Friday, November 06, 2015

Ceresney and Former SEC Enforcement Directors Tackle Recent Enforcement Developments

By Amanda Maine, J.D.

The director of the SEC’s Division of Enforcement, Andrew Ceresney, was joined by several former enforcement directors for a spirited discussion about recent developments concerning SEC enforcement issues. The discussion took place at this year’s Securities Enforcement Forum in Washington, D.C.

Penalties. In his opening remarks, Ceresney noted that the Division obtained $4.2 billion in remedies last year from enforcement actions. He highlighted cases involving financial reporting (including a recent action against BDO), market structure, asset management, and computer hacking, as well as high-profile actions against Blackstone and UBS.

Moderator Bradley J. Bondi of Cahill Gordon & Reindel asked whether the penalties obtained against wrongdoers actually deterred misconduct. Ceresney said that financial institutions have increased spending on compliance and noted that every case that the Division brings results in publicity that can influence institutions.

William R. McLucas of WilmerHale, who served as Enforcement Director for eight years, was less enthusiastic about the SEC’s approach to penalties, stating that it is difficult to determine how the SEC calculates penalty amounts. In his personal experience, he said that the staff had proposed during settlement negotiations a $25 million penalty for his client, but would not reveal how they arrived at that number. The SEC can make a general assessment to get to a particular number, he said, but it is done by feel and by precedent, rather than based on particular statutory violations.

George S. Canellos of Milbank Tweed said that the scope of penalties is affected by the political climate of the Commission. The political makeup of the Commission can get whipsawed from anti- to pro-regulation depending on who is in office, he said. Practitioners cannot rely on precedent to determine what kind of penalty might be applied given that a change of administration can lead to very different policies, according to Canellos.

Bondi noted that there has been an increased number of public dissents among the commissioners and inquired about the impact of these dissents. Former Commissioner and Enforcement Director Irving Pollack said he thought that such public dissents were “destructive” and that commissioners that disparage the SEC do not help the SEC’s overall image. Bondi polled the panel and, with Ceresney abstaining, none of them thought that such dissents were productive. McLucas said that there used to be battles behind closed doors, but in the end, the commissioners would find a way to obtain a consensus. In today’s Commission, that has broken down, he said.

Political influence. Responding to a question by moderator Bondi about political influences on the Commission and on the Enforcement Division, former director Robert Khuzami, now at Kirkland & Ellis, agreed that the overall gestalt of the political landscape does affect the SEC’s priorities; however, he emphasized that it is just one input among many. As an example, Khuzami said the Division brought cases relating to the credit crisis and its aftermath, but rather than that being a result of pressure from politicians or the media, the SEC was addressing the misconduct that led to the crisis.

Compliance officers. Piggybacking on a discussion of the SEC’s policing of gatekeepers, Bondi inquired about recent enforcement actions against Chief Compliance Officers (CCOs), what CCOs should take from those actions, and whether the SEC should issue guidance for CCOs. Former Enforcement Director Linda Chatman Thomsen, now at Davis Polk, questioned the usefulness of such guidance, noting that CCOs must use a great deal of judgment to deal with facts that can be very nuanced. If compliance officers rely on SEC cases for guidance, they might actually end up doing less or even get out of the business entirely.

McLucas echoed the sentiment that CCOs might look at the Commission’s actions against CCOs, while still low in number, and wonder if the job is worth the potential liability. He said there should be a difference between a “wholesale failure” of adhering to the compliance function and simply not turning in a “blue-ribbon performance.”

Admissions. Bondi asked Ceresney and the former directors about their views on the SEC’s policy, announced two years ago, on requiring admissions of wrongdoing as a condition of settling charges in certain cases. Ceresney said the policy was an additional tool in the SEC’s enforcement arsenal and holds respondents accountable for their actions. Khuzami, while not disagreeing with the policy, wondered if requiring admissions actually had a deterrent effect given that penalties in general have increased. Thomsen also questioned their deterrent effect, and agreed with Bondi that the SEC may be using the admissions policy as leverage in settlement negotiations by stating that they are seeking a certain dollar amount in penalties “but not admissions…for now.”

ALJ proceedings. Ceresney rejected the suggestion that the recent cases involving the SEC’s administrative proceedings have caused the SEC to pull back from bringing such proceedings. He also noted that the SEC has taken steps to address the controversy, including outlining publicly the factors the Commission considers when selecting in which forum to bring an action and a recent proposal to modernize its rules of practice.

Retired U.S. District Judge Stanley Sporkin, who served as SEC Enforcement Director for seven years, said that the perception that the SEC’s administrative law judges have a bias in favor of the Commission has become a reality, and suggested an “economic crimes court” under Article I of the Constitution. Canellos agreed that the commissioners could not help to have at least some bias, given that in administrative proceedings, the SEC plays the role of both prosecutor and judge.

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