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State Board Report

October 2013

The Securities and Exchange Commission will continue to “focus on financial statement and accounting fraud,” SEC Chair Mary Jo White told the Council of Institutional Investors on September 26. She stated: “In many ways, the most visible face of the SEC is what we do to enforce the law. After all, most Americans do not see how well our experts examine a financial form, review a regulatory filing, or conduct economic analysis of a complex rule.”

The SEC “must be aggressive and creative in the way we use the enforcement tools at our disposal,” Chair White told the investors group. “That means we should neither shrink from bringing the tough cases, nor fail to bring smaller ones. When we detect wrongdoing, we should consider all the legal avenues to pursue it. If we do not have the evidence to bring a case charging intentional wrongdoing, then bring the negligence case that does not require intent.”

Noting that in 2012 the SEC changed the no-admit-no-deny language it applied to settlements with parties that pled guilty in a related criminal action to explicitly reference admissions, Ms. White said she has concluded other cases not involving parallel criminal cases also require acceptance of responsibility. Under the SEC’s new approach, public admission of wrongdoing will also potentially be required in four types of cases:

  1. “Cases where a large number of investors have been harmed or the conduct was otherwise egregious.
  2. “Cases where the conduct posed a significant risk to the market or investors.
  3. “Cases where admissions would aid investors deciding whether to deal with a particular party in the future.
  4. “Cases where reciting unambiguous facts would send an important message to the market about a particular case.”

 

Chair White said she supports legislation in Congress that would allow the SEC to seek penalties based on either three times the ill-gotten gains or the amount of investor losses, whichever is greater. That legislation would also allow for additional penalties if the wrongdoer is a repeat offender. Besides strong penalties, she favors requiring companies to also adopt measures that make the wrong less likely to occur again.

“Another core principle of any strong enforcement program is to pursue responsible individuals wherever possible,” Chair White said. The SEC staff should look first at individual conduct, rather than starting to look at the entity as a whole. “When people fear for their own reputations, career and pocketbooks, they tend to stay in line,” she observed.

Investors will have more confidence in the markets if the SEC is perceived as “the tough cop that everyone rightfully expects,” she told the meeting.

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