New York, N.Y.
Nov. 6, 2013
This is my first time to speak here as Chair of the SEC, but it is actually about my 20th appearance overall. For most of those 20 years, I moderated the enforcement panel. And for five of those years, I served as a Co-Chair of the Institute – in chairs now occupied by Alan Beller, David Lynn, and Colleen Mahoney, who also have served with great distinction as senior officials of the SEC.
As former SEC staffers, your Co-Chairs and all the former SEC staff that I see listed in the program and that are in the audience today are well-positioned to know what the agency is, does, and expects. I also believe that those who have served at the SEC more deeply appreciate the agency´s commitment to its investor protection mandate, and they understand the value of and need for strong regulation.
They also deeply appreciate the extraordinary professionalism, dedication and expertise of the SEC staff, the men and women who work tirelessly and selflessly in furtherance of our mission, sometimes for an entire career of public service.
The SEC also benefits when dedicated professionals in the private sector like you agree to give back to the country through public service. Those who choose to join us bring their expertise and a new and different perspective that keeps us current and helps strengthen the agency. And the public is the beneficiary of it all.
The program for this year´s Institute covers the waterfront of significant issues that securities practitioners face. There are panels on accounting, M&A deals, corporate governance, disclosure, ethics, enforcement, and litigation. In many of these areas, you interact with our SEC staff. And over the course of the next three days, you will get to hear directly from a number of our division heads and most senior officials.
On your panel this morning on SEC rulemaking, you also will be privileged to hear from my esteemed predecessor and friend, former Chairman Elisse Walter.
Since becoming Chair of the Commission in April, my speeches have explained my vision for the agency and addressed our many priorities. I have talked about our rulemaking agenda, the SEC´s role as an independent agency, our strengthened approach to enforcement and compliance, our need to review our disclosure regime to ensure that it is delivering the most meaningful information to investors, and the path to address the questions that are raised by today´s high-speed, increasingly fragmented equity markets.
But today, I have decided to do something a little different.
I will let the distinguished panelists, including my colleagues from the SEC, address the specific topics. What I want to talk about for a few minutes today is a small sampling of our work that does not capture the most, if any, public attention, but which significantly impacts investors as well as many of you and your clients.
It is very important work that I now see every day – the cases and exams and the guidance and reviews that also are at the heart of what we do. It is work that investors and our markets depend on and rightly expect from us. And it is work that does not get the recognition and credit that it deserves. I would like to give it a little this morning and pay tribute to the SEC staff.
Many of you know about the massively complex rulemakings we have undertaken and the huge mandates placed upon the agency by the Dodd-Frank Act and JOBS Act. Many of you know about the multi-million dollar settlements we have reached with some of the largest financial institutions in the world and the massive insider trading rings that we and our colleagues at the DOJ have brought down. You read about our major trial verdicts on the front pages of the business sections.
But less sensational actions happen daily across the entire agency that perhaps best embody our unrelenting efforts to protect investors, promote capital formation, and maintain fair, orderly and efficient markets – the SEC´s mission.
On an even more fundamental level, these day-to-day activities reflect our part in making good on the promise of fair play that this nation makes to every one of us.
This window into the SEC that I would like to share with you won´t be a revelation for seasoned, former SEC senior staffers like Alan, David, and Colleen. But it reflects a deeper perspective on the work of the SEC that I only fully appreciated after becoming Chair. It is a view that I hope will complement what you will hear from the knowledgeable speakers over the next three days, and that I hope will stay with you after the conference.
Enforcement
We file hundreds and hundreds of enforcement actions every year touching every corner of the securities laws – cases that are complex and cutting edge.
In just the financial crisis arena alone, the SEC brought actions against more than 160 individuals and corporate entities, resulting in more than $2.7 billion in disgorgement and penalties, nearly all of which will be returned to harmed investors.
Of the individuals charged, more than 60 were CEOs, CFOs, or other senior corporate executives. And more than 30 of them were barred from the securities industry or from serving as directors or officers of public companies. And at the same time these cases were being brought, we were filing literally thousands of other cases in other areas.
It is a very impressive record, a record that I am proud of and one that I know many in this room have followed closely. But our work is not limited to the cases and settlements that make a big splash or impressive statistics.
Many of our cases – often smaller ones – you never hear about. But they are no less meaningful and not just to the parties involved, but also to the functioning of our markets.
