FINANCIAL FIRM CHARGED BY SEC WITH IMPROPER CALCULATION OF ADVISORY FEES

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced charges against a St. Petersburg, Fla.-based financial services firm for improperly calculating advisory fees and overcharging clients.

SEC examinations and a subsequent investigation found that Transamerica Financial Advisors offered breakpoint discounts designed to reduce the fees that clients owed to the firm when they increased their assets in certain investment programs.  The firm permitted clients to aggregate the values of related accounts in order to get the discounts.  However, Transamerica failed to process every aggregation request by clients and also had conflicting policies on whether representatives were required to pass on to clients the savings from breakpoint discounts.  As a result, the firm overcharged certain clients by failing to apply the discounts and failed to have adequate policies and procedures to ensure that the firm was properly calculating its fees.

Transamerica has agreed to settle the SEC’s charges.  As a result of the SEC investigation, the firm reviewed client records and has reimbursed 2,304 current and former client accounts with refunds and credits totaling $553,624 including interest.  In the settlement, Transamerica has agreed to pay an additional $553,624 penalty.

“Transamerica failed to properly aggregate client accounts so that they could receive a fee discount, and this systemic breakdown caused retail investors to overpay for advisory services in thousands of client accounts,” said Julie M. Riewe, co-chief of the SEC Enforcement Division’s Asset Management Unit. 

According to the SEC’s order instituting settled administrative proceedings, Transamerica’s failure to properly process aggregation requests occurred since 2009.  SEC examiners first alerted Transamerica about aggregation problems in 2010 after an examination of a branch office.  While the firm went on to provide refunds to clients of that branch office, Transamerica failed to undertake a firm-wide review of all client accounts as SEC examiners recommended.  Hence during a subsequent examination of the firm’s headquarters in 2012, SEC examiners found that Transamerica was still failing to aggregate certain related client accounts.  The problem persisted beyond any one branch office.  In fact, Transamerica had conflicting policies throughout its branch offices on whether the firm required its representatives to provide breakpoint discounts to advisory clients.

“The securities laws require investment advisers to charge advisory fees consistent with their own disclosures and stated policies so investors get what they bargained for,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office.  “Transamerica failed to take appropriate remedial steps even after SEC examiners had flagged the problem.”

The SEC’s order finds that Transamerica willfully violated Sections 206(2), 206(4), and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-7.  Transamerica agreed to a censure without admitting or denying the SEC’s findings, and must cease and desist from committing or causing any further violations of those provisions of the federal securities laws.  In addition to the monetary reimbursements and sanctions, Transamerica agreed to retain an independent consultant to review its policies and procedures pertaining to its account opening forms, fee schedules, and fee computation methodologies as well as the firm’s account aggregation process for breakpoints. 

The SEC’s investigation was conducted by Salvatore Massa and Tonya Tullis under the supervision of Chad Alan Earnst in the Miami Regional Office.  Mr. Massa and Mr. Earnst are members of the Enforcement Division’s nationwide Asset Management Unit.  The 2012 examination that led to the investigation was conducted by Jean Cabot, Jesse Alvarez, and Roda Johnson under the supervision of John Mattimore in the Miami office.

SEC CHAIR WHITE'S SPEECH ON ALL-ENCOMPASSING ENFORCEMENT TO POLICE MARKETS

FROM:  SECURITIES AND EXCHANGE COMMISSION 
All-Encompassing Enforcement: The Robust Use of Civil and Criminal Actions to Police the Markets
 Chair Mary Jo White
March 31, 2014

Introduction
Thank you, David Prince, for that kind introduction.  I have participated in this event for many years and have always considered this conference to be all about the compliance and legal issues that are most important to the integrity of our securities markets.  Now, as Chair of the SEC, I would like to thank you for the work you do day in and day out to protect investors and keep our markets robust and safe.

In about a week, I will have completed my first year at the SEC.  It has been quite a year.  We have made very good progress in accomplishing the initial goals I set to achieve significant traction on our rulemaking agenda arising from the Dodd Frank and JOBS Acts, intensify our review of the structure of our equity markets, and enhance our already strong enforcement program.

All-Encompassing Enforcement
Today, I thought I would talk about the SEC’s Enforcement program, and in particular, the importance of all-encompassing enforcement of the securities laws.  By that, I mean the appropriate, but vigorous, use of criminal, civil, and regulatory tools to enforce the securities laws.  Before I begin, let me assure Preet Bharara, one of my very distinguished successors as United States Attorney, that Congress did not give the SEC criminal authority as we were flying in last night.  And, although I often emphasize how essential our examination function is to achieving comprehensive compliance with all of the regulatory requirements, today’s focus will be the SEC’s enforcement function—investigating and bringing cases.

So why am I, the Chair of the SEC, talking about civil and criminal enforcement?  It is because I know, from both my years as United States Attorney working alongside the SEC and now from inside the SEC, that the SEC’s expertise and extensive cooperation and partnership with the criminal authorities is essential to all-encompassing enforcement of the federal securities laws.  So, too, are the much greater number and variety of standalone cases the SEC brings for violations that are not prosecuted criminally.

There are, of course, no more powerful tools than a criminal conviction and the prospect—and reality—of imprisonment.  When they are added to the wider range of actions the SEC brings and the unique remedies available to us, law enforcement can best fulfill its collective obligation to investigate, charge, and address the full range of securities law violations.  And my message today is that a robust combination of criminal and regulatory enforcement of the securities laws is not only appropriate, but also critical to deterring securities violators, punishing misconduct, and protecting investors.

All-Encompassing Enforcement on the Rise
As you undoubtedly know, essentially any violation of the federal securities laws and regulations can be a criminal violation if done willfully, that is, with intent to violate the law.[1]  This means that many of the SEC’s investigations can give rise to criminal cases, although obviously not every one of our cases that could be prosecuted criminally is.  But, in the last 20 years, there has been a significant rise in criminal prosecutions of securities cases.

A couple of statistics make the point.  When I became U.S. Attorney in 1993, there were 67 criminal cases that were related to SEC proceedings.[2]  That number now has doubled.[3]  And the number of instances where we grant access to our files to other law enforcement authorities—a rough proxy for the number of cases where we have parallel investigations—has also more than doubled.[4]

And there is more to the story than the numbers.  We now coordinate our efforts with the criminal authorities on many types of securities law offenses that did not garner much, if any, criminal attention in the past.  Insider trading has, of course, been the subject of criminal cases for many years, as have offering frauds and Ponzi schemes.  But accounting fraud prosecutions were relatively rare before Enron, WorldCom, and Adelphia.  More recently, our parallel efforts have also yielded a significant increase in criminal actions in the FCPA space and in other areas, including actions against investment advisers for false valuations, overcharging, and hiding fees.  Although the SEC is certainly not the source of or involved in every securities fraud prosecution, my sense is that many criminal authorities across the country are more willing and better able to pursue these prosecutions because the SEC devotes significant resources to uncovering and building these complex cases, and then working in parallel with the prosecutors to bring our respective cases.

