Vedder Price

Vedder Thinking | Articles Highlights From SEC Speaks 2016: Enforcement and Litigation Trends


Reader View

As republished on February 23, 2016 by The National Law Review.

The U.S. Securities and Exchange Commission ("SEC" or "Commission") held its annual SEC Speaks conference in Washington, DC on February 19 and 20, 2016, and provided an update on recent litigation trends, the current enforcement initiatives in place at the Commission and the enforcement priorities for the coming year.  

  • Chairman's Address 
  • Commissioner's Remarks 
  • Division of Enforcement: Litigation Enforcement Trends and Priorities for 2016
    • Insider Trading and Cyber Security Developments 
    • Gatekeepers 
    • Litigation Developments 
    • Complex Financial Instruments 
    • Market Abuse Unit 
    • Whistleblower and Cooperation Programs 
    • Asset Management Unit 
    • Broker-Dealer Task Force 
    • FCPA Unit 
    • Financial Fraud and Auditing 
    • MicroCap Fraud Matters 
    • Municipal Securities and Public Pensions Unit 
    • Technology and Risk Analytics 
  • Office of the General Counsel: Judicial and Legislative Developments

Chairman's Address

Chairman Mary Jo White emphasized the need for the Commission to go "beyond disclosure" in carrying out its mission of protecting investors, maintaining fair, orderly and efficient markets, and facilitating capital formation. Specifically, Chairman White noted that "[d]isclosure is one tool among many" that the SEC has in its arsenal and stressed that the growing complexity of the capital markets, connections between participants and the multitude of risks they face "require more of us." Specifically, Chairman White discussed the need for the Commission to take additional, carefully targeted substantive measures, including controls on technology and limitations on activities, so that the SEC may regulate the means of trading securities. For instance, Chairman White indicated that current SEC proposals would "impose minimum liquidity requirements and limits on derivatives" on asset managers and require updates to regulations of alternative trading systems (i.e., dark pools) in order to provide better supervisory tools. Chairman White emphasized that "considering and using other policy tools to strengthen our regulatory regime does not reflect a retreat from our core disclosure powers," but, due to the increasing complexity of products, changes in the behavior of market participants and systemic risks require additional protections beyond disclosure alone. Chairman White praised Congress for recently approving an increase to the Commission's budget, and also complimented the high morale of the staff. Chairman White addressed the Division of Enforcement's second straight record-setting year in both the total number of enforcement actions brought and amount of monetary relief obtained. She highlighted several areas of enforcement focus during 2015, including cybersecurity, market structure requirements, dark pools, microcap fraud, financial reporting failures, insider trading, disclosure deficiencies in municipal securities offerings, and protection of retail investors and retiree savings. Chairman White stated that the SEC has executed upon the vast majority of the rulemakings required by the Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). This progress includes recent proposals for the remaining executive compensation rulemakings (hedging the company's stock, disclosure of pay versus performance measures, and clawback of incentive compensation), as well as the adoption of the pay ratio rule in August 2015. Chairman White concluded her remarks by quoting President Franklin Delano Roosevelt's statement to Congress just two days after he signed the Securities Exchange Act that "[w]e have sought to put forward the rule of fair play in finance and industry"—the critical responsibility the Commission carries forward today and every day. 

Commissioner's Remarks

Commissioner Kara M. Stein's remarks focused on what lies ahead for our financial markets and, in particular, on transparency and accountability. Both concepts are "critical to the efficient and effective operation of our capital markets." Commissioner Stein also noted that both concepts are "central" to the Commission’s efforts in 2016. 

With respect to transparency, Commissioner Stein noted that an increasing number of Americans are turning to the capital markets to purchase homes, send their children to college and save for retirement. She noted that, with more than half of Americans invested in the stock market, these investors count on our economy and our economy counts on these investors. Commissioner Stein then asked "how are we ensuring that our capital markets provide sufficient transparency to foster confidence? How are we ensuring that investors are protected, while at the same time still spurring innovation and encouraging capital formation?" She noted that one of the most important tools used by the Commission for investor protection is disclosure, which fosters transparency. Indeed, Commissioner Stein noted that both quality information and quality disclosure matter, especially given the growing complexity in capital markets.

As an example, Commissioner Stein discussed the increased complexities within the exchange-traded funds ("ETFs") market. While ETFs provide investors with both benefits and alternatives, Commissioner Stein noted that the complexity of some ETFs makes understanding such products difficult for many investors. More and more individuals are investing in ETFs, with over $2 trillion in assets under management in 2014 in the U.S. ETF market. Commissioner Stein called this growth "astounding and potentially good" provided that the risks are identified, market participants and investors are informed, and appropriate safeguards are in place. 

