Expect more big fines, targeting individuals, and demands for improved internal controls and compliance programs when it comes to enforcement activity by the Securities and Exchange Commission in the months ahead

Speaking at the Council of Institutional Investors fall conference in Chicago on Thursday morning, SEC Chairman Mary Jo White described enforcement as a “key priority” and shared her thoughts on what the Commission is doing right, and will do more of.

White first spoke to restrictions that limit the SEC' s enforcement reach. It cannot put offenders in jail like a U.S. Attorney can and, in many cases, the law limits penalties the SEC may obtain to amounts “that both we and the public think are too low.” Under current law, it cannot assess a penalty based on investor losses, and is limited instead “to the usually much lower figure based on the ill-gotten gains of a defendant.”

White said she supports legislation introduced in Congress that would allow it to seek penalties based on either three times the fraudulent gains or the amount of investor losses, whichever is greater. The proposed legislation would also authorize the Commission to seek additional penalties if the wrongdoer is a repeat offender who was undeterred by prior enforcement actions. 

With big firms already coughing up billions to settle charges brought by regulators, continuing to slam them with “meaningful monetary penalties,” whether against companies or individuals, will make them “sit up and take notice,” White said.

A non-exclusive list of factors that may guide consideration of corporate penalties, drawn from a 2006 Commission release, includes the egregiousness of the misconduct, how widespread it was, and whether the company cooperated and had a strong compliance program. 

“When we enter into a settlement with a company involving systems control failures, for example, we should consider mandating new policies and procedures and other controls, and require that a compliance consultant test these controls,” White said. “Expect to see more such mandatory undertakings in future cases so that we are not just punishing past wrongs, but also acting to prevent future wrongs.”

She also addressed the SEC's new enforcement philosophy for demanding accountability. Until recently, it settled virtually all of its cases on a “no-admit-no deny” basis.  A party would pay a hefty penalty and agree to an injunction against future misconduct, but not admit to wrongdoing asserted by the SEC in a court complaint or set forth as findings in an order instituting administrative proceedings.

“Sometimes more may be required for a resolution to be, and to be viewed as, a sufficient punishment and strong deterrent message,” she said, suggesting that she will issue deferred prosecution agreements on a more regular basis. These are agreements that the government will file a criminal charge, but defer its prosecution for a period of time during which the party must demonstrate good behavior and satisfy the other terms of the agreement.  The terms can include significant payments of money, enhanced compliance requirements, and sometimes an outside monitor.

White detailed the types of cases where admissions might be appropriate:

A large number of investors have been harmed or the conduct was otherwise egregious.

The conduct posed a significant risk to the market or investors.

Admissions would aid investors deciding whether to deal with a particular party in the future.

Reciting unambiguous facts would send an important message to the market about a particular case.

White added that a “core principle of any strong enforcement program” is to pursue responsible individuals wherever possible. “Redress for wrongdoing must never be seen as ‘a cost of doing business' made good by cutting a corporate check. Individuals tempted to commit wrongdoing must understand that they risk it all if they do not play by the rules,” she said.

Ongoing enforcement priorities, White said, will include: protecting investors from misconduct by investment advisers at hedge funds, private equity funds, and mutual funds; continuing to focus on financial statement and accounting fraud; bringing insider trading cases; focusing on fraud in connection with microcap securities where abuses have increased with the use of social media.

“Expect to see more actions relating to sophisticated trading strategies, dark pools, and other trading platforms in the coming year,” she added.

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