SEC Commissioner Urges SEC Enforcement to “Resist” Numerical or Financial Targets

SEC Commissioner Hester Peirce called on the agency to “resist” the distraction of focusing on achieving numerical and penalty amount targets with respect to enforcement actions.

In remarks at the Annual Securities Litigation and Regulatory Enforcement Seminar, Ms. Peirce contended that the number of initiated or settled enforcement cases and penalty amounts is a “meaningless measure of the effectiveness of the enforcement program.” She stated that analyzing the different types of cases brought by the SEC would be a better indicator of the success of the agency’s enforcement work.

Ms. Peirce further advised the SEC to consider the entirety of the case – rather than just the potential penalty amount – when deciding on whether to divert resources to a specific enforcement action. According to Ms. Peirce, a case with a smaller penalty amount may set a more meaningful precedent than one with a larger penalty amount.

“Halting a Ponzi scheme or an affinity fraud that touched the lives of retail investors might be more meaningful than halting a practice in which one large financial institution gives a bad deal to another.”

Additionally, Ms. Peirce highlighted several issues the SEC should ask for help in pursuing. In particular, she suggested that the SEC:

  • revisit SEC rules that are implementing antifraud statutes to ensure the rules are accomplishing their intended mission;
  • consider rulemaking to alter the transfer agent rules and reporting requirements; and
  • help public companies build more effective Foreign Corrupt Practices Act programs.

Ms. Peirce also expressed concern regarding recent enforcement actions targeting suspicious activity report (“SAR”) filing errors, especially when a firm has an operational SAR program in place. According to Ms. Peirce, the recent SAR enforcement actions may cause (i) an increase in quantity, rather than quality, of SAR filings or (ii) legitimate firms to exit the “microcap space,” forcing investors to rely on “unsavory firms” instead.

Lofchie Comment: Commissioner Pierce makes a number of important points.

The SEC has treated its imposition of financial penalties as if the agency were a corporation that was under pressure to announce greater profits each year. The SEC’s mission is larger than that; it is, or at least should be, to create a capital market system that functions well and serves the economy. Catching and punishing bad actors is part of that, but a limited part. Rather than boast of fine amounts, the SEC would do better to consider the decrease in the number of initial public offerings.

Commissioner Pierce is absolutely right to point out that sanctioning firms for operational issues in filing SARs, or in other anti-money laundering procedures, is driving legitimate firms out of a variety of lawful activities.

SEC Amends Regulation NMS to Require Additional Order-Handling Disclosures

The SEC will amend Regulation NMS Rules 600(b) and 606 to increase the transparency of broker-dealers’ “handling and routing of orders in NMS stock.” The amendments (i) will require a broker-dealer, upon request by a customer, to provide such customer with certain standardized disclosures related to the broker-dealer’s routing and execution of the customer’s “not held” orders for the previous six months, and (ii) revise the current quarterly public order-routing report to include additional disclosures regarding the terms of any payment for order flow and any profit-sharing arrangements that may influence a broker-dealer’s order-routing decision.

The amendments will become effective 60 days after their publication in the Federal Register. The compliance date will be 180 days following the date of publication of the amendments in the Federal Register.

Lofchie Comment: This requirement is in line with the SEC’s historical policy of requiring disclosure and then allowing investors to make their own investment and trading decisions based on that disclosure. Questions remain as to whether the disclosures are sufficient for customers to make informed decisions and whether the requirement of making the added disclosures may motivate broker-dealers to improve their execution practices.

Trade Associations Request Extension of Comment Period for Security-Based Swap Rules

Several trade associations requested that the SEC extend the comment period for its proposed rules on capital, margin and segregation requirements for security-based swaps. The requests seek an additional 30 days to comment (comments are currently due on November 19, 2018).

As previously covered, the SEC reopened the comment period, and requested additional comments, on proposed new rules and amendments to (i) establish capital, margin and segregation requirements for security-based swap dealers and (ii) revise broker-dealer capital requirements relating to the use of security-based swaps. The extension requests came in two letters: one from SIFMA and the Institute of International Bankers, and the other from ISDA, the Investment Company Institute, the MFA and the Chamber of Commerce Center for Capital Markets Competitiveness. In requesting an extension, the trade associations cited, among other things, the long period between the initial comment period and the reopening, as well as the significance of the proposal for market participants.

Lofchie Comment: It is really difficult to see any justification for not extending the comment period by another month. The rule proposals have been sitting at the SEC for years. Not only are the proposals extremely complicated in their implementation, but much has changed since they were first proposed.

FRB to Implement New Supervisory Rating System

The Federal Reserve Board (“FRB”) will implement a new supervisory rating system for large financial institutions.

Effective February 1, 2019, the FRB will enforce a new rating system for large financial institutions (“LFI”). The new system is intended to (i) better reflect current FRB supervisory programs and practices, (ii) enhance the supervisory assessments and communications of supervisory findings and implications and (iii) improve “transparency related to the supervisory consequences of a given rating.” The new LFI rating system will apply to (i) all domestic bank holding companies and non-insurance, non-commercial savings and loan holding companies (“SLHCs”) with $100 billion or more in total consolidated assets and (ii) U.S. intermediate holding companies of foreign banking organizations with $50 billion or more in total consolidated assets.

The existing RFI/C(D) rating system will continue to be applied to community and regional bank holding companies with less than $100 billion in consolidated assets. In addition, the RFI/C(D) rating system will be expanded to apply to certain SLHCs with less than $100 billion in total consolidated assets on February 1, 2019.