Recent speeches by SEC Chairman Mary Schapiro and Commissioner Luis Aguilar provide glimpses of the future at the SEC. In their remarks, the Commissioner’s commented on three key areas, enforcement approach and internal procedures, rule making initiatives and possible legislative proposals.

Ms. Schapiro, in her remarks to the American Business Editors and Writers on April 27, 2009, discussed the approach to enforcement, emphasizing that there is more than just a new division director. Rather, there is a new approach, a new tone at the top emphasizing speed, coordination and efficiency. That new tone begins with speeding up investigations, ensuring that the various staff divisions work effectively and that they coordinate with criminal authorities and state regulators. As part of this effort, Enforcement is considering unidentified “structural” changes that would make better use of its scarce resources.

Commissioner Aguilar, in his comments before the NASAA Members on April 28, 2009, titled “United in the Public Interest and Making Investors a Priority” added specific suggestions to improve enforcement. These include: 1) delegating authority to the Director of Enforcement and Heads of the Regional Offices to open routine, non-controversial formal investigations; 2) improving the collection processes to facilitate returns to investors; 3) implementing a risk-based data analysis system; and 4) revising the corporate penalty guidelines to focus on deterring misconduct. Commissioner Aguilar, like Chairman Schapiro, emphasized that “to revitalize its enforcement program, we must also continue to effectively coordinate” with others regulators.

Ms. Schapiro also outlined key areas for future rule making. One priority is rating agencies, where the Chairman stated that “the SEC needs to be pushing forward a real agenda of reform.” Next month, a key rule making initiative will be unveiled in the corporate governance area. These proposed rules will “remove the barriers that make it costly and difficult for a company’s owners to nominate directors.”

Another group of proposals will be issued for comment in June when the SEC will propose enhancements to the rules governing credit quality, maturity and liquidity provisions that apply to money market funds. These proposals are part of an overall review of rules applicable to these funds and echo the recent congressional testimony of the Treasury Secretary.

The Commission also intends to propose rules to strengthen the controls over investment advisers who have custody of investor assets. These proposals will include “consideration of ‘surprise’ examinations by a certified public accountant,” according to the Chairman.

Finally, when discussing legislative reform, Commissioner Aguilar focused on two key points. The first is to close the regulatory loopholes. This includes hedge funds and swaps which he termed “policy mistakes.”

The second turns on the question of regulation of systemic risk. Here, “the focus needs to be on ensuring the continuation of systemically important market functions, and on investor protections.” This means identifying systemically important market functions and ensuring that they are backed up properly so that if there is a failure by one entity, another can step in, the Commissioner noted. Accordingly, risk regulation would focus on overarching risk to the financial system. In this context, the SEC would continue to function as a primary regulator.

Last year, there were important circuit court decisions regarding the scope of aiding and abetting liability in SEC enforcement actions and parallel SEC and DOJ investigations. Each decision is likely to have a significant impact on SEC enforcement in the future.

Following the Supreme Court’s decision in Central Bank of Denver v. First Interstate, 511 U.S. 164 (1994), Congress, in the Private Securities Litigation Reform Act of 1995, restored aiding and abetting liability in SEC enforcement actions. Congress did not extend aiding and abetting liability to private securities actions.

In SEC v. Papa, Case No. 08-1172 (1st Cir. Feb. 6, 2009), the court gave definition to the scope of liability for aiding and abetting in an SEC enforcement action. The complaint named six former employees of Putnam Fiduciary Trust Company. According to the SEC, the six executives engaged in a scheme to defraud Putnam client Cardinal Health, Inc. The misconduct centered on the cover-up of a one-day delay in investing certain assets of Cardinal in a defined benefit plan in 2001. The delay caused Cardinal to miss out on about $4 million of market gains. Following the error, the defendants chose not to inform Cardinal. Rather, they took steps to conceal the error by improperly shifting about $3 million of the costs to the shareholders of other Putnam mutual funds through backdated accounting entries and various accounting mechanisms. Cardinal bore about $1 million in losses.

The district court, on a motion to dismiss, concluded that three of the defendants were primarily violators, having directly participated in the scheme. Three others, however, only attended meetings about the cover-up and one year later executed what are effectively internal audit confirmations stating that all accounts were accurately stated. The district court concluded that this conduct was not sufficient to constitute aiding and abetting liability. Accordingly, the case was dismissed as to these three defendants.

On the SEC’s appeal, the court affirmed. The test of aiding and abetting liability is whether each defendant rendered substantial assistance in furtherance of the wrong committed. First, the execution of the audit letters did not render substantial assistance because the fraudulent scheme was already complete. Second, the SEC’s claim that the three defendants breached their fiduciary duty in executing the audit confirmations, because if they had been answered truthfully, the fraud would have been revealed which would have turned the scheme into a continuing and never ending one. The court rejected this notion of aiding and abetting.

Another key court ruling involved parallel proceedings. Frequently, SEC investigations are conducted at the same time as those by the Department of Justice and other regulators and self-regulatory organizations. Parallel proceedings offer certain efficiencies for both the government and a potential defendant. Their use has repeatedly been upheld by the courts. They do, however, present certain pitfalls.

U.S. v. Stringer, 521 F.3d 499 (9th Cir. 2008) is a key decision involving parallel SEC and DOJ investigations. The district court dismissed a criminal indictment based on misconduct by the U.S. Attorney’s Office and the SEC. The court concluded that the USAO and the SEC violated the constitutional rights of defendants by merging their investigation and concealing the criminal inquiry behind the SEC civil investigations which was used to collect evidence for the USAO. U.S. v. Stringer, 408 F. Supp. 2d. 1083 (D. Or. 2006).

The Ninth Circuit reversed. The court concluded that the government fully disclosed the possibility that information received in the course of the civil investigation could be used for criminal proceedings by furnishing witnesses SEC Standard Form 1662. The decision is predicated on the court’s determination that the SEC did not make any affirmative misrepresentations. Reliance on Form 1662 was argued by the SEC in an amicus brief. The decision in Stringer, as well as the ruling in Papa, are likely to have a significant impact on SEC enforcement actions in the future.