Benefits of a Strong Partnership
In the vast majority of criminal securities fraud prosecutions, the SEC’s Enforcement staff works closely with the criminal authorities, whether it be DOJ, the FBI, or state and local law enforcement.  These parallel investigations are entirely appropriate under the law, as long as we conduct our investigations, as we do, independently, but in cooperation with the criminal authorities.[5]  Criminal investigations unquestionably bring great value—search warrants, wiretaps, and undercover operations are not in the SEC’s toolbox.

In many of these cases, it is the lawyers, accountants, and other professionals from the SEC’s enforcement and exam programs who initially detect the misconduct and put the preliminary case together.  Every day, our staff sorts through dozens of tips, complaints, and whistleblower submissions, pursues leads derived from our exam program and SRO referrals, and analyzes large volumes of transactional data generated from our risk analytic initiatives.  Many of these sources lead to investigations that we pursue.

When we find sufficient evidence of a serious violation to justify criminal involvement, we alert the criminal authorities, and we may conduct parallel investigations.  The criminal authorities will sometimes decide to conduct undercover investigative operations, while we take the lead in documentary review and analysis of records.  As many of you here know, we also often interview witnesses together.

When we work together and bring parallel actions, we will typically file our actions on the same day, unless there is some investigative reason for one of us to act first, such as a need for an emergency asset freeze or to stop a flight risk.  Often, you will see that the SEC action names additional defendants who are not part of the criminal case, including those who did not necessarily act with intent to advance the scheme, such as the gatekeeper who permitted the scheme to proceed[6] or the supervisor who failed to appropriately supervise the wrongdoers. [7]  We charge these additional defendants because it is very important to proceed broadly against other participants in a scheme to ensure that they too are called to account.

Importance of Standalone SEC Actions
The SEC’s partnership with the criminal authorities in parallel cases represents a very important component of our enforcement program, but most of our cases are standalone, as we operate independently under a broad 80-year old statutory mandate to enforce the federal securities laws.  We, for example, often bring cases based on negligence, while most criminal statutes require intent or at least willful blindness.  Some of our statutes are also strict liability, which do not require intent, recklessness, or negligence.  And because of the higher, beyond a reasonable doubt evidentiary standard in criminal cases, the SEC has more flexibility to bring important cases that send a strong message of deterrence when the evidence may not be enough for a criminal case.

In our standalone cases, we also have unique remedies to protect investors, beyond disgorgement of ill-gotten gains and civil monetary penalties.  One of the SEC’s most effective tools is our ability to bar wrongdoers from their particular roles in the securities profession, and, thanks to the Dodd-Frank Act, from the entire securities industry.[8]  So whether it is the broker who charged hidden commissions, or the investment adviser who misused investor funds, we can ensure they are not in a position to abuse the trust of investors again.  We can also seek orders barring the officer of a public company who committed accounting fraud from serving as an officer or director of any public company, and prevent the microcap promoter from being involved in penny stocks.  We also have the authority to prohibit certain professionals who engaged in misconduct from appearing or practicing before the SEC—an accountant can be prohibited from signing an audit report for a public company and an attorney can be prohibited from advising on documents that will be filed with the Commission.[9]

The SEC also has the authority to obtain asset freezes, trading suspensions, and temporary injunctions to stop fraud in its tracks before illicit profits are dissipated or the fraudsters can complete their schemes.  Finally, through our Fair Fund authority, we are able to distribute money recovered through disgorgement and penalties back to harmed investors.

Although standalone criminal prosecutions and parallel actions send important messages of deterrence, our ability, in civil standalone actions, to broadly punish wrongdoing also sends an important and additive message to the market on appropriate standards of conduct.  My strong sense, from all of the different vantage points I have occupied, is that the SEC’s cases are closely watched by industry participants, as well as those in this room who represent them.  As a result of that dynamic, compliance programs are enhanced, training is intensified and behavior changes.  Our efforts thus have a multiplier effect by having meaningful impact on market participants who are not involved in the particular misconduct that has been charged.

All-Encompassing Enforcement in Practice
So how does this all fit together in practice?  I will briefly talk about just three areas—insider trading, microcap fraud, and financial fraud.  Obviously, there are others, such as FCPA and investment adviser fraud, where the same takeaways apply.

Insider Trading

Unlawful insider trading always receives significant enforcement attention and has historically been a staple for both the SEC and criminal prosecutors.  In the last five years,  Preet and his team in the Southern District of New York have done a tremendous job bringing cases against over 75 defendants who have all either pled guilty or been convicted after trial.  This remarkable record and the sheer number of criminal cases send an unmistakable message of strong deterrence.

The SEC’s record in insider trading cases, while not perfect, is also very impressive.  Over the last five years, we have charged over 570 defendants in civil insider trading cases, the vast majority of which have been successfully concluded either through settlement or a finding of liability after trial.

Behind the headlines is the important story of how many of these cases originated and how they are made.  Many insider trading cases, whether criminal, civil or both, start out as a referral to the SEC from FINRA or the Options Regulatory Surveillance Authority (“ORSA”) containing an informational nugget suggesting suspicious trading, or are triggered by our own trade data analytics that identify possible patterns of insider trading.

Some of our newer technologies have augmented our ability to identify suspicious trading.  In addition to our traditional issuer-based approach, we now also use a trader-based approach—focusing on identifying similar trading trends among traders.  SEC staff engage in hours of painstaking trade analysis, detailed electronic scrutiny of phone records, bank records, emails, and texts, and relentlessly dig for evidentiary scraps left behind by these often very careful and sophisticated wrongdoers that are necessary to build a case.

Let me give you one example where we used the trader-based approach and a dogged search for evidence in a parallel action.  A couple of weeks ago, the SEC filed a civil action against a registered representative at a large broker-dealer and the managing clerk at a prominent international law firm.[10]  The SEC charged that the two engaged in a four-year insider trading scheme that generated $5.6 million in trading profits by trading in advance of more than a dozen corporate transactions for which the law firm provided advice.

