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SEC’s White ‘Proud of Progress’ at Commission

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Securities and Exchange Commission Chairwoman Mary Jo White told the lawyers in attendance at the 47th annual Rocky Mountain Securities Conference, co-sponsored by the SEC and the Business Law Section of the Colorado Bar Association, that she was “proud of the progress” the SEC has made in reducing risk to investors in the asset management industry.

Litigation at the SEC has increased, with 755 enforcement actions in 2014, up from 676 in 2013. Of those, 166 were against broker-dealers and 130 were against investment advisors or investment companies. White said on Thursday, “As we get more aggressive, you’ve got to be prepared to litigate.”

She noted that considering the SEC’s limited exam resources, examiners have “worked miracles.”

White said that focusing on individuals rather than institutions was a better deterrent against wrongdoing, but added that the “tone at the top” needs to emphasize the importance of compliance through “constant messaging. It has to become the zeitgeist,” she said.

Andrew Ceresney, director of the SEC’s division of enforcement, said in a separate panel that taking action against individuals was harder due to jurisdiction and evidentiary burdens.

Although technology resources have improved at the SEC and the agency has more data to work with in examining advisors, White emphasized the importance of experienced staff. She said technology needs examiners who can exercise judgment on what the data is showing and “what it means.” She said, “Technology will always require the judgment of examiners.”

Still, she said the SEC’s near-term initiatives included gathering more data on registrants and applying it in more useful ways. Other initiatives include a focus on transition planning to ensure that firms are doing all they can to protect their clients if the firm changes hands.

In the enforcement panel, Ceresney said it’s a “great time to be in enforcement” due to the supportiveness of Mary Jo White as chairwoman and the other commissioners.

He noted the increasing number of enforcement cases and said that’s “not going to let up” in the next few months.

Ceresney recommended that when firms discover wrongdoing they consider self-reporting. He said people are beginning to recognize that if “you don’t tell us, we’ll probably hear about it from someone else.”

In a panel on defending clients in SEC enforcement actions, Merri Jo Gillette, a partner at Morgan Lewis and Bockius LLP, said that self-reporting requires a “judgement call” on the part of the firm so that it doesn’t start too early “before you’ve got your hands around” the issue, and it doesn’t start to late when the whistleblower has already taken the alleged wrongdoing to the SEC.

Randall Fons, a partner at Morrison Foerster LLP and a former regional director at the SEC, added that he’s “surprised how many companies don’t talk to the whistleblower” after he or she brings an issue to management’s attention. “The best way to keep information inside the company is to let the whistleblower know you’re doing the right thing,” he said.

Sean McKessy, chief of the SEC’s Office of the Whistleblower, reinforced that sentiment during a lunchtime presentation. He said that employees prefer to report internally, at least at first. In whistleblower reports, the “lion’s share” of whistleblowers said that they reported wrongdoing they discovered to their bosses and only go to the SEC when “they feel their employer let them down,” McKessy said.

In determining penalties against a firm, Ceresney said the commission considers the conduct, pervasiveness, duration, cooperation of the firm with the commission, remediation and precedence. He added that the size of the institution is another factor, saying a penalty has to be large enough that it’s not just a “cost of doing business” in order to act as a deterrent.

The defense panel also addressed using admissions of wrongdoing to reach a settlement. Fons said that there’s no pattern to the SEC’s choice to settle with firms that admitted wrongdoing, but he recommended that a firm considering it do so as early as possible.

Fons urged the lawyers in attendance not to take exams lightly, saying they need to assume there’s a possibility that their clients’ cases will be referred to enforcement. “Respond to examiners as if they’re enforcement staff,” he said. “Once an investigation is launched, you’ve already lost,” he said, because even if the firm wins its case, it’s already lost time, money and resources defending it.

Gillette warned that examiners are increasingly asking for information they don’t have authority for, and urged attendees to think carefully about whether they should provide it. If companies refuse to supply requested information, examiners can get a subpoena for it, and companies will lose any “credit” examiners might have given them for providing it voluntarily, Gillette said.

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