Let me share an example.
A few years back, one of our examiners was looking through the records of a broker-dealer in Florida as part of a regular examination when two particular client accounts caught his eye.
They were not huge accounts, but they were important to many people. Among other things, they provided funding to help children and families in some of New York´s toughest neighborhoods. The accounts belonged to the Sisters of Charity – a Catholic charitable organization located in the Bronx not far from Yankee Stadium, my home away from home.
Something about the trading volume in the accounts looked suspicious to the examiner, so much so that he reached out to a colleague in our Enforcement Division who had substantial expertise on the type of securities held and the type of trading that would be expected in such accounts. Immediately, the attorney knew the matter was worth looking into to determine if the broker had been trading excessively in the accounts simply to generate fees – an unlawful practice that long ago was given the name "churning."
After further investigation, the staff filed an action against the broker who had managed the account. After several months of litigation, he agreed to settle. As a result, on Christmas Eve, an SEC staff attorney was able to place a call to the nun in charge of the Sisters of Charity to tell her that she would be receiving a very special present: the return of $350,000 to their account.
But our enforcement team did not stop there. They also obtained an order permanently barring the broker from associating with other firms – a crucial action that helps protect against future harm.
The dollar amounts involved were relatively small and there was little press coverage. But conduct like this if not pursued and punished not only harms real people, it also pulls at the fabric of investor confidence. Finding and solving such cases one after the next bolsters confidence, keeps capital flowing to the markets, and upholds the integrity of the system.
Of course, not all of our cases tug at heart strings the way the Sisters of Charity did or involve a phone call on Christmas Eve. But they are all important in their own way.
Take the enforcement action filed last summer charging a Texas man with running a Ponzi scheme in which the transactions were conducted not with dollars, but Bitcoin – a virtual currency traded on online exchanges. As you may know, this new start-up currency has some avid supporters.
After we obtained an order freezing the defendant´s assets including his Bitcoin, we heard from one anonymous Bitcoin fan who said, among other things, "…the SEC is kind of our hero right now." Although Bitcoin may be new and exciting, using something new and exciting to lure investors into participating in a fraudulent scheme is one of the oldest tricks out there, and we are happy to get praise like this when we are able to help stop one.
International Affairs
In addition to patrolling the new frontier of online currency, our staff´s heroics often cross international boundaries as well.
Yet, much of this global work involving our Office of International Affairs is unseen by those outside the agency. Our international experts build the international relationships that make regulatory coordination and cooperation possible. They advocate for the agency´s priorities in international meetings and analyze how our rules interact with those of foreign jurisdictions. They provide technical assistance through seminars for foreign regulators trying to better understand the securities industry and the enforcement practices and procedures we successfully use.
And when a fraud is perpetrated that has a foreign angle, they often jump into action when we need the assistance of our overseas law enforcement counterparts.
This type of coordination was critical in a case we brought a few weeks ago. It involved a business consisting of five entities located in Hong Kong, Canada, and the British Virgin Islands that allegedly targeted members of the Asian-American community in what appeared to be a pyramid scheme. The scheme´s operators were charged with exploiting their close connections in the Asian-American community by using Internet videos, promotional materials, and seminars to create the appearance of a legitimate enterprise.
We asserted that the scheme falsely promised exponential, risk-free returns to investors from a venture that purportedly sold Internet-based children´s educational courses.
But our complaint charged that, in reality, the firm had no sales and no apparent source of revenue other than money received from new investors. In fact, we alleged that the bulk of the $20 million invested with the company by more than 400 investors ended up in accounts controlled by executives and promoters of the company.
With the assistance of the securities agencies in Hong Kong, Canada, and Malaysia, the staff was able to amass the evidence needed to freeze the assets and obtain an order that will help us take steps to prevent the defendants from keeping the ill-gotten gains held overseas.
But the staff did not stop there. Our investor education professionals stepped in and used the case to remind investors about the dangers of pyramid schemes. They distributed investor alerts in Chinese to the Chinese-American community that described how investors could distinguish between pyramid schemes and legitimate multi-level marketing programs. And we believe they helped to keep others in the community from falling prey to similar scams.