This action resulted from the efforts of the SEC staff and the U.S. Attorney’s Office for the District of New Jersey and the FBI.  Working together, investigators uncovered illegal tips that allegedly were conveyed, as if from a movie scene, through a middleman who met with the trader at Grand Central Station, showed him hand-written notes of the stocks he should trade, and then ate the notes to cover his trail.  On the same day that the SEC filed its case, the U.S. Attorney’s office announced that they had arrested the trader and his source.

Our insider trading cases are not limited to cases brought in parallel with criminal prosecutions.  Since October 2009, about 20% of the insider trading charges we brought involved a parallel criminal prosecution.  In contrast to many criminal cases, which often have some recording or cooperator testimony, our standalone cases are usually based on more indirect evidence—brokerage records suggesting suspicious trading, phone records indicating contact with an insider close in time to the trading, a chronology detailing material non-public events soon after the trading, and maybe, if we are lucky, cryptic emails or text messages indicating some knowledge of a relevant event or a breach of duty.  In other words, ours are usually highly circumstantial cases.

For that reason, these cases can be very challenging to try and win.  But they are very important because strong deterrence requires that there be punitive consequences for insider trading even if the evidence is insufficient to criminally prosecute and difficult to successfully try civilly.

Another civil tool we have and use in insider trading cases is our ability to freeze assets and obtain temporary injunctions based on suspicious trading so illicit profits do not disappear while we investigate.  We used this tool to great effect in July 2012 when the SEC obtained an emergency asset freeze against unknown traders just days after an announcement of the acquisition of an energy company.[11]  The SEC team moved quickly to file an emergency action after discovering that traders using brokerage accounts in Hong Kong and Singapore stood to make millions in potentially illegal profits.  Once the freeze was in place, SEC investigators carefully scrutinized the trading records to identify the traders, setting the stage for a string of successful settlements against a number of firms and individuals that unfolded over the next year and a half.  Thanks to the staff’s swift action, the SEC recovered nearly $30 million in ill-gotten gains, plus financial penalties from the foreign traders.

Microcap Fraud

Microcap fraud is another area where effective law enforcement requires both extensive cooperation with the criminal authorities and pursuit of many standalone cases.  As you know, these are most often pump-and-dump schemes where the volume and price of the stock are artificially inflated by means of a misleading promotional campaign that lures investors to buy shares.  Then, the wrongdoers sell their stock, the share price plummets, and retail investors are left holding practically worthless stock.

Like insider trading cases, these sorts of cases typically originate with a trading analysis that shows patterns of trading suggestive of illegal activity.  We then need to identify the promotional statements feeding the trading activity, investigate whether and how those statements may be actionable, identify the promoters and other participants orchestrating the scheme, and follow the stock and money, often through nominee entities with complex corporate structures, transfer agents, broker-dealers, banks, and often, off-shore financial institutions.

This methodical work can serve as the genesis for a parallel criminal case.  And these cases are uniquely conducive to criminal methods, where cooperators and undercover agents can interact with the wrongdoers and collect very powerful evidence.  We, in fact, used these methods when I was United States Attorney and were able to bring cases, along with the SEC, against over 120 defendants on a single day in connection with what we called Operation Uptick.[12]

These kinds of joint efforts continue today.  A number of our regional offices have been conducting parallel investigations with the FBI and various U.S. Attorneys to uncover penny stock schemes and involving corporate insiders, stock promoters, gatekeepers, and issuers.  In one office alone, since 2009, we have brought actions against 41 individuals and 24 companies, obtaining injunctive and other relief against all of them.  The U.S. Attorney’s Office has secured criminal convictions against 40 of the same defendants.

Parallel investigations only tell part of the microcap fraud story.  Here, too, our standalone actions have significant consequences for those trying to manipulate thinly-traded stocks for their own profit.  We often bring Section 5 charges under the Securities Act—a strict liability offense—against microcap fraud participants, suing them for directly or indirectly transacting in unregistered securities or aiding and abetting such violations.  We can bring cases against not only the issuers, but also the promoters, attorneys, auditors, broker-dealers, and others who give life to and facilitate these elaborate schemes.  If they commit fraud, we bring those charges too.[13]

We also rely on our temporary suspension authority to stop trading in securities that are the objects of pumps-and-dumps.  Just last month, we suspended trading in 255 companies, any one of which might have been the next vehicle for stock manipulators.[14]  There were more than 1,000 similar suspensions over the last two years.[15]  These trading suspensions perform a critical investor protection function—not only do they stop trading in the company’s stock for ten days, but they also have the effect of preventing market makers from displaying quotes in those securities until the company updates its public disclosures.  We also have been using our trading suspension authority more frequently to cut off trading while the pump-and-dump is in progress.

Obtaining emergency asset freezes is another essential tool in the battle against microcap schemers.  Just a couple of weeks ago, the SEC obtained an asset freeze at the outset of a case against a promoter who was charged with directing a sophisticated, international microcap stock promotion operation.[16]  We were able to demonstrate a complex series of movements of funds and securities through various foreign and domestic investment and bank accounts and obtain an order to freeze $2.5 million that had just been received from the sale of the alleged wrongdoer’s interest in a private jet that was about to be transferred to an off-shore account.

Financial Reporting Fraud
The last area of parallel cases I will mention is financial reporting fraud.  Here, we add another layer of expertise—that of our outstanding accountants.  The Enforcement Division has over 100 accountants, each of whom has unique and important expertise that is critical to these cases.  Knowledgably sifting through accounting records and audit work papers is not always glamorous work, but it is essential to making these cases, which are often based on specific and complex GAAP violations.

Just recently, we worked with the Manhattan District Attorney’s Office to bring such a case against the former chairman, executive director, and several accounting personnel from another prominent international law firm.[17]  This case required sophisticated analyses of the firm’s accounting systems.  Among the accounting misstatements alleged were the treatment of salaried partners as equity partners so that payments to them would not be treated as expenses; reclassifying uncollectible receivables and disbursements as collectible; and treating loans from partners as income received from clients.

Good financial reporting and vigilant auditing obviously go to the heart of the integrity of our markets and strong investor protection—which is why we have again intensified our focus on this area.  Last year, we created the Financial Reporting and Audit Task Force, whose objective is to focus on trends or patterns of conduct that are risk indicators for financial fraud, including in areas like revenue recognition, asset valuations, and management estimates, and through their work identify potential cases for investigation.  Our Cross-Border Working Group also has been focused on accounting fraud cases against foreign issuers whose shares trade on U.S. exchanges.  Nearly all of these cases have been standalone SEC cases.  Through this initiative, the SEC has thus far filed fraud actions against over eighty issuers, officers, and directors; instituted proceedings against auditors; revoked the registration of more than sixty issuers; suspended trading in the securities of seven issuers; approved enhancements to listing standards at the three major exchanges; and issued a related investor bulletin.[18]  This is all part of the SEC’s all-encompassing internal effort to address serious securities law violations.

