SEC Enforcement has been revamping and reorganizing in an effort to become more effective and efficient. Part of that process focuses on joint investigations with criminal prosecutors and other regulators. The recently recast Financial Fraud Task Force and the newly created Virginia Financial Fraud Task Force are two examples of SEC Enforcement teaming up with the Department of Justice and the U.S. Attorneys Office. Another part of the rejuvenation appears to be an increased reliance on civil fines. Together, more criminal prosecutions and bigger fines are supposed to caution the market place, resulting in deterrence.

As the rejuvenation moves forward, SEC Enforcement would do well to pause and review the recently released FSA Annual Report: 2009/10. The Financial Services Authority is the top market regulator in the U.K. In the report, available on its website, the FSA states that one of the ways in which it seeks to develop confidence in the U.K.’s markets is “to mitigate and deter market abuse. . .” by detecting and prosecuting insider trading. In the past the regulator has suffered from the perception that it was not aggressive at investigating and eliminating this type of market abuse, particularly by major market participants.

Beginning in 2006/07 the FSA “decided to make more extensive use of the full range of investigation and prosecution powers available . . .” This resulted in a series of insider trading investigations, the FSA’s first criminal prosecutions for insider dealing and an increased use of fines. The report goes on to cite a number of examples to illustrate the new more aggressive stance adopted by the regulator. This includes two criminal trials in which the FSA secured convictions and the execution of a number of searches followed by arrests which lead to more criminal prosecutions. In addition, the FSA published findings of market abuse and imposed large fines on a number of major market participants.

According to the report, the new policy of increased criminal prosecutions and large fines is working, sending a credible deterrence to the market. The policy is going to continue.

The statistics cited by the FSA, however, raise questions about the impact of its new policy. The FSA says it is the only regulator that publishes metrics by which possible insider trading and market abuse can be measured. Those metrics focus on incidents of suspicious trading activity in advance of a corporate announcement. Specifically, the FSA analyzes the scale of share price movement in the two days prior to regulatory announcements to assess trading and price movements which may be abnormal for that security. While this data does not establish or prove insider trading, it is some indication of possible market abuse, according to the FSA.

For the 2009/10 time period, the incidents of abnormal trading activity discovered by the FSA is about the same as in prior years. Stated differently, the incidents of suspicious trading activity and abnormal price movements have remained essentially constant. Accordingly, the metrics reported by the FSA do not support the claim that its new program is deterring market abuse. If in fact increased criminal prosecutions and large fines translate to deterrence in the marketplace then the data should show a decrease in suspicious trading and price movements.

Some might argue that the FSA’s program is new and that any assessment of its success should be deferred. At the same time, however, it would seem that the immediate impact of initiating a string of criminal prosecutions and imposing a series of large fines would have some impact in the marketplace if this type of activity translates to deterrence. That point, however, is not supported by FSA’s Annual Report.

As SEC Enforcement moves forward with its rejuvenation efforts it would do well to carefully assess the experience of the FSA. More criminal prosecutions and bigger fines may yield headlines as it has done for the FSA but not necessarily deterrence and more effective enforcement.