Commissioner Stein expressed concern that the risks presented by some of these new ETF products may not be understood by the people who invest in them. Referencing the events of August 24, 20151, Commissioner Stein noted that, although Commission staff and market participants are continuing to assess what happened that day, one thing is clear—many ETFs behaved in an unpredictable and volatile manner. In the wake of the events of August 24, 2015, and the questions that remain, Commissioner Stein indicated that the Commission needs to take a holistic approach to these products, examining their transparency and how they behave in our capital markets. She proposed that the Commission needs to carefully review the proper role of authorized participants and market makers in facilitating ETF operations and trading. She also emphasized that the Commission must continue looking for opportunities to enhance investor protection in ETFs, reinvigorate SEC staff working groups, work with FINRA and other self-regulatory organizations to take a look at these products, how they are being marketed and by whom, and examine whether certain products are even suitable for buy and hold investors.

Commissioner Stein then discussed board accountability to shareholders, noting that good corporate citizens all have an accountable, open and effective group of stewards at the helm. Last February, the SEC held discussion about proxy voting mechanics and how to amend the proxy rules to facilitate a more effective and robust shareholder voice. Commissioner Stein discussed the discrepancy between shareholders who physically attend meetings and those who vote by proxy, noting that those who are not physically present (i.e., voting by proxy) are generally limited to choosing either the company's nominees or the shareholder-proponent's nominees. She does not think they should be treating investors differently and noted that it is time to amend proxy rules and facilitate more robust shareholder enfranchisement.

Commissioner Stein further noted that "issues of transparency and accountability also arise in connection with the market structure improvements that are currently being proposed to the Commission." She posed the following questions: "How do we support greater transparency amidst the rapid and significant technological innovations going on in our financial markets? How do we instill greater accountability?" Commissioner Stein believes that the first order of business is to finish remaining the rules pursuant to Title VII of the Dodd-Frank Act. She noted that the Commission made some progress last year and earlier this year but many rules remain outstanding, including the requirements for capital and margin, obligations for segregation and recordkeeping, and standards for business conduct. Commissioner Stein also noted that further work must be done to finalize rules regarding the reporting and dissemination of swap trading data. She indicated that the continued delay in finalizing the swap rules "affects the transparency, efficiency and resiliency of our markets."

Commissioner Stein also noted that another area of focus in 2016 should be the Consolidated Audit Trail ("CAT"). She voiced her concern regarding the lack of movement towards completion of the CAT and reemphasized her belief that this must be made a top priority of the Commission. Commissioner Stein indicated that to properly understand the events of August 24, 2015, we need a system that sees across the capital markets. She noted that the Commission should be able to look back at a CAT to make a data-driven conclusion about what is going on in our markets at any given time on any given day, in particular during times of market stress.

Finally, Commissioner Stein noted that the concepts of accountability and transparency also merge when discussing the public-private market divide. Statistics show that more money is being raised in the private markets than in public markets, with more than $2 trillion raised privately in 2014. The lessons to be drawn from this and the questions to be asked include the following: What effect is private capital raising having on capital markets in the public sphere, and are these private markets the best places for capital formation and investor protection? Commissioner Stein noted that there is no doubt that the Commission needs to encourage and foster capital formation, which is the cornerstone of what has made American markets and the American economy great. She further noted, however, that there are both risks and rewards that flow from private markets and striking the right balance and finding the appropriate amount of oversight is always tricky.

Commissioner Stein concluded her remarks by reiterating that good regulatory oversight fosters transparency and accountability while still fostering and encouraging innovation, and "we are at our best when we look back and learn, then look forward and act in a balanced and thoughtful manner to accomplish smart and effective outcomes."

Division of Enforcement: Litigation Enforcement Trends and Priorities for 2016

Speakers from the Division of Enforcement (the "Division"), including Andrew Ceresney, Director of the Division, discussed the Division's recent cases as well as the Division's priority areas for 2016, which include cybersecurity, insider trading, gatekeepers, complex products and complex market practices, and the Foreign Corrupt Practices Act ("FCPA"). Speakers also highlighted how the Division has been able to leverage data that other units and groups within the SEC have compiled as well as developments and improvements in the technological tools the Division uses to assist in identifying issues earlier and faster, enabling the Division to bring better and more effective enforcement actions.