Investor Education
This is a great example of how the staff leverages an enforcement action into an outreach effort to educate and more broadly protect investors. As this case reflected, unfortunately fraudsters are increasingly abusing shared ethnic, religious, and cultural experiences and contacts to find more trusting and susceptible victims. That is why even though it is not widely noticed, we are constantly working to inform communities about these particularly egregious schemes. Our mission to protect investors – especially those who are most vulnerable – could not be a higher calling at the SEC.
Last year alone, the agency´s investor education professionals issued two dozen investor alerts on subjects like the alleged Bitcoin scheme, pre-IPO investment scams, and binary options. And the staff makes sure to reach their audience. One alert was done by way of a videocast using sign language to target members of the deaf community – an alert prompted by a case against an unregistered investment company that had swindled deaf investors out of millions of dollars.
Garnering even less attention are the thousands of investor phone calls fielded each year by our staff who dispense basic advice and, when appropriate, stand with investors in a dispute.
In one case, for example, an investor after submitting the necessary paperwork was having trouble redeeming a variable annuity.
During the delay, the annuity significantly increased in value. But when the funds were redeemed, the investor´s payout was calculated reflecting the lower value based on the date of the investor´s request for his money. Our staff contacted the firm and requested an explanation. The firm soon sent the investor additional funds equal to amount that the annuity´s value had increased while the firm was processing the redemption request.
That is the type of helping hand that our investor education professionals extend every day and almost always below the radar.
Corporation Finance
Our disclosure review experts in our Division of Corporation Finance also do vital work that falls under the radar.
Many of you, of course, know the work of Corp Fin well – you might say too well from time to time. And you will hear today and tomorrow directly from Keith Higgins, our new director, about a number of things they are doing, including their efforts to shape the rules under the many Dodd-Frank Act and JOBS Act mandates.
But the public hears little or nothing about the painstaking work of the division´s disclosure experts.
Year after year, fewer than 400 people review the filings of more than 5,000 public companies out of the nearly 10,000 registered with the SEC. Our Corp Fin disclosure staff carefully reviews the annual and quarterly reports, 8-Ks, and registration statements that tens of millions of investors rely on. They send thousands of comment letters back to the companies asking important questions about the disclosure in the filings in an effort to make them even more useful and relevant to investors´ needs.
All of this is done in a collaborative, non-adversarial, non-enforcement context that increases the information flow to investors – all in furtherance of strengthening our markets and protecting investors.
As an example, in recent years, a number of technology companies have relied on unique financial or operational metrics to illustrate the size and growth of their businesses.
These metrics track numbers important to the company that often reflect their very fast pace of growth – like the number of users of the service, the number of players of an online game, or the number people who quote "liked" the company or something the company does. And these metrics usually total in the millions.
Our staff´s concern has been the impact on investors of the sheer magnitude of some of these metrics – investors for whom the true meaning of the metric (or more importantly the link from metric to income and eventual profitability) may not be clear or even identified. In the absence of a clear description, it can be hard not to think that these big numbers will inevitably translate into big profits for the company. But the connection may not necessarily be there.
Consider a company that correctly claims it has a hundred million users, and that the rate of user growth is expected to continue to grow at double digit rates. That certainly sounds good and it would seem to bode well for the prospects of the company – information that certainly could influence an investment decision.
But what if only a fraction of those users are paying customers? What does that mean for future financial results? What if the bulk of the growth in the number of users is in an area where the company has not yet figured out how to turn those users into paying customers? What does that then say about the meaning of user growth rates?
These are the types of questions our disclosure experts ask. And this is the type of information that they try to flesh out in reviews. You cannot read the back and forth in the comment letters in real time (though they are posted on EDGAR after the offering), but investors get to see and benefit from the improved information before they invest.
The efforts of our incredibly dedicated disclosure review teams help to provide that clear-eyed perspective on the information that investors rely on every day. It is at the heart of what they do to maintain faith in the offering process itself.
Examinations
Another group that does not usually get the attention they deserve is our examination staff from the Office of Compliance Inspections and Examinations (OCIE). I do realize that some of you or your clients may feel you know these folks better than you would like.
Approximately 900 dedicated professionals are charged with inspecting a vast array of some 25,000 entities – including approximately 11,000 investment advisers, 10,000 mutual funds and ETFs, and 4,500 broker-dealers with 160,000 branch offices. This does not even include the national securities exchanges, clearing agencies, transfer agents, municipal advisers, FINRA, the PCAOB, MSRB, and SIPC. In the investment adviser arena alone, we have a 24-to-1 ratio of registrants to examiners.