Conclusion
Let me stop here.  Hopefully, I have given you a bit of an inside baseball glimpse into what enforcement looks like at the SEC, and how we go about making our cases, both on our own and with the criminal authorities.  The SEC lawyers, accountants, and other professionals that make and bring these cases are truly impressive.  They are deeply committed to the mission of the agency and make tremendous contributions not only to the cases that we bring but also to the cases brought by our criminal law enforcement partners.  That approach unquestionably gives us stronger and broader coverage that is good for investors, good for the markets, and good for the industry.

Thank you.


[1] See Section 24 of the Securities Act of 1933, 15 U.S.C. § 77x; Section 32(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78ff(a); Section 49 of the Investor Company Act of 1940, 15 U.S.C. § 80a-48; and Section 217 of the Investor Advisor Act of 1940, 15 U.S.C. § 80b-17.  In the criminal context, the Court of Appeals for the Second Circuit “has defined willfulness as ‘a realization on the defendant's part that he was doing a wrongful act’ under the securities laws, in a situation where the ‘the knowingly wrongful act involved a significant risk of effecting the violation that has occurred.”  United States v. Cassese, 428 F.3d 92, 98 (2d Cir. 2005) (internal citations omitted).

[2] See U.S. Securities and Exchange Commission 1993 Annual Report, at 1, available at http://www.sec.gov/about/annual_report/1993.pdf.

[3] The average for the five most recent fiscal years is 136.  See Select SEC and Market Data for Fiscal Years 2009-2013, available at http://www.sec.gov/about/secreports.shtml.

[4] The number of such requests in 1993 was 205.  See U.S. Securities and Exchange Commission 1993 Annual Report, at 1, available at http://www.sec.gov/about/annual_report/1993.pdf.  The average for the three most recent fiscal years is 535.  See U.S. Securities and Exchange Commission FY 2013 Annual Performance Report, at 150, available at http://www.sec.gov/about/reports/sec-fy2013-annual-performance-report.pdf.

[5] See United States v. Kordel, 397 U.S. 1, 11 (1970); see also SEC v. Dresser Indus., Inc., 628 F.2d 1368, 1377 (D.C. Cir. 1980); United States v. Stringer, 535 F.3d 929, 939 (9th Cir. 2008).

[6] See “SEC Files Anti-Bribery Charges Against Former Finance Executives and Senior Employees Of Global Tobacco Company” (Apr. 29, 2010) (alleging that a controller formalized the accounting methodology used to record bribes made in violation of the FCPA), available at https://www.sec.gov/litigation/litreleases/2010/lr21509.htm.

[7]See In the Matter of Ronald S. Rollings, Admin. Proc. File No. 3-15392 (Jul. 29, 2013) (finding that a Chief Compliance Officer failed properly to supervise an associated person who was convicted of misappropriating assets from client accounts), available at http://www.sec.gov/litigation/admin/2013/34-70058.pdf; In the Matter of Comprehensive Compliance Mgmt., Inc., Admin. Proc. File No. 3-15393 (Jul. 29, 2013) (finding that the investment advisory firm also failed to supervise the associated person), http://www.sec.gov/litigation/admin/2013/ia-3636.pdf .

[8] See Dodd-Frank Wall Street Reform and Consumer Protection Act, Section 925 (providing for collateral bars in Sections 15, 15B, and 17A of the Exchange Act and Section 203 of the Investment Advisers Act).

[9] 17 CFR § 201.103(f)(2); 17 CFR § 205.2(a)(1)(iii).

[10] Press Release No. 2014-55, “SEC Charges Stockbroker and Law Firm Managing Clerk in $5.6 Million Insider Trading Scheme,” (Mar. 19, 2014) available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541172895.

[11] See Press Release No. 2012-145, “SEC Freezes Assets of Insider Traders in Nexen Acquisition (Jul. 27, 2012), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171483502 ; Press Release No. 2014-26, Two Hong Kong-Based Firms to Pay $11 Million for Insider Trading Ahead of Nexen Acquisition by Company in China (Feb. 11, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540775561

[12] See, e.g., “Feds nab 120 for fraud: Mob members, securities dealers, charged with bilking victims of more than $50 million,” (Jun. 14, 2000), available at http://money.cnn.com/2000/06/14/companies/fraud/

[13] See Press Release No. 2013-249 “Penny Stock Financier Agrees to Pay $1.4 Million to Settle SEC Charges” (Nov. 25, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540410863; Press Release No. 2013-155, “SEC Announces Charges Against Florida-Based Penny Stock Schemes” (Aug. 14, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539776014; Press Release No. 2013-114, “SEC Charges San Diego-Based Promoter in Penny Stock Scheme,” (Jun. 18, 2013) available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171605883; Press Release No. 2013-39, “SEC Charges San Diego Lawyers and Others in an International Market Manipulation Scheme” (Mar. 13, 2013) available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171513254.

[14] See Press Release No. 2014-21, “SEC Continues Microcap Fraud Crackdown, Proactively Suspends Trading in 255 Dormant Shell Companies,” (Feb. 3, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540714936.

[15] The SEC suspended trading in 371 issuers in fiscal year 2013, and 651 issues in fiscal year 2012.  See Select SEC and Market Data for Fiscal Years 2012-2013, available at http://www.sec.gov/about/secreports.shtml.

[16] See Press Release No. 2014-52, “SEC Obtains Asset Freeze Against Promoter Behind Microcap Stock Scalping Scheme,” (Mar. 13, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541128311

[17] See Press Release No. 2014-45, “SEC Charges Five Executives and Finance Professionals Behind Fraudulent Bond Offering by International Law Firm,” (Mar. 6, 2014) available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540889964.

[18] See, e.g., Press Release No. 2014-47, “SEC Charges Animal Feed Company and Top Executives in China and U.S. With Accounting Fraud,” (Mar. 11, 2014) available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541102314; (Nov. 7, 2013); Press Release No. 2013-205, “SEC Charges New Jersey-Based Accounting Firm and Founding Partner for Failed Audits of China-Based Company,” (Sep. 30, 2013) available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539849819;  Lit. Release No. 22755, “SEC Files Fraud Charges Against China Intelligent Lighting and Electronics, Inc.; NIVS Intellimedia Technology Group, Inc.; and Their Sibling CEOs,” (Jul. 22, 2013) available at http://www.sec.gov/litigation/litreleases/2013/lr22755.htm.

