analogy.
This morning at SEC Speaks 2014, Chairwoman Mary Jo White elaborated on the new admissions protocol, Financial Fraud Task Force, and MIDAS tool we discuss above. Of note, White highlighted the Enforcement Division’s “unparalleled record of successful cases arising out of the financial crisis.” This includes:
- 169 individuals or entities charged with wrongdoing, 70 of whom were CEOs, CFOs, or other senior executives;
- Landmark insider trading cases pursuing complex cases against investment advisers, broker dealers and exchanges, as well as FCPA violations, state pension funds, and municipal bonds; and
- Return of $3.4 billion in disgorgement and civil penalties in 2013 alone.
White expects a “strong, busy, and proactive” 2014 for the SEC.
We also anticipate a very active year for the SEC’s Enforcement Division.
We look forward to keeping you informed on the latest trends in securities laws and enforcement, as well as working with you to meet the compliance challenges you or your company may face this upcoming year.