Insider Trading and Cyber Security Developments

Stephanie Avakian, Deputy Director of Enforcement, noted that insider trading cases will remain a priority for the SEC in 2016. Ms. Avakian discussed Salman v. U.S., a decision from the Ninth Circuit upholding an insider trading conviction that the U.S. Supreme Court recently agreed to review on the issue of what type of "personal benefit" is needed to establish liability for insider trading2. In particular, the Supreme Court will examine whether "personal benefit" in insider trading cases requires proof of "an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature," as the Second Circuit held in U.S. v. Newman, or whether it is sufficient that the insider and the tippee shared a close family relationship, as the Ninth Circuit held in Salman. Ms. Avakian also stated that the SEC will continue to pursue cases involving cybersecurity issues in three main areas: (1) where there has been a failure by a registrant to safeguard non-public information; (2) where material non-public information has been stolen to obtain a market advantage; and (3) where there has been a cybersecurity-related disclosure failure by a public company. With respect to the final area—cybersecurity-related disclosure failure—Ms. Avakian noted that, in order to bring a case involving a cybersecurity-related disclosure failure, it would have to be a "significant disclosure failure" and self-reporting and working with authorities would minimize a company's exposure.


Joseph Brenner, Chief Counsel, discussed recent cases brought by the SEC against a variety of gatekeepers, including auditors, attorneys, fund directors, underwriters and transfer agents. Mr. Brenner noted that the Commission has pursued gatekeeper cases not only against firms or companies, but also increasingly against the individuals at those firms or companies. He further noted that the Commission has obtained remedies in gatekeeper cases beyond the standard disgorgement, civil monetary penalties and injunctions, noting that the SEC also has focused on obtaining additional forward-looking investment protection remedies for associated persons, including suspensions, bars, practice limitations, officer or director bars and other individually tailored remedies. Mr. Brenner also stated that the SEC frequently requires affirmative steps of future compliance by firms, such as appointing independent compliance consultants, increased training programs and other structural changes at those firms.

Litigation Developments

Matthew Solomon, Chief Litigation Counsel, described the SEC's "heavy" docket, noting that the SEC had 27 trials nationwide for the fiscal year 2015. According to Mr. Solomon, the SEC won 92 percent of its cases in 2015. Mr. Solomon noted that the SEC will continue to pursue administrative proceedings where appropriate, and he said that the results the SEC obtains in administrative proceedings—which included two losses in 2015—suggest that the SEC does not go to administrative proceedings in order to obtain "home court advantage." He said that the SEC files its most contested cases in federal court. Lastly, Mr. Solomon said the SEC will continue to act strongly to protect SEC processes from abuses, whether that involves filing contempt actions (e.g., instances in which a respondent is defying a court order), bringing subpoena enforcement actions (e.g., instances in which a respondent makes a blanket or overbroad assertion of privilege) or making criminal referrals (e.g., instances in which an individual lies to the Office of Compliance Inspections and Examinations ("OCIE") in the examination context or gives false testimony in an SEC investigation).

Complex Financial Instruments

Michael J. Osnato, Chief of the Complex Financial Instruments Unit, emphasized that the Unit's purpose is to ensure that the Division stays current with ever-evolving markets, practices and complex instruments. Mr. Osnato described the Unit's simple mandate—to identify and investigate potential misconduct arising from the creation, sale, usage and valuation of complex financial instruments—but also noted that it is increasingly focused not just on those instruments, but also large-scale market practices that present a risk of harm to investors. Mr. Osnato discussed how the Unit carries out its mandate through smart and efficient case generation by putting in place a dedicated infrastructure to continue to grow its pipeline through (1) strategic allocation of resources, (2) targeted sweeps focused on key products and markets, and (3) developing tailored, homegrown analytical tools to identify problem areas such as over-the-counter markets for asset-backed securities. Mr. Osnato then described the Unit's 2016 priorities, which include (1) complex products, (2) complex market practices and (3) protection of vulnerable retail customers. Complex products that will remain a priority include trading, the credit rating process and swaps, each of which will be aggressively pursued using analytics and a variety of other smart initiatives. The Unit will also be looking for sophisticated market actors seeking to exploit gaps in regulatory coverage, particularly with respect to vulnerable retail investors.

Market Abuse Unit

Robert Cohen, Co-Chief of the Market Abuse Unit, explained that the Unit focuses primarily on regulation of insider trading, market structure and high-volume manipulative trading. Regulation of "dark pools" continues to be the focus of significant enforcement activity, including seven cases against national stock exchanges. Mr. Cohen explained that dark pool cases typically arise where firms either (1) fail to operate in the manner in which they told customers they would, (2) selectively share material information with some investors, but not others or (3) fail to protect confidential trading information. Mr. Cohen briefly described three such recent cases (Barclays, Credit Suisse and ITG), each of which resulted in payment of steep penalties to the Commission. Mr. Cohen also discussed the increasing focus on spoofing/layering, which involves manipulative conduct in which traders send non-bona fide offers in an effort to trick the market and then place orders on other end. Finally, Mr. Cohen described the Unit's increasing use of homegrown data and related analytics to identify suspicious trading practices, not only during investigations, but also to generate investigations, highlighting that the SEC now has its own trading analysis and detection center. The Division filed five cases in 2015 that originated from the Unit's analytical tools rather than referrals from FINRA or other self-regulatory organizations.

