Monday, March 23, 2009

Commissioner Paredes Suggests Four Ways to Make SEC Enforcement More Effective

SEC Commissioner Troy Paredes has suggested four ways to make SEC enforcement more efficient and effective: involving case selection, case tracking, cooperation credit, and self assessment. In remarks at the Southeastern Securities Conference in Atlanta, he said that he would be exploring these areas with the other commissioners and with the new Enforcement Director Robert Khuzami. (We were honored to have Commissioner Paredes as a guest blogger before he assumed his commissionership).

Case selection is critical, he maintained, since an effective enforcement program must have a strategy for selecting the investigations and enforcement actions to pursue and then determining how aggressively to pursue them. Given the SEC’s finite resources, he continued, the decision to pursue a particular matter can compromise the agency’s ability to investigate and bring other cases that can better serve investors and markets.

In constructing the right blend of cases, the SEC must ask itself a number of questions. The first question is how and to what extent did the misconduct harm investors. Similarly, it must be determined if the misconduct was intentional or the result of negligence. While the SEC should not abstain from bringing cases for negligence-based violations, he said, at the same time there must be adequate resources available to aggressively pursue those who intentionally violate the federal securities laws.

Another important question associated with case selection is whether there are alternative ways to address the violation short of an enforcement action. Some technical violations, for example, may be better addressed through remedial steps that parties have already undertaken or agree to undertake without an enforcement action.

The SEC should also ask what the impact of bringing one more case of a particular type will be. Specifically, it should be determined if there is an important deterrent effect from bringing another case of this type or have diminishing returns already set in. Similarly, there is the question of the marginal benefit of bringing a particular charge or advancing a particular legal theory. In this regard, the commissioner reasoned that a case built on untested legal theories may evoke a more strenuous defense that prolongs the matter at the expense of valuable Commission time.

A further consideration is whether the alleged wrongdoer will be meaningfully sanctioned through other sources. For example, if an individual is being pursued by federal criminal authorities, it may be more productive for the SEC to dedicate its efforts to matters that others may not pursue. Further, active private enforcement through litigation may counsel against an SEC action.

Secondly, with regard to case tracking, the commissioner recommended that the SEC’s system be enhanced so that the Enforcement Division can more effectively track the status of ongoing investigations and cases. In his view, a robust centralized tracking system would serve investors well. By affording senior Enforcement Division officials a comprehensive look at the range of ongoing and potential investigations and cases, the system would empower the Commission to allocate resources more strategically and make proper adjustments over time regarding how resources are expended. It is impossible to choose the best blend of cases without an at-the-ready panoramic look at all the options, he reasoned, and a complete understanding of what resources are being dedicated to what matters. An enforcement strategy without the information needed to implement it will fall short of its potential, he warned.

More robust centralized tracking would also better position the agency to achieve important synergies out of complementary enforcement efforts. For example, on an ongoing basis, senior Division officials would be better able to see interconnections among investigations and cases that, once identified, would allow the staff to work the matters more effectively. State-of-the-art centralized tracking would help the agency get the most out of the staff’s expertise. Such tracking also may enable the Commission to spot trends in fraud and manipulation cases sooner rather than later, thus allowing the SEC to take appropriate enforcement or regulatory steps expeditiously.

On the third point, the commissioner espoused giving defendants a credit for cooperation. Encouraging parties to self-report violations and otherwise cooperate with SEC investigations is an important enforcement tool, he averred, since it helps the Commission conserve resources and provides an opportunity to get helpful information concerning the perpetration of fraud and manipulation.

The Commission's 2001 Statement Concerning Cooperation, the Seaboard Report, guides the Commission in measuring the extent of a party's cooperation and assessing whether to bring an enforcement action. Cooperation credit is an asset that the Commission has at its disposal to grant.

Fourth and finally, Commissioner Paredes urged the SEC to periodically undertake a frank self-assessment that audits the agency’s progress as part of a rigorous evaluation of whether the enforcement program is accomplishing its goals. While conceding that this will not be easy to measure, the official said that the SEC cannot measure the actual impact of its enforcement program by overemphasizing the number of cases brought or the monetary sanctions imposed. The analysis he is suggesting, if done right, will be more nuanced and refined than focusing on such metrics to the exclusion of other considerations.

However, he cautioned that the SEC’s self-audit should not be taken as an opportunity to second-guess the staff, which often must make decisions under enormous time pressure and without perfect information. To be constructive and fair, he emphasized, the review must account for the actual environment in which decisions were made.