SEC CHARGES COAL COMPANY, FOUNDER WITH MAKING FALSE DISCLOSURES ABOUT WHO WAS IN CHARGE

FROM:  SECURITIES AND EXCHANGE COMMISSION 
The Securities and Exchange Commission today announced fraud charges against a Seattle-headquartered coal company and its founder for making false disclosures about who was running the company.

The SEC’s Enforcement Division alleges that L&L Energy Inc., which has all of its operations in China and Taiwan, created the false appearance that the company had a professional management team in place when in reality Dickson Lee was single-handedly controlling the company’s operations.  An L&L Energy annual report falsely listed Lee’s brother as the CEO and a woman as the acting CFO in spite of the fact that she had rejected Lee’s offer to serve in the position the month before.  L&L Energy and Lee continued to misrepresent that they had an acting CFO in the next three quarterly reports.  Certifications required under the Sarbanes Oxley Act ostensibly bore the purported acting CFO’s electronic signature.  Lee and L&L Energy also allegedly misled NASDAQ to become listed on the exchange by falsely maintaining they had accurately made all of their required Sarbanes-Oxley certifications.

In a parallel action, a criminal indictment against Lee was unsealed today in federal court in Seattle.  The U.S. Attorney’s Office in the Western District of Washington is prosecuting the case.

“Lee and L&L Energy deceived the public by falsely representing that the company had a CFO, which is a critical gatekeeper in the management of public companies,” said Antonia Chion, associate director in the SEC’s Enforcement Division.  “The integrity of Sarbanes-Oxley certifications is critical, and executives who manipulate the process will be held accountable for their misdeeds.”

This enforcement action stems from the work of the SEC’s Cross-Border Working Group, which focuses on companies with substantial foreign operations that are publicly traded in the U.S.  The Cross-Border Working Group has contributed to the filing of fraud cases against more than 90 companies, executives, and auditors.  The securities of more than 60 companies have been deregistered.

The SEC separately issued a settled cease-and-desist order against L&L Energy’s former audit committee chair Shirley Kiang finding that she played a role in the company’s reporting violations by signing an annual report that she knew or should have known contained a false Sarbanes-Oxley certification by Lee.  Kiang, who neither admitted nor denied the charges, must permanently refrain from signing any public filing with the SEC that contains any certification required pursuant to Sarbanes-Oxley.

According to the SEC’s order against Lee and L&L Energy, the false representations began in the annual report for 2008 and continued with quarterly filings in 2009.  The purported acting CFO did not actually sign any public filings during this period or provide authorization for her signature to be placed on any filings.  After Lee was confronted by the purported acting CFO in mid-2009, he nonetheless continued to falsely represent to L&L Energy’s board of directors that the company had an acting CFO.  When L&L Energy filed its annual report for 2009, it contained a false Sarbanes-Oxley certification by Lee that all fraud involving management had been disclosed to the company’s auditors and audit committee.  Then, in connection with an application to gain listing on NASDAQ, Lee informed the exchange that L&L Energy had made all of its required Sarbanes-Oxley certifications – including during the period of the purported service of an acting CFO.  As a result, L&L Energy became listed on NASDAQ.  

The SEC’s order against Dickson Lee and L&L alleges that they violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 17(a) of the Securities Act of 1933.  The order also alleges other violations of rules under the Exchange Act concerning Sarbanes-Oxley certifications, disclosure controls and procedures, and obtaining and retaining electronic signatures on filings.  The order seeks disgorgement and financial penalties against L&L Energy and Lee as well as an officer-and-director bar against Lee.  The order also seeks to prohibit Lee, who is a certified public accountant, from practicing before the SEC pursuant to Rule 102(e) of the Commission’s rules of practice.

The SEC’s investigation, which is continuing, has been conducted by Joseph Griffin, Jennie Krasner, and Brad Mroski under the supervision of Ricky Sachar.  The SEC’s litigation will be led by Cheryl L. Crumpton.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Western District of Washington and the Federal Bureau of Investigation.

SEC INVESTOR ALERT: FALSE CLAIMS OF BEING REGISTERED WITH THE SEC

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Investor Alert: Beware of False Claims of SEC Registration
03/20/2014

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Alert to warn investors about potentially fraudulent investment schemes that involve individuals or firms misrepresenting that they are registered with the SEC. Investors should be careful to check the background, including license and registration status, of any person who tries to sell them an investment product or service, and should avoid investing with anyone who falsely represents that they are registered with the SEC.

Fraudsters may try to lure you into investing with them by falsely claiming to be registered with the SEC. In a recent fraud case brought by the SEC, SEC v Fleet Mutual Wealth, the defendants allegedly promised investors guaranteed returns of 2-3% per week through the use of a high frequency trading strategy, but instead used investors’ money to operate a pyramid scheme. The defendants allegedly recruited investors by misrepresenting that their firm was “registered” or “duly registered” with the SEC and pointing to the firm’s Form D filings to support this misrepresentation.

A Form D filing has nothing to do with whether an individual or firm is registered with the SEC.

Registration of Individuals and Firms

Many sellers of investment products or services are either brokers, investment advisers, or both. Most brokers must register with the SEC and join the Financial Industry Regulatory Authority (FINRA). Investment advisers that provide investment advice to retail investors generally must register with the SEC or the state securities regulator where they have their principal place of business.
The fact that an individual or firm has made a filing with the SEC does not mean that the individual or firm is registered with the SEC. If an individual or firm offering you an investment product or service claims to be registered with the SEC, verify that this is true:

Determine whether a firm is registered with the SEC as a broker and whether key individuals are duly licensed, and check whether there is a history of investor complaints or problems with regulators, by using FINRA’s BrokerCheck or by calling the FINRA BrokerCheck Hotline at (800) 289-9999.

Determine whether a firm’s registration with the SEC as an investment adviser is active and whether any required licenses of individuals are current, and review disciplinary history by searching the SEC’s Investment Adviser Public Disclosure (IAPD) database:

To check a firm, select the SEC Registration Status hyperlink.
To check an individual, review the Qualifications section of an Investment Adviser Representative Report Summary.

In addition, always contact your state securities regulator to determine whether an individual or firm is licensed or registered with your state securities regulator to do business with you, and ask about any complaints. Find contact information for your state securities regulator by visiting the North American Securities Administrators Association (NASAA)’s website or by calling NASAA at (202) 737-0900.

Registration of Securities Offerings and Form D

Under the federal securities laws, a company or private fund may not offer or sell securities unless the transaction has been registered with the SEC or an exemption from registration applies. Companies and private funds that offer and sell securities in reliance on certain exemptions from registration are required to file a brief notice known as Form D. Form D filings are publicly available in the EDGAR database.