Whistleblower and Cooperation Programs

Sharon Binger, Regional Director of the Philadelphia Regional Office, discussed recent developments in the whistleblower and cooperation programs. First, Ms. Binger described the continued robust track record of the whistleblower program, which paid $37 million in rewards in 2015 alone, compared with $54 million since the program's inception, and also saw a 30 percent increase in tips/complaints. Ms. Binger also discussed one notable 2015 case, In the Matter of KBR, Inc., in which the Division charged the company with violation of Rule 21F-17 for using overly restrictive language in confidentiality agreements in order to impede or limit the whistleblower process. Ms. Binger stated that she expected the Division to pursue more of these cases, which will inevitably turn on the facts and circumstances of each case and each agreement. Next, Ms. Binger discussed the success of the cooperation program in 2015, which resulted in 103 cooperation agreements, nine non-prosecution agreements and nine deferred prosecution agreements. She emphasized the tangible benefits of cooperation, which include flexibility on charging decisions and/or reduction of monetary sanctions or the terms of any bars and/or suspensions. She also underscored the importance of early self-reporting, which not only furthers the Commission's goals of efficiency, speed and effectiveness, but also minimizes a company's risk that a whistleblower will report improper conduct. Ms. Binger closed by stating that the SEC still looks to the Seaboard Report to evaluate cooperation by companies, but noted that it is commonplace for companies to share findings and results of internal investigations with the SEC. 

Asset Management Unit

Marshall S. Sprung, the Chief of the Asset Management Unit, spoke about the Unit's priorities, key cases from 2015 and areas of emphasis for 2016. The SEC views the asset management space as being divided into three categories: registered investment companies, private funds and retail accounts. With respect to registered investment companies, Mr. Sprung noted that the SEC's priorities include valuation/performance and compliance with section 15(c) of the Investment Company Act. Key 2015 cases highlighted by Mr. Sprung included BlackRock Advisors LLC (failure to disclose conflicts of interest and failure to adopt appropriate policies/procedures), Commonwealth Capital Management (violation of section 15(c) of the Investment Company Act by failing to satisfy statutory obligations in connection with evaluation and approval of mutual fund advisory contracts) and First Eagle Investment Management, LLC (improper use of mutual fund assets to pay for marketing/distribution of fund shares). In 2016, the SEC expects to bring cases regarding conflicts of interest, valuation and related performance issues, and compliance failures. With respect to private funds, Mr. Sprung discussed as priorities conflicts of interest, valuation and fees/expenses. Key 2015 cases noted by Mr. Sprung included Alphabridge Capital Management, LLC (fraudulent inflation of securities prices in managed hedge fund portfolios), Alpha Titans LLC (improper allocation of fund assets to pay undisclosed operating expenses), Kohlberg Kravis Roberts & Co. LP (misallocation of "broken deal" expenses) and Fenway Partners, LLC (failure to disclose conflicts of interest). Mr. Sprung indicated that, in 2016, the Division expects to bring cases regarding undisclosed conflicts of interest, aberrational risk performance analytics, and—in the private equity context—misallocations of fees/expenses and failure to register as a broker. Finally, with respect to retail accounts, Mr. Sprung noted that the Unit's priorities include conflicts of interest, fee arrangements, compliance and advertising. Key 2015 cases included Pekin Singer Strauss Asset Management Inc. (failure to conduct timely annual compliance program reviews and failure to implement and enforce policies/procedures, failure to disclose conflict of interest, failure to seek best execution), Everhart Financial Group, Inc. (failure to disclose conflict of interest, failure to seek best execution, failure to conduct annual compliance reviews, and insufficient disclosures), R.T. Jones Capital Equities Management (failure to establish cybersecurity policies/procedures) and J.P. Morgan (failure to disclose conflict of interest based on preference for own proprietary products). Mr. Sprung indicated that, in 2016, the Division expects to bring cases regarding advertisements utilizing the publication of unverified track records and—in the gatekeeper context—cases against auditors for failure to comply with auditing standards.

