Today's SEC is not the same agency that failed to protect investors in the years leading up to the Great Recession, according to Andrew Ceresney, director of the commission's Division of Enforcement.
In an exclusive interview with Financial Planning, Ceresney spoke of how the SEC’s enforcement capabilities have evolved since the financial crisis, which threatened large banking institutions, caused millions to be evicted from their homes, wiped out trillions of dollars in consumer wealth and uncovered Bernie Madoff's massive Ponzi scheme.
Since 2008, the SEC has created a new whistleblower program, increased its data analytics skills and built cooperative relationships with criminal authorities around the country to bring more cases, Ceresney says.
His comments come after recent Senate criticism of SEC Chairwoman Mary Jo White for failing to protect investors.
As he does before speaking publicly, Ceresney, who worked for White when she was the U.S. Attorney for the Southern District of New York and followed her to the law firm Debevoise & Plimpton before joining her at the SEC in 2013, said he was speaking on his own behalf and not for the commission. The following is an edited transcript of the conversations, including FP's parenthetical explanations.
FP: Is the commission is in better shape to detect and stop fraud than it was in 2008?
AC: Oh, I think definitely the answer is yes. We've made major changes in the Enforcement Division since then, as well as in the commission more generally.
For example, we've created the Office of Market Intelligence that receives tips, complaints and referrals and makes sure they are assigned appropriately. We have a whistleblower office, obviously, and that is a new program. We've created specialized units with in-house experts that allow us to be smarter about what is going on in in the markets. The exam staff has made huge changes to the way they operate. We've got(ten) much better in terms of using data and analyzing data. I think, in general, we're just more sophisticated and we've done some things to set ourselves up to detect that sort of misconduct.
FP: How does this beefed-up detection process work?
QuoteI think we'll have more cases involving disclosures on fees and expenses. That's an area of great focus.
AC: If you get five different tips from five different investors about issues regarding a particular investment, you now are going to put those together, and you are going to be able to track those. Or, you are going to get a particular whistleblower tip, and it will go to the particular team. They are going to see trends that are going on. You are going to have experts who are going to be able to analyze that information and use data to try to understand what is going on.
Each one of those areas brings important tools to detect that conduct.
What are some recent SEC cases that advisers should pay attention to?
AC: An example was the J.P. Morgan case we brought last year. (It) related to their failure to disclose their preference for proprietary funds, as well as the BlackRock case we brought about a year-and-a-half ago, which involved the failure to disclose the interest of a portfolio manager in companies in which he was investing.
Then there was the Guggenheim case, which involves failure to disclose loans to investors.
Second, I think the private equity cases, which I mentioned before, have been very significant. I think those have had a tremendous impact on the industry.
I think we'll have more cases involving disclosures on fees and expenses. That's an area of great focus.
I'd also point you to our cases in the performance advertising area and, in particular, the cases that come out of the F-Squared Investments case: the Virtus Investment Advisors case and the Cantella & Co. case. These involve entities that need to make sure that, when they make performance advertising claims, even when they are using a third party to manage the funds, they have a reasonable basis for those performance claims. Those are important cases.
Finally, I'd point to cases such as Dion and Shelton involving failure to disclose revenue that advisers are getting. We've brought a number of cases in that area and I think advisers need to be careful about disclosing all revenue that they receive, the sources of all revenue that they receive.
FP: Any advice you have for financial advisers to help them comply with SEC oversight?
AC: They should consider self-reporting issues if they find them. We will give significant credit to firms who self-report to us and, so, I think firms should consider that. They should understand that we are going to be aggressive regarding issues in what is a heavily regulated area, and so they should create compliance systems to try to address these issues and give legal and compliance an important role.
FP: How does the commission use data today in its enforcement?
AC: We have done a great job of creating analytical tools that allow us to take advantage of that data both to detect misconduct as well to as to advance our investigations.
So for example, with regards to insider trading, we have billions of lines of blue sheet data (information that tracks trading activity) and we've created tools that allow us to see patterns that suggest insider trading activity
We've also taken advantage of trading data that we've been able to collect on the exam side to allow us to see patterns for things like churning and sales of complex products that may be being sold improperly. We've used data in financial reporting to help detect aberrations that may suggest potential misconduct.
Some of this we have done in conjunction with other divisions, like the Division of Economic and Risk Analysis.