Form D requires basic information about the issuer of the securities and the unregistered securities offering, such as information about the issuer’s executive officers, the size of the offering, and the date of first sale. The SEC does not verify the accuracy of the information in a Form D filing, and a Form D filing cannot be used to accomplish registration of individuals or firms with the SEC, or registration of securities offerings with the SEC.

SEC CHARGES LIONS GATE WITH GIVING INACCURATE DISCLOSURES TO STOP TAKEOVER

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
The Securities and Exchange Commission today charged motion picture company Lions Gate Entertainment Corp. with failing to fully and accurately disclose to investors a key aspect of its effort to thwart a hostile takeover bid.

Lions Gate agreed to pay $7.5 million and admit wrongdoing to settle the SEC’s charges.

According to the SEC’s order instituting settled administrative proceedings, Lions Gate’s management participated in a set of extraordinary corporate transactions in 2010 that put millions of newly issued company shares in the hands of a management-friendly director.  A purpose of the maneuver was to defeat a hostile tender offer by a large shareholder who had been locked in a battle for control of the company for at least a year.  However, Lions Gate failed to reveal that the move was part of a defensive strategy to solidify incumbent management’s control, instead stating in SEC filings that the transactions were part of a previously announced plan to reduce debt.  In fact, the company had made no such prior announcement.  Lions Gate also represented that the transactions were not “prearranged” with the management-friendly director, and failed to disclose the extent to which it planned and enabled the transactions with the expectation that the director would get the shares.

“Lions Gate withheld material information just as its shareholders were faced with a critical decision about the future of the company,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “Full and fair disclosure is crucial in tender offers given that  shareholders rely heavily on corporate insiders to make informed decisions, especially in the midst of tender offer battles.”

According to the SEC’s order, the large shareholder had made several tender offers and acquired more than 37 percent of Lions Gate’s outstanding stock.  For its part, Lions Gate management believed that allowing the shareholder to control the company was not in the best interest of Lions Gate or its shareholders.  The company engaged in an active campaign to discourage shareholders from tendering their stock to the shareholder, and vigorously looked for a management ally to purchase available shares of Lions Gate stock.  Lions Gate went on to establish the basic framework for an extraordinary three-part set of transactions that would begin by exchanging $100 million in notes from a holder for new notes convertible to stock at a more favorable conversion rate.  The note holder would then sell the notes to the management-friendly director at a premium, and the director would then immediately convert the notes to shares.

According to the SEC’s order, the Lions Gate board of directors approved the transactions at a midnight board meeting on July 20, 2010, while facing an imminent tender offer from the large shareholder.  Completed in hours, these transactions allowed the friendly director to obtain control of approximately nine percent of the company’s outstanding stock, effectively blocking the takeover bid.

The SEC’s order finds that Lions Gate then failed to meet its disclosure obligations.  First, Lions Gate stated in a July 20 press release and 8-K filing that the transactions were done to reduce the company’s debt, and failed to disclose the effort to foil the takeover bid.  Furthermore, Lions Gate management knew that a large, direct sale of stock from the company to the friendly director would have required prior approval from its shareholders under a New York Stock Exchange (NYSE) rule.  After the transactions, NYSE contacted Lions Gate to inquire whether the transactions violated the NYSE rule requiring shareholder approval.  In response to the NYSE inquiry, Lions Gate said it would disclose additional information.  In its subsequent tender offer filings made to the SEC in September, Lions Gate represented that the note exchange was not part of a prearranged plan to get shares to the management-friendly director.

Among the facts admitted by Lions Gate, reflecting the extent to which the company planned and enabled the transactions, include:

Lions Gate did not announce a plan to reduce total debt prior to issuing the press release on July 20, 2010.
Lions Gate amended its insider trading policy at the midnight board meeting to allow the friendly director to immediately convert the notes to stock.
Lions Gate approved the friendly director’s last-minute request to change the conversion price.
Lions Gate allowed the friendly director to review the new note terms, term sheet, and exchange agreement before they were provided to the note holder.
Lions Gate failed to include other required information in its tender offer filings, including the fact that the friendly director converted the notes at favorable price resulting in the director owning a near 9 percent interest in Lions Gate.
The SEC’s order finds that Lions Gate violated Sections 13(a) and 14(d) of the Securities Exchange Act of 1934 and Rules 12b-20 13a-11, and 14d-9.  In addition to the financial penalty, the order requires Lions Gate to cease and desist from future violations.

The SEC’s investigation was conducted by Nicholas A. Brady with assistance from Jeffrey T. Infelise.  The case was supervised by Anita B. Bandy and Moira T. Roberts.

SEC OBTAINS $7.2 SANCTION FOR SHORT SELLING EQUITY DURING RESTRICTED PERIOD

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced the largest-ever monetary sanction for Rule 105 short selling violations as a Long Island-based proprietary trading firm and its owner agreed to pay $7.2 million to settle charges.

Rule 105 prohibits short selling of an equity security during a restricted period – generally five business days before a public offering – and the subsequent purchase of that same security through the offering.  The rule applies regardless of the trader’s intent, and promotes offering prices that are set by natural forces of supply and demand rather than manipulative activity.  The rule therefore prevents short selling from interfering with offering prices.

According to the SEC’s order instituting settled administrative proceedings, Jeffery W. Lynn created Worldwide Capital for the purpose of investing and trading his own money.  Lynn’s principal investment strategy focused primarily on new shares of public issuers coming to market through secondary and follow-on public offerings.  Through traders he engaged to trade on his behalf, Lynn sought allocations of additional shares soon to be publicly offered, usually at a discount to the market price of the company’s already publicly trading shares.  He and his traders would then sell those shares short in advance of the offerings.  Lynn and Worldwide Capital improperly profited from the difference between the price paid to acquire the offered shares and the market price on the date of the offering.

“Rule 105 is an important safeguard designed to protect the market against manipulative trading, and we will continue to aggressively pursue violators,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.

According to the SEC’s order Lynn participated in 60 public stock offerings covered by Rule 105 after selling short those same securities during the pre-offering restricted period.  The violations occurred from October 2007 to February 2012.  Worldwide Capital traders purchased the offering shares through numerous accounts at multiple broker-dealers involved in the offering, and sold the stock through an account in Worldwide Capital’s name at other broker-dealers.  All of the trades – the purchases of offering shares and short sales – cleared and settled in a Worldwide Capital master account at the firm’s prime broker.