Broker-Dealer Task Force

Antonia Chion, Associate Director and co-head of the Broker-Dealer Task Force, provided an update on two of the key initiatives that the Task Force has been working on over the past year. The Task Force was created in 2013 in order to focus on issues and current practices within the broker-dealer community and, in particular, within the retail space. Although the Task Force does not have a dedicated staff, Ms. Chion commended the diligence of its steering committee. First, Ms. Chion discussed the anti-money laundering ("AML") compliance initiative implemented by the Task Force in 2014. She indicated that the Task Force has been able to leverage the substantial work done by the Bank Secrecy Act ("BSA") review group, which was spurred by the realization that many broker-dealers had not filed a single suspicious activity report ("SAR") in 2013. The BSA Group, using various risk metrics and other inputs, analyzed various data collected from numerous broker-dealers regarding their SAR policies and practices. The Task Force worked with the BSA Group to coordinate dozens of referrals either for examination or investigation. Ms. Chion believes that the focus the Task Force has given to this area has encouraged broker-dealers to review their policies and procedures regarding SARs. Second, Ms. Chion commented on a new initiative focused on retail investments and alternative products. Specifically, the Task Force is collecting and analyzing data relating to the sale of alternative products to retail investors and due diligence surrounding those products. They are looking at the percentage of amount of revenues generated from alternative products, number of registrants, and the results of various examinations by FINRA and OCIE. The Task Force also obtained additional information from various broker-dealers regarding their due diligence policies, practices and procedures. The Task Force is still reviewing and analyzing all of the data it has collected to date, and Ms. Chion indicated that the broker-dealer community and the public at large should "stay tuned" for things to come.

Andrew M. Calamari, Regional Director, New York Regional Office, provided an update on the Task Force's churning initiative. Identifying and investigating churning has been a top priority for OCIE year after year and, as a result, the Task Force wanted to develop new and better approaches to help identify the perpetrators. Thus, working with the Risk Analysis and Examinations Team, a quantitative analytics unit that processes clearing firm data, the Task Force examined two key metrics: (i) turnover ratio and (ii) cost-to-equity ratio. The Task Force decided to collect two different types of data strains from suspect data firms and clearing firms. In furtherance of the initiative, the Task Force sought and obtained two sets of orders (issued under Section 21A of the Exchange Act). The first set was issued to a number of introducing firms requiring them to provide detailed information under oath concerning business operations and activity in customer accounts. The second set of orders was issued to a number of clearing firms requiring them to provide data concerning accounts of introducing brokers that show high cost-to-equity and high turnover ratios. The Task Force will then screen customer accounts at hundreds of introducing firms to identify more introducing firms that might require investigations.


Kara N. Brockmeyer, Chief of the SEC's FCPA Unit, recapped 2015 FCPA activity and provided insight as to points of emphasis for 2016. In fiscal year 2015, the SEC brought 14 FCPA cases resulting in $215 million in disgorgements and penalties. So far, 2016 has seen a substantial increase in activity with six cases already brought by the SEC totaling $200 million in disgorgements and penalties. Five of those cases have come in February 2016 alone, and the rest of 2016 is looking like a “very busy year” in this area. While 2016 has already seen a marked increase in parallel FCPA proceedings involving the SEC and Department of Justice (only three such cases were brought in the prior year and a half, but two new cases were already brought in the past week alone), the SEC does not anticipate that this will become a trend. Rather, it is likely that many cases going forward will be brought by only the SEC because of a focus on cases that do not involve bribery and are based on violations too small or not sufficiently egregious to warrant criminal charges. More specifically, the SEC is focused on ensuring that public companies keep accurate books and records and implement and maintain good internal controls. Ms. Brockmeyer highlighted the recently announced VimpelCom case, in which a telecommunications company paid $114 million in bribes in an effort to develop business in Uzbekistan. VimpelCom is one of the largest FCPA cases ever brought, and resulted in payment of $795 million in settlements (including $395 million in disgorgement) with the SEC, Department of Justice and Dutch authorities. In addition to the noteworthy amount of money paid to resolve these charges, this case was also groundbreaking in that the SEC obtained assistance from over 13 foreign jurisdictions. Ms. Brockmeyer also discussed a number of "firsts" for the FCPA Unit in 2015 and 2016 to date, including the first case against a financial services firm (BNY Mellon), the first case in which the SEC received assistance from the African Development Bank (Hitachi) and the first case in which the SEC entered into a deferred prosecution agreement ("DPA") with an individual (PTC Inc.). Expanding on this new use of a DPA, which was the result of extensive cooperation from the DPA recipient, Ms. Brockmeyer noted that the SEC hopes its use of DPAs and non-prosecution agreements ("NPAs") will encourage foreign nationals to cooperate with the SEC on future cases. Importantly, the SEC reiterated its position—stated previously in November 2015—that self-reporting is a prerequisite to DPAs and NPAs. The SEC plans to make cooperation and use of DPAs and NPAs a point of emphasis going forward. As far as areas of focus in 2016, Ms. Brockmeyer noted that 20 percent of last year's FCPA cases involved suits against individuals, and that the SEC will continue to focus on charging individuals. This includes foreign nationals, despite the jurisdictional and evidentiary hurdles presented by such cases. The SEC received cooperation from 24 foreign jurisdictions in FCPA matters in the last year, and plans to continue working with foreign authorities. The next three to six months in particular could see the announcement of significant cases currently in the SEC's pipeline. More specifically, the SEC will focus on the following industries in 2016: pharmaceuticals and financial services. With respect to the financial services industry, the SEC will look specifically at internship programs and whether, as in the BNY Mellon case in 2015, firms are committing FCPA violations by selectively disregarding their rigorous hiring standards.

