As the new year begins SEC Enforcement appears to be at a cross-roads. Commissioners have, or will, depart; there are, or will be, new appointees. The reconstituted agency will have to determine if its current numbers-monetary-sanctions-publicity driven approach is actually effective at brining a new ethics to the market place as its statutory mandate requires. The SEC will also have to decide if self-reporting and cooperation are integral to the mission of its enforcement program. If so, the related question is if those goals are consistent with the approach being utilized.
The actual path of SEC enforcement may be difficult to chart, other expecting the agency to continue with its current staples of offering frauds, Ponzi schemes, insider trading and cases tied to the findings of its inspection program. Yet there are key issues which, if examined as they unfold, may point the way:
Collegiality: With the addition of new Commissioners will the agency once again achieve a spirit of collegiality built on shared goals and the compromise necessary to effectively implement its statutory mandate? In the recent past many commentators have decried the politicization of an agency which once prided itself on being non-political. The impact can be seen in a series of 3-2 votes on questions ranging from rule making to sanctions and enforcement actions. Increased collegiality might permit the Commission to move forward with a more robust agenda and away from the current disharmony.
Venue selection: The announcement that more enforcement actions will be brought as administrative proceedings spurred a series of suits against the agency. Those suits raise a number of key constitutional issues. The SEC typically defends these cases by claiming that those charged can be effectively present the issues in an administrative process which culminates with an appeal to an Article III court. In advancing this argument the SEC does not mention the fact that once the case reaches the circuit court, the Commission will argue that the court should defer to its decision under Chevron, thus ending any effective review. Although the U.S. Chamber of Commerce is lobbying Congress for relief on this issue, that seems unlikely. Its time, however, for the SEC to step-up, regardless of the outcome in the courts and Congress. It is time for for the agency to stop trying to win enforcement actions through venue selection and demonstrate that it is a fair, even-handed regulator, not an agency which seeks to win at all costs. That begins by bringing actions in the forum in which they have traditionally been brought. This would reflect the kind of fundamental fairness that is critical to an effective enforcement program.
Broken windows: The initiation of this program has driven the numbers-sanctions-publicity approach of the current program. While it may be an effective approach for the New York police department, it has no real application in SEC enforcement. If, for example, a New York City police officer walks a beat and strictly enforces the law on all matters it is reasonable to expect that his or her presence on the street taking such actions will have a deterrent effect on a would-be bank robber, burglar or street corner drug seller. In contrast, there is no reason to believe that if SEC enforcement generates a headline in the New York Times, Washington Post or Wall Street Journal by packaging-up a group of Rule 105 short selling violations and trumpeting the large total fine that it will have any deterrent impact on the CFO of a public company who is considering cooking the books to make the numbers or the executive who is about to tell his or her best friend about a potential take-over of the company so the person can trade and make large profits.
Fair application of the law: SEC enforcement actions should be just what the name implies – the enforcement of existing law, not rewriting it. It is axiomatic that those charged with violations of the law are entitled to fair notice and an opportunity to defend. This issues presents itself in a number of areas. For example, in insider trading a critical question is how the agency will deal with Newman — will it apply the teachings of the decision or try to skirt or water down its application? In the past the agency has tried to avoid unfavorable interpretations of the law as it did with its ill-fated decision in In the Matter of John W. Lawton which utilized a sophistic argument to claim that the backdated application of new sanctions was not impermissibly retroactive, a decision struck down by the D.C. Circuit (full disclosure, the author was counsel to Respondents in that case). Likewise, it is difficult to view the 3-2 Commission decision to reverse in part the ALJ’s findings of no liability in Flannery as anything but overreaching. This is particularly true in view of the First Circuit’s decision to reverse the SEC’s findings of liability on the evidence – a rare and embarrassing rebuke on that basis by a circuit court. The fundamentally unfair positions taken by the SEC in these actions only serve to undercut the credibility of the enforcement program, painting it as overreaching and not trustworthy.
The common thread through each of these points is the necessity for a dedication by the Commission – the five Commissioners working together – to effectively police the markets and market place through an enforcement program bottomed on fundamental fairness. That approach lends credibility to the program, encouraging market participants to trust it and cooperate with it. If 2016 is going to serve as a new beginning for SEC enforcement, the predicate is fundamental fairness which creates the trust of those dealing with the agency that it will do the right thing.