“The trading conducted by Lynn and Worldwide Capital disregarded the markets’ independent pricing mechanisms,” said Amelia A. Cottrell, associate director of the SEC’s New York Regional Office.  “Their use of multiple accounts in obtaining offering shares and short selling did not satisfy the separate accounts exception to Rule 105.”      

To settle the SEC’s charges, Worldwide Capital and Lynn agreed to jointly pay disgorgement of $4,212,797, prejudgment interest of $526,358, and a penalty of $2,514,571.  Lynn and his firm agreed to cease and desist from violating Rule 105 without admitting or denying the findings in the SEC’s order.

The SEC’s investigation, which is continuing, has been conducted by Leslie Kazon, Joseph P. Ceglio, Karen M. Lee, Richard G. Primoff, Elzbieta Wraga, and Elizabeth Baier of the New York Regional Office.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority and the New York Stock Exchange.

SEC CHARGES EXECUTIVES, FINANCE PROFESSIONALS FOR ROLES IN $150 MILLION FRAUD SCHEME

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged five executives and finance professionals with facilitating a $150 million fraudulent bond offering by Dewey & LeBoeuf, the international law firm where they worked.

The SEC alleges that the five turned to accounting fraud when the firm needed money to weather the economic recession and steep costs from a merger.  Fearful that declining revenue might cause its bank lenders to cut off access to the firm’s credit lines, Dewey & LeBoeuf’s leading financial professionals combed through its financial statements line by line and devised ways to artificially inflate income and distort financial performance.  Dewey & LeBoeuf then resorted to the bond markets to raise significant amounts of cash through a private offering that seized on the phony financial numbers.

“Investors were led to believe they were purchasing bonds issued by a prestigious law firm that had weathered the financial crisis and was poised for growth,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement.  “Dewey & LeBoeuf’s senior-most finance personnel used a grab bag of accounting gimmicks to create that illusion, and top executives green-lighted the decision to sell $150 million in bonds to investors as a desperate grasp for cash on the basis of blatantly falsified financial results.”

The SEC’s complaint filed in federal court in Manhattan charges the following executives at Dewey & LeBoeuf, which is no longer in business: chairman Steven Davis, executive director Stephen DiCarmine, chief financial officer Joel Sanders, finance director Frank Canellas, and controller Tom Mullikin.

In a parallel action, the Manhattan District Attorney’s Office today announced criminal charges against Davis, DiCarmine, and Sanders.

According to the SEC’s complaint, the roots of the fraud date back to late 2008 when senior financial officers began to conjure up fake revenue by manipulating various entries in Dewey & LeBoeuf’s internal accounting system.  The firm’s profitability was inflated by approximately $36 million (15 percent) in its 2008 financial results through this use of accounting tricks.  For example, compensation for certain personnel was falsely reclassified as an equity distribution in the amount of $13.8 million when they in fact those personnel had no equity in the firm.  The improper accounting also reversed millions of dollars of uncollectible disbursements, mischaracterized millions of dollars of credit card debt owed by the firm as bogus disbursements owed by clients, and inaccurately accounted for significant lease obligations held by the firm.

The SEC alleges that   Dewey & LeBoeuf finance executives continued using these and other fraudulent techniques to prepare its 2009 financial statements, which were misstated by $23 million.  The culture of accounting fraud was so prevalent at the firm that Canellas sent Sanders an e-mail with a schedule containing a list of suggested cost savings to the budget.  Among them was a $7.5 million line item reduction entitled “Accounting Tricks.”

According to the SEC’s complaint, Sanders acknowledged in separate e-mail communications, “I don’t want to cook the books anymore. We need to stop doing that.”  But he and other finance personnel continued to banter about ways to create fake income.  For example, in the midst of a mad scramble at year-end 2008 to meet obligations to bank lenders, Sanders boasted to DiCarmine in an e-mail, “We came up with a big one: Reclass the disbursements.”  DiCarmine responded, “You always do in the last hours. That’s why we get the extra 10 or 20% bonus. Tell [Sanders’ wife], stick with me! We’ll buy a ski house next.”  DiCarmine later e-mailed Sanders, “You certainly cheered the Chairman up. I could use a dose.”  Sanders answered, “I think we made the covenants and I’m shooting for 60%.”  He cryptically added, “Don’t even ask – you don’t want to know.”

The SEC alleges that Dewey & LeBoeuf didn’t want investors in the bond offering to know either.  The firm continued using and concealing improper accounting practices well after the offering closed in April 2010.  The note purchase agreement governing the bond offering required Dewey & LeBoeuf to provide investors and lenders with quarterly certifications.  The quarterly certifications made by the firm were all fraudulent.

“As Dewey & LeBoeuf’s revenue was falling and the firm was struggling to meet commitments, its top executives and finance professionals brazenly looked for ways to create fake income and retain their lucrative salaries and bonuses,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.

The SEC’s complaint alleges that Davis violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5.  The complaint alleges that DiCarmine, Sanders, Canellas, and Mullikin violated Section 17(a) of the Securities Act and aided and abetted Dewey LeBoeuf’s and Davis’ violations of Section 10(b) of the Exchange Act and Rule 10b-5(b) pursuant to Section 20(e) of the Exchange Act.  The SEC is seeking disgorgement and financial penalties as well as permanent injunctions against all five defendants, and officer and director bars against Davis, DiCarmine, and Sanders.  The SEC also will separately seek to prohibit Davis and DiCarmine from practicing as lawyers on behalf of any publicly traded company or other entity regulated by the SEC.

The SEC's investigation, which is continuing, has been conducted by William Finkel, Joseph Ceglio, Christopher Mele, and Michael Osnato.  The case has been supervised by Sanjay Wadhwa.  The litigation will be led by Howard Fischer.  The SEC appreciates the assistance of the Manhattan District Attorney’s Office and the Federal Bureau of Investigation.

COURT ACTS TO STOP FRAUDULENT PYRAMID SCHEME ON FACEBOOK, TWITTER

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced an emergency enforcement action to stop a fraudulent pyramid scheme by phony companies masquerading as a legitimate international investment firm.

The SEC has obtained a federal court order to freeze accounts holding money stolen from U.S. investors by Fleet Mutual Wealth Limited and MWF Financial – collectively known as Mutual Wealth.  The SEC alleges that Mutual Wealth has been exploiting investors through a website and social media accounts on Facebook and Twitter, falsely promising extraordinary returns of 2 to 3 percent per week for investors who open accounts with the firm.  Mutual Wealth purports to invest customer funds using an “innovative” high-frequency trading strategy that allows “capital to be invested into securities for no more than a few minutes.”  In classic pyramid scheme fashion, Mutual Wealth encourages existing investors to become “accredited advisors” and recruit new investors in exchange for a referral fee or commission.