Financial Fraud and Auditing

Margaret S. McGuire, Chief, Financial Reporting and Audit Group ("FRAud Group") discussed some of the priorities for the group as well as highlighted some of the ways the FRAud Group has evolved since its inception. First, Ms. McGuire emphasized that financial reporting and disclosure have been high-priority areas for SEC. In fiscal year 2015, the Division brought 135 issuer/financial reporting matters, compared to 96 in 2014, including high-profile cases against CSC, St. Joe, Assisted Living Concepts and Monsanto. Some of the areas of focus include missing or insufficient internal controls, and Ms. McGuire noted that the Division has brought financial fraud matters involving violations of internal controls provisions even where there is not an actual fraud in play. She also highlighted the importance of gatekeepers and indicated that, even where the Division cannot prove an actual fraud has occurred, it is always going to look to what the auditors and audit firms are doing. She noted the recent charges brought against BDO and Grant Thornton as examples, which were the first cases against national audit firms for audit failures since 2009 and the very first cases in which the SEC obtained admissions from audit firms. Next, Ms. McGuire discussed the evolution of the FRAud Group, which started off as a task force in 2013 with the aim of renewing focus on financial reporting, auditor matters and disclosure matters. The FRAud Group is tasked with identifying matters and promising leads, developing investigative theories and referring those matters to others within the Division. According to Ms. McGuire, the group is "mining things up from the ground." Ms. McGuire noted that the FRAud Group has evolved in two very significant ways—it has expanded its efforts to include liaisons (about 35 attorneys and accountants), and, last year, it evolved into a permanent group within the Division. The FRAud Group remains focused on identifying potential issues as early as possible before they have time to evolve into “a giant headline-grabbing fraud.” There are over 270 issuers of interest to their work which has led to a number of new matters. Ms. McGuire concluded her remarks by discussing the developments in technology. The accounting quality model ("AQM"), an important endeavor for the Commission, has evolved into the Corporate Issuer Risk Assessment Program ("CIRA"), a home-grown system that aggregates and organizes information related to corporate issuers. There are multiple dashboards involved which allow the staff to compare a specific company to its peers and to compare a specific anomaly to other anomalous results. Ms. McGuire did not specifically identify the types of dashboards or information collected through CIRA and did not discuss in detail they types of issues the FRAud Group is identifying. She did note that a significant benefit to CIRA is that they can tailor and refine the program to suit their needs, and it allows FRAud Group and the staff to do things with the "click of a mouse" whereas, prior to the development of CIRA, it would have taken months.

MicroCap Fraud Matters

Jason Berkowitz, Co-Chair of the Microcap Fraud Task Force noted that, while over-the-counter markets are critical for small businesses seeking to raise capital, they are also targeted by "fraudsters" seeking to take advantage of thinly traded stocks and lower disclosure requirements. MicroCap fraud schemes often target less-sophisticated investors, including senior citizens. These schemes are also increasingly reliant on Twitter and Facebook. The Task Force, composed of around 20 attorneys, is responsible for combating microcap fraud. The Task Force frequently brings parallel actions together with agencies such as the Department of Justice, Federal Bureau of Investigation and Internal Revenue Service, and also works closely with the SEC's Office of Market Intelligence, which is responsible for the collection, analysis, referral and monitoring of the tips, complaints and referrals received by the Division each year. Leads are often generated through referrals and data analysis from FINRA. The Task Force also works with the SEC's Office of International Affairs and receives assistance from regulators in foreign jurisdictions ranging from Canada to the Caribbean to Europe. One of the specific tactics used by the Task Force is the issuance of trading suspensions to halt pump-and-dump activity before completion; in 2015, the Task Force issued over 50 suspensions. The Task Force also sought to identify dormant issuers based on lack of activity and relied on stop orders to thwart reverse merger fraud. The Task Force brought several gatekeeper cases in 2015, including against auditors involved in the issuance of sham registration statements for companies and for substandard audits, failure to comply with auditor independence rules, and falsification and backdating of documents. The Task Force used parallel actions to target international financial firms, promoters and others engaged in microcap schemes. In 2015, these international actions included pump-and-dump cases against Israel-based promoters and financial institutions based in the Cayman Islands, Belize and Panama, as well as charges against a Canadian citizen.

