Government auditors have again rapped the Securities and Exchange Commission on its regulatory knuckles, saying the agency should modernize its technology to improve its oversight of stock exchanges and other self-regulatory organizations.
The Government Accountability Office issued a report last month saying that even as SROs refer more inquiries to the SEC for possible investigation, flaws and shortcomings in the Commission’s IT system prevent it from tracking follow-up investigations and analyzing aggregate SRO data effectively.
The current SRO referral system only allows the SEC to search advisories or referrals by the issuer whose stock was flagged by SRO surveillance, rather than by the names of individuals or hedge funds that may be associated with suspicious activity. Meanwhile, the number of referrals dealing with suspected insider trading has soared since 2003.
Moreover, the referral and case-tracking systems are not networked and don’t allow SEC staff to analyze advisory and referral trends or characteristics, such as how long it takes the SEC to follow up on SRO referrals.
Those limitations “may reduce the ability of [SEC] enforcement staff to manage the advisory and referral processes by efficiently accessing information that could help monitor unusual market activity and make decisions about opening investigations,” the GAO report says.
The SEC is developing a new tracking system that will allow its Office of Compliance, Inspections and Examinations to generate management reports later this year. Until that happens, however, SEC investigators cannot take full advantage of the SROs’ preliminary work and “may be duplicating SRO efforts or missing opportunities to direct examination resources to other higher-risk or less-examined program areas,” the GAO says.
Finally, while SEC examiners have processes for inspecting SRO enforcement programs, the Commission has not documented those processes in an examination manual or other formal guidance. SEC officials said in response to the GAO audit that the uniqueness of SRO rules and surveillance systems would make it difficult to tailor a manual for all SROs and keep it current.
GAO recommendations for enhancing SRO oversight included establishing a written framework for conducting SRO inspections, expanding the use of SRO internal review products, and enhancing information technology to improve the SEC’s ability to track and analyze SROs’ implementation of inspection recommendations and SRO referral data.
Cox
In response to the report, SEC Chairman Christopher Cox said the SEC “will assess the feasibility” of the recommended system improvements. He noted that Office of Compliance Investigations and Examinations will prepare written guidance for SRO inspectors, and assess the quality and reliability of the SROs’ internal audit programs to determine “whether, and the extent to which, inspections can be risk-focused based on the SRO’s own internal audit work.”
In addition, SEC staff will implement the recommendation that the Division of Market Regulation ensure that enforcement-related databases continue to be reviewed periodically by SROs’ internal audit programs.
EU Gives Guidance on ‘Non-Horizontal’ Mergers
The European Commission has adopted new guidelines for how to assess “non-horizontal” mergers between companies in different markets or at different levels of the supply chain.
The policies explain how the Commission will analyze the effect of such mergers (more commonly known as vertical or conglomerate mergers) on competition—for example, a razor maker buying a company that makes shaving cream, or a customer buying one of its suppliers.
The guidance provides examples of where vertical and conglomerate mergers may harm effective competition and indicates so-called “safe harbors,” levels of market share and concentration below which the Commission is unlikely to identify competition concerns. The policies complement existing EC guidelines on the mergers of companies that do compete in the same markets.
Schneider
“The European Commission is sending the signal that enforcement against vertical and conglomerate mergers is going to continue in Europe,” says Hartmut Schneider, of the law firm WilmerHale. He notes that on the same day the final guidelines were published, the EC announced an investigation into a proposed vertical merger between TomTom, a manufacturer of GPS navigation devices, and Tele Atlas, a European supplier of navigable digital maps.
But, Schneider adds, “I don’t think the guidelines are signaling an era of extremely vigorous enforcement on the European side. They recognize that a lot of times, non-horizontal mergers are likely to create efficiencies” and most don’t raise competition concerns.
Schneider says U.S. agencies have “generally been very cautious with respect to vertical mergers,” and conglomerate mergers haven’t been issued here in at least a decade. U.S. guidelines on non-horizontal mergers haven’t been updated since they were adopted in 1984.
“It’s widely acknowledged that [U.S. rules] are out-of-date,” Schneider says. “They don’t provide guidance to the private bar or other practitioners as to what kind of vertical mergers might raise concerns” at the Justice Department or the Federal Trade Commission.
Whether to update the U.S. rules right now is still a debating point in the regulatory community, Schneider says. While some practitioners say the guidelines should be brought into step with current economic thinking, others say it’s too early because opinions on those underlying economic principles are just as unresolved.
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