WASHINGTON, DC - Earlier this year, the regulator was accused of institutional incompetence after failing to expose the $50 billion Bernard Madoff Ponzi scam despite repeated tip-offs. In February, the US Congress House Committee on Financial Services was told by fraud examiner Harry Markopolos that SEC examiners had no expertise in derivatives or quantitative finance and were therefore unable to uncover complex fraud.
"Many questioned the effectiveness of the division in light of the revelations surrounding Bernard Madoff and his egregious conduct," Robert Khuzami, director of the SEC's division of enforcement, said in a speech before the New York City Bar on August 5. "We listened to the criticism and used it as a learning opportunity. We did what a responsible public agency must do - we used the episode as a catalyst to undertake a vigorous self-assessment of how we do our job."
The result of the exercise will be five specialised units dedicated to complex areas of securities law. The asset management unit will handle cases involving investment companies, hedge funds and private equity funds; the market abuse unit will focus on large-scale market abuses and complex manipulation schemes; while the structures and new products unit will scrutinise issues related to complex derivatives and financial products. There will also be a foreign corrupt practices unit, and a municipal securities and public pensions unit.
These new units will be staffed by existing personnel in the enforcement division who will receive specialised training, as well as by individuals with practical market experience from other SEC divisions and the private sector.
An SEC official declined to say when the new units would start work.
In addition, the SEC will set up an office of market intelligence to analyse and cross-reference complaints and identify where resources ought to be focused. The division also announced a number of initiatives designed to incentivise individuals to co-operate in SEC investigations. These include a public policy statement for individuals, assurance for witnesses in appropriate cases that charges will not be filed against them and the possibility of deferred prosecution agreements in certain circumstances, which would see the SEC agree to forgo enforcement action in exchange for full co-operation.
However, Khuzami insists this does not mean wrongdoers will be let off lightly. "While I believe in giving credit for co-operation that results in tangible benefits for the investors and the enforcement programme, I don't believe in being lenient for the sake of leniency, or for rewarding persons for simply complying with routine or expected requests," he said.
The division also plans to reduce delays in decision-making and disciplinary action by streamlining its internal processes. As part of this effort, a chief operating officer will be appointed to oversee project management.
"These are challenging times at the division of enforcement, but they are also times of great opportunity. We are aggressively pursuing long-term improvements in our structure and processes, while at the same time working hard to continue our enforcement efforts," Khuzami remarked.
The week on Risk.net, December 2–8, 2016Receive this by email