We've also created our own Center for Risk and Quantitative Analytics within the Enforcement Division that's been focused on these issues.
FP: How has the role of enforcement changed since you've headed up the division?
AC: We are going into areas that we haven't necessarily gone into in the past, so things like market structure, our cases against alternative trading systems and exchanges that I mentioned earlier. Those are relatively new developments that have really increased over the last few years.
We are much more active with our cases in the public finance area.
And our Foreign Corrupt Practices Act program has just expanded significantly. So, we have a lot of different additional areas we are focused on.
It also used to be that most of our cases on the criminal side were with the Southern District of New York and we still obviously do many, many cases with them, but we do a lot more cases now with other U.S. attorneys offices around the country, as well as main Justice (the U.S. Department of Justice's main headquarters in Washington D.C.).
FP: Why the jump in cases outside of New York?
AC: One is I think those offices are just more interested in doing these cases, thanks to a general increased focus on the importance of white collar prosecutions. Second, we've built increased partnerships with offices around the country. Our regional offices have strong relationships with the prosecutors' offices in their regions and I think that is a relatively recent phenomenon.
FP: What is driving this increased focus on white-collar prosecutions?
AC: I think the financial crisis certainly added to that, but, over the past 10 or 15 years, since Enron and WorldCom (publicly traded companies that perpetrated fraud on the billions of dollars scale), all those things have just increased the focus on white-collar crime.
FP: What part is the commission playing in this increased activity?
AC: We in the commission have been more aggressive in the settlements we've been seeking, and we've gone after more individuals who are more likely to litigate. We also have been more aggressive in terms of bringing cases now where the evidence is more challenging.
QuoteI think advisers need to be careful about disclosing all revenue that they receive, the sources of all revenue that they receive.
I'll give you an example from cases we've litigated over the past two or three years. There's the Payton case (against former New York-based registered representative Daryl M. Payton). It's an insider trading case in the Southern District that we just tried a few months ago. That was a case that, post the Newman decision (which makes it harder to pursue cases involving insider trading tips), the criminal authorities dropped their case. We were left as the only regulatory authority with a case against those defendants. And we litigated that case aggressively. Thanks to Newman, it was a challenging case on the personal benefit issues and on other issues. But we were able to win.
FP: What do you see as the biggest accomplishments of the Division of Enforcement in the 3.5 years since you became its chief?
AC: It's been a pretty active time. In terms of achievements, we've solidified ourselves as a strong, aggressive, but fair regulator. We've had record years both in terms of enforcement actions as well as monetary recoveries over the last couple years. We're on target this year to at least equal those
We've brought some very high quality and important cases. In terms of prominent cases, we've brought the hacking case against 34 defendants last summer.
We brought the case against Bank of America just two months ago related to customer protection. It won $415 million in penalties and disgorgement and admissions of guilt.
We've brought the insider trading case against Walters (in which sports gambler William "Billy" Walters of Las Vegas allegedly made $40 million on illegal stock tips) and the related actions there.
But we've also brought lots of cases that have a huge impact on the industry and have changed industry behavior.
For example, the MCDC (Municipalities Continuing Disclosure Cooperation initiative) self-reporting initiative (where the SEC charged 72 underwriters for material misstatements and omissions in municipal bond offering documents); the private equity cases (such as one last year against Kohlberg Kravis Roberts & Co.) that we've brought; financial reporting cases that we've brought; cases against exchanges and alternative trading systems (such as the so-called dark pools case against Barclay's and Credit Suisse).
All of that has had a very significant effect on the industry.
I'd cite two other things. One is litigation. We have made it clear that we are very experienced and difficult adversaries. Whenever we go into court, we put our best foot forward. I think there has been an increase in litigation over the past few years and I think we've risen to that challenge.
And, then, finally, in terms of the use of data, the last three years have seen just a huge proliferation in the availability and use of data.
FP: What do you most like about your job?
AC: It's a great job. You have really a wide view of all that's going on in the enforcement area, which is just an amazing perspective. There are great investigations, many of which we do on our own, but some of which we work together with the criminal authorities. We have really talented people who just have great expertise but are also extremely committed to the mission of protecting investors.
I think the other part about of the job that I enjoy is the management.
I have 25 or so people who report to me. Each one of those has a number of people reporting to them and managing the division, which is more than 1,300 people nationwide, which is a great challenge but also very interesting.