Municipal Securities and Public Pensions Unit

LeeAnn G. Gaunt, Chief, Municipal Securities and Public Pensions Unit, discussed the Unit's priorities and key initiatives for the year. She indicated that issuer disclosure and offering fraud is top of mind for the Unit, and they are standing at the ready to enforce the anti-fraud provisions of the Exchange Act when it comes to municipal securities. Ms. Gaunt noted that the Unit is addressing broker-dealer abuses in valuation, pricing, suitability and due diligence by underwriters. Another important area of focus for the Unit is public corruption (e.g., pay-to-play violations) in the underwriting of municipal securities and investment of public pension funds and other pools of money public officials have access to. In this area, Ms. Gaunt noted that there is a lot of opportunity for public officials to be influenced by improper payments. The Unit is also focused on municipal advisors, a relatively new class of SEC registrants, composed of the firms and individuals that advise municipalities on bond issues. These advisors have fiduciary duties to their clients so the Unit is focusing efforts on identifying potential violations in those areas in coordination with OCIE. Ms. Gaunt next discussed the Unit's cooperation initiative, the Municipalities Continuing Disclosure Cooperation ("MCDC") initiative, pursuant to which the Division offered to underwriters and municipal issuers the opportunity to self-report in exchange for recommendations of more lenient settlement terms. Today, the first phase of the MCDC initiative is completed with respect to underwriters and, as a result, the Division brought actions against 72 underwriters of municipal securities, which makes up 96 percent of the market for municipal underwriting in the country. Ms. Gaunt noted that she was surprised that there were such widespread failures in due diligence within the underwriting community but was pleased that so many were willing to come forward to self-report these failures. In connection with the self-reporting, all of these underwriters have agreed to hire independent third parties to review their procedures. The second phase of the MCDC initiative involves bringing actions against issuers, which Ms. Gaunt noted should be expected in upcoming months. Ms. Gaunt also noted that the Unit is enhancing its communication and coordination with criminal authorities with respect to public corruption to assist the Unit in identifying possible corruption in the municipal securities market.

Technology and Risk Analytics

Lori Walsh, Chief, Center for Risk and Quantitative Analytics ("CRQA"), spoke about how the SEC is focusing on getting more out of the data at its disposal. CRQA aims to make highly skilled data scientists and programmers available to enforcement staff so that the SEC's frontline attorneys have access to valuable analytical tools. Specifically, CRQA offers three primary services: data, analytics and programming. One of CRQA's current focuses is proactive lead generation. This consists of determining how to best utilize the tremendous amount of data available to the SEC (i.e., via EDGAR) to identify and stop wrongdoing in its tracks. CRQA has two main initiatives to achieve this goal: surveillance, which consists of, for example, proactively mining trade data; and periodic sweeps, which consist of, for example, running text mining and natural language tools through structured and unstructured data from EDGAR filings. Ms. Walsh did not discuss the specific type of trade data the SEC is reviewing or the types of searches being run through EDGAR filings or other text files.

Office of the General Counsel: Judicial and Legislative Developments

Speakers from the Office of the General Counsel discussed judicial and legislative developments in insider trading liability, post-Janus antifraud issues, whistleblower protection and recent challenges to the SEC's administrative proceedings. Solicitor Michael A. Conley moderated the discussion.

Jacob H. Stillman, Senior Advisor to the Solicitor, and Jeffrey A. Berger, Senior Litigation Counsel, discussed recent developments in insider trading liability, specifically situations in which a corporate insider (tipper) provides material non-public information to an outsider (tippee) in breach of a fiduciary duty. Mr. Stillman explained that, beginning with Dirks v. SEC, 463 U.S. 646 (1983), the Supreme Court required that in such scenarios the government must show that the tipper received a personal benefit from the tippee in exchange for providing the non-public information, which could arise in a quid pro quo exchange or as a "gift" of confidential information to a relative or friend. This "gift" scenario became the subject of controversy in U.S. v. Newman, 773 F.3d 438 (2d Cir. 2014), when the Second Circuit expanded the personal benefit standard to require proof of a meaningfully close personal relationship "that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature." Mr. Berger discussed how this decision potentially can be used to limit the scope of insider trading by increasing the government's burden of proof in such cases. However, in a recent decision by the Ninth Circuit, United States v. Salman, No. 14-10204 (9th Cir., July 6, 2015), the court found that a close family relationship between a tipper and tippee satisfies the personal benefit standard imposed by Dirks. Mr. Stillman noted that the Supreme Court has agreed to review the Salman decision during its October 2016 term, and will decide whether the personal benefit to the insider requires proof of a close personal relationship that generates an exchange, as set forth in Newman, or whether it is enough that the tipper and tippee share a close family relationship. Mr. Berger stated that it is unclear whether the Court will limit the ruling to this narrow question presented or if it will choose to redefine tipper/tippee liability in a broader sense.

