In a speech yesterday at the SIFMA Compliance & Legal Conference, SEC Chair Mary Shapiro offered some interesting insights into the agency's efforts to improve its use of technology in the enforcement area. She offered several examples of how new technology was enabling the SEC to work smarter and bring cases it might not have been able to bring in years past. Notable examples include:

"Aberrational Performance" inquiries concerning hedge funds. In December 2011, the SEC brought actions against four hedge fund advisers identified through the "aberrational performance inquiry for inflating returns, overvaluing assets and other actions that materially misled and harmed investors." This type of inquiry uses quantitative analytics combined with qualitative review to identify hedge funds that merit additional scrutiny. As previously discussed here, these inquiries into funds with "outlier" returns are led by the Enforcement Division's Asset Management Unit. The goal is to achieve earlier detection and prevention of problems, even in the absence of a tip or complaint.

Roll-out of a new e-discovery system. The SEC is now putting in place a new e-discovery system that will allow much faster access to information and more intuitive searching of data produced to the agency. Shapiro emphasized that the search capabilities of the new system will go beyond anything the agency presently has in place, and "will make connections between search terms and terms that may be related, allowing the attorney to explore new paths towards an effective case, or revealing evidence and relationships – needles that might have been missed or overlooked." 

Audio-searching technology. This technology allows phonetic searches of voice recordings, and will help SEC attorneys "find potentially relevant evidence from conversations between brokers and their customers without having to listen to hundreds or thousands of hours of talk."

The Automated Bluesheet Analysis Project.  At the beginning of new investigations concerning possible market abuse such as insider trading, relevant trading data is loaded into a database containing approximately four billion electronic equities and options trading records dating back roughly 15 years. Enforcement staff can use this database and newly-developed analytics to flag suspicious trading patterns and relationships among multiple traders and across multiple securities. Shapiro credited the Automated Bluesheet Analysis Project with identifying parallel trading that helped the agency bring its high-profile case against Matthew Kluger and Garrett Bauer, which also led to a successful criminal prosecution. 

Relationship mapping technology. Shapiro said the SEC is now trying out a technology that turns tens of thousands of phone records or lines of trading data into a "visual representation that graphically maps out previously undiscovered relationships between participants in complex conspiracies." The SEC recently filed a case, she said, after this technology helped the Enforcement division connect traders involved in an insider trading ring.

Shapiro concluded that these new technologies were making the agency smarter and better at its job. In addition, she observed that the new technologies contributed "significantly to the job satisfaction of men and women who did not join the SEC to spend their days wrestling with low-tech tools. It means they'll stay longer, get better and use the tools even more effectively."

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