It is a daunting task. But our examiners are able to achieve extraordinary things.
Municipal Underwriting
In 2011, for example, our Chicago Regional Office set out to examine a number of regionally and nationally prominent broker-dealers engaged in municipal underwritings to see whether the broker-dealers had a process for determining that the bonds they are selling to investors were sound.
Unfortunately, not only did many broker-dealers do an inadequate job of due diligence – if they conducted any at all – but several had decided not to keep records of their inquiries into specific offerings as required by the rules. We were deeply concerned that this practice created significant risks for retail investors.
As a result of the information gathered in these exams, our exam program issued a risk alert reminding municipal underwriters of their obligations. We did not bring a case and we did not write a new rule. But we believe that firms are now more likely to maintain due diligence files and improve the overall quality of the practices they use.
While every enforcement action involves a public filing that lays out what we have found, examinations we conduct are often confidential by law. And yet their behind-the-scenes efforts can be just as significant and indeed far-reaching across an entire industry.
Others
There are many other parts of the agency that play critical roles that get little notice.
There are the market experts in our Division of Trading and Markets who already have put in place a series of measures to address excessive market volatility, and are now quietly gathering the necessary data through our data analysis system known as MIDAS to address broader market structure issues. A webpage that this group recently launched of new metrics and empirical research already has been called "revolutionary" by some.
There is the Office of the Chief Accountant that works with companies and their accountants on accounting, financial reporting, and auditing concerns – addressing unusual, complex, or innovative transactions for which no clear authoritative guidance exists. By helping companies get their accounting right the first time, investors are provided with higher quality, more timely information.
There is the Division of Investment Management (IM) that most people associate with our efforts to reform money market funds and adopt rules related to the Regulation D market. But IM´s disclosure staff like their colleagues in Corp Fin also works tirelessly to improve disclosures in a market segment where products are complex and risk can be difficult to discern. Our relatively small team of about 50 professionals reviews the filings of nearly 8,000 mutual fund portfolios, with more than $12 trillion in assets under management. Again, not something that everyone often hears about, but something they undoubtedly would notice and be harmed by if we weren´t doing it every day as a matter of routine – a very important routine for investors.
And then there are the teams of professionals who painstakingly sift through the 15,000 tips and complaints – including whistleblower complaints – that we receive every year. They too work largely behind the scenes seeking clues to potentially unlawful and harmful conduct. And while sometimes an award to a whistleblower may generate news coverage, the behind scenes work of the staff most often cannot. But recently we got a rare window into that work and how important it is.
The first whistleblower to receive an award under the SEC´s new whistleblower program was so impressed by the staff´s professionalism through the entire, often difficult process that this individual was persuaded to continue to work with the SEC to improve our program, and even served on a joint agency enforcement panel talking about the dedication and skill of SEC employees and encouraging others to step forward. It´s a remarkable tribute to our staff and no small matter for the enforcement of the securities laws.
Conclusion
So let me close my drive-by tour of some of our staff´s unsung heroics. What I have shared is only the tip of the iceberg, there are so many other parts of the agency that I have not been able to touch upon. To remain the most dynamic market in the world, America´s investors must feel that their interests are protected and our markets are fair. And all 4,000 women and men of the SEC play a very important role in achieving that objective.
I now get to see all of the things the SEC does to make that possible. Not just headline-grabbing case against large firms or high-profile CEOs and the significant rulemakings we do. Those are very important, but they tell only part of the story. There are so many other stories like the ones I shared with you today making a difference one small, unheralded piece at a time.
Giving a group of nuns and the people who rely on them a merrier holiday … producing a sign-language video-cast that will help keep a deaf person from losing his savings to financial fraud … ensuring municipal underwriters are following best practices … improving companies´ disclosures every year. It adds up.
The cumulative impact is an investor community that understands that markets are fair, fraudsters are caught, and that there is an advocate for the investor.
So the next time we come knocking, try to remember the extraordinary dedication of the SEC staff and all of the exceptional work that goes on at the agency every day. Much of it is behind the scenes, much of it out of the headlines, but nearly all of it contributing to the integrity and health of our markets and protecting investors whose interests and confidence are paramount to strong capital markets.