John W. Avery, Deputy Solicitor, and Lisa Helvin, Senior Counsel, discussed the state of antifraud provisions following the Supreme Court's decision in Janus Capital Group v. First Derivative Traders, 131 S. Ct. 2296 (2011). Janus held that, for purposes of Rule 10b-5, "the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it." Mr. Avery noted that the Janus decision raised questions regarding the concept of "ultimate authority," and whether the holding also applied to Rules 10a, 10c and 17a of the federal securities laws. Ms. Helvin explained that since Janus, most courts have taken a pragmatic approach to determining the "maker" of a statement and have declined to expand its holding to other rules. She stated that in SEC v. Pentagon Capital, 844 F. Supp. 2d 377 (2d Cir. 2012), the Second Circuit ruled that Janus does not apply to cases brought by the SEC pursuant to these other provisions, which recent Commission opinions have echoed. However, Ms. Helvin acknowledged that there is tension between certain court opinions and internal SEC administrative opinions about whether the SEC may pursue cases that would otherwise have been brought under Rule 10b through Rules 10a, 10c or 17a instead.

Stephen Yoder, Senior Litigation Counsel, and Jodie Morse, Counsel to the General Counsel, spoke about whistleblower protections. Mr. Yoder discussed the whistleblower protections implemented by Section 922 of the Dodd-Frank Act, which protects individuals who report potential securities law violations to the Commission from retaliation by employers. Mr. Yoder explained that the Dodd-Frank Act defines a whistleblower as someone who reports potential violations directly to the Commission, which conflicts with the SEC's clarifying regulation Section 21F(h)(1)(A), extending the anti-retaliation provisions to whistleblowers who report such information internally to an employer. Ms. Morse then discussed the current circuit split in the appellate courts regarding who is entitled to whistleblower protections. In Asadi v. GE Energy LLC, 720 F.3d 620 (5th Cir. 2013), the Fifth Circuit held that, pursuant to the Dodd-Frank Act definition, the retaliation provisions protect only whistleblowers who report directly to the Commission. In Berman v. Neo@Ogilvy LLC, No. 14-4626, 2015 WL 5254916 (2d Cir. Sept. 10, 2015), the Second Circuit applied the broader SEC definition, reasoning that applying whistleblower provisions strictly would limit protections and likely not produce the legislature's intended result. Mr. Yoder stated that the Commission believes the scope of whistleblower protections will eventually be raised in the Supreme Court, and intends to continue filing amicus briefs asking courts to find that individuals who report misconduct internally are covered by the anti-retaliation protections of the Dodd-Frank Act, regardless of whether they report the information directly to the SEC. Mr. Yoder cautioned that if courts choose to apply the holding of Asadi, it is foreseeable that whistleblowers would bypass internal reporting entirely and instead report directly to the Commission.

Finally, Ms. Morse discussed recent cases brought in federal court by respondents in SEC administrative proceedings raising constitutional challenges to the SEC's administrative court process. Ms. Morse explained that the SEC has sought to dismiss these cases due to lack of subject matter jurisdiction. The Seventh Circuit and the D.C. Circuit agreed with the Commission and held that federal district courts lack jurisdiction to rule on ongoing SEC proceedings. The Commission is awaiting rulings from the Second, Fourth and Eleventh Circuits, with cases pending on appeal in which federal district courts found subject matter jurisdiction existed and went on to enjoin the administrative proceedings. Ms. Morse stated the most notable underlying claims were brought under Article 2 of the U.S. Constitution. These claims allege that the SEC administrative law judge appointments and removal provisions violate separation of powers principles. The Commission internally ruled against these challenges, and the cases are scheduled to be reviewed by the courts of appeals for the D.C. Circuit and Tenth Circuit.

1 On August 24, 2015, in what has been dubbed a "Flash Crash," the stock market experienced an abnormally high amount of early-day sell offs and the Dow dropped over 1,000 points within minutes after opening.
2 For a fuller discussion of the Salman and Newman cases, see the Office of the General Counsel: Judicial and Legislative Developments section below.





Thomas P. Cimino, Jr.


Brooke E. Conner


Rachel T. Copenhaver


Joshua A. Dunn


Brian W. Ledebuhr


William W. Thorsness


Ryan S. Hedges


Junaid A. Zubairi