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, almost nothing that Mutual Wealth represents to investors is true.  The company does not purchase or sell securities on behalf of investors, and instead merely diverts investor money to offshore bank accounts held by shell companies.  Mutual Wealth’s purported headquarters in Hong Kong does not exist, nor does its purported “data-centre” in New York.  Mutual Wealth also lists make-believe “executives” on its website, and falsely claims in e-mails to investors that it is “registered” or “duly registered” with the SEC.  Approximately 150 U.S. investors have opened accounts with Mutual Wealth and collectively invested a total of at least $300,000.

“Mutual Wealth used Facebook and Twitter as well as a team of recruiters to spread a steady stream of lies that tricked investors out of their money,” said Gerald W. Hodgkins, an associate director in the SEC’s Division of Enforcement.  “Fortunately we were able to quickly trace the fraud overseas and obtain a court order requiring Mutual Wealth to shut down its website before the scheme gains more momentum.”

According to the SEC’s complaint, Mutual Wealth operates through entities in Panama and the United Kingdom and uses offshore bank accounts in Cyprus and Latvia and offshore “payment processors” to divert money from investors.  Mutual Wealth’s sole director and shareholder presented forged and stolen passports and a bogus address to foreign government authorities and payment processors.

The SEC alleges that Mutual Wealth leverages the scope and reach of social media to solicit investors with its fraudulent pitch.  Mutual Wealth maintains Facebook and Twitter accounts that link to its website and serve as platforms through which it lures new investors.  Some of Mutual Wealth’s “accredited advisors” then use social media channels ranging from Facebook and Twitter to YouTube and Skype to recruit additional investors and earn referral fees and commissions.  Mutual Wealth’s Facebook page spreads such misrepresentations as “HFT portfolios with ROI of up to 250% per annum.  Income yield up to 8% per week.”  A Facebook post on Aug. 12, 2013, boasted “$1000 investment into the Growth and Income Portfolio made on April 8th, 2013 is now worth $2,112.77.”  Mutual Wealth regularly posts status updates for investors on its Facebook page, and the comment sections beneath the posts are often filled with solicitations by the accredited advisors.  Mutual Wealth also tweets announcements posted on its Facebook page.

The SEC’s complaint charges Mutual Wealth with violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  For the purposes of recovering investor money in their possession, the complaint names several relief defendants linked to offshore accounts to which investor funds were diverted from the scheme: Risort Partners Inc., Hullstar Capital LLP, Camber Alliance LLP, Kimrod Estate LLP, and Midlcorp Trade LTD.

The Honorable Dolly M. Gee has granted the SEC’s request for a court order deactivating Mutual Wealth’s website and freezing assets in all accounts at any bank, financial institution, brokerage firm, or third-payment payment processor (including those commercially known as SolidTrust Pay, EgoPay, and Perfect Money) maintained for the benefit of Mutual Wealth.

The SEC’s investigation, which is continuing, has been conducted by H. Norman Knickle and Mark M. Oh and supervised by Conway T. Dodge.  The SEC’s litigation will be led by Melissa Armstrong and Mr. Knickle.  The SEC appreciates the assistance of the Federal Bureau of Investigation, Financial and Capital Market Commission of Latvia, Ontario Securities Commission, and Cyprus Securities and Exchange Commission.

SEC COMMISSIONER GALLAGHER'S REMARKS AT INSTITUTE OF INTERNATIONAL BANKERS CONFERENCE

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Remarks Given at the Institute of International Bankers 25th Annual Washington Conference
 Commissioner Daniel M. Gallagher
U.S. Securities and Exchange Commission
Washington, D.C.

March 3, 2014

Thank you, Roger [Blissett].

Before I begin, I’d like to point out that two years ago, I spoke at this conference and discussed the Financial Stability Oversight Council, or FSOC, in great detail.  I spoke about the inherently political nature of FSOC, how it had been vested with tremendous power, and how it could threaten our capital markets.  So, given everything that has happened since then, I have to say: I told you so.[1]

Today, I’d like to share some thoughts about regulatory capital requirements.  I’ve spoken before about the significant differences between bank capital and broker-dealer capital, because I fear that these distinctions are all too often overlooked in the debates over regulatory capital.  After all, in order to come up with the right answers on how to set capital requirements, we need to ask the right questions – and that’s impossible without a proper understanding of the important differences between broker-dealer and bank capital requirements.  Those differences are fundamental, and we ignore them at our peril.

In many ways, the philosophy of bank capital is easier to understand.  In the banking sector, which features leveraged institutions operating in a principal capacity, capital requirements are designed with the goal of enhancing safety and soundness, both for individual banks and for the banking system as a whole.  Bank capital requirements serve as an important cushion against unexpected losses.  They incentivize banks to operate in a prudent manner by placing the bank owners’ equity at risk in the event of a failure.  They serve, in short, to reduce risk and protect against failure, and they reduce the potential that taxpayers will be required to backstop the bank in a time of stress.

Capital requirements for broker-dealers, however, serve a different purpose, one that, to be fair, can be somewhat counterintuitive.  The capital markets within which broker-dealers operate are premised on risk-taking – ideally, informed risks freely chosen in pursuit of a greater return on investments.  In the capital markets, there is no opportunity without risk – and that means real risk, with a real potential for losses.  Whereas bank capital requirements are based on the reduction of risk and the avoidance of failure, broker-dealer capital requirements are designed to manage risk – and the corresponding potential for failure - by providing enough of a cushion to ensure that a failed broker-dealer can liquidate in an orderly manner, allowing for the transfer of customer assets to another broker-dealer.

As I said, it’s counterintuitive, but the possibility – and the reality – of failure is part of our capital markets.  Indeed, our capital markets are too big – as well as vibrant, fluid, and resilient – not to allow for failure.  Our job as capital markets regulators is to accept the inevitability that some brokerage firms will fail and to craft a capital regime that fully protects customers in the event of such failures.  A safety-and-soundness bank-based capital regime simply doesn’t work in the context of capital markets.

To put it another way, when you deposit a dollar into a bank account, you expect to get that dollar back, plus a bit of interest.  We place our savings into bank accounts for safekeeping, and while we know that the bank makes use of our funds, we also know that we are entitled to receive all of our principal back – and bank capital requirements, along with government backstops, are designed to ensure the availability of that principal.  When you invest a dollar through a broker-dealer account, however, the market determines how much you get back.  You could break even, you could double your investment, or, of course, you could lose part or all of that initial investment.  The point is that when we make a bank deposit, we expect, at a minimum, to receive the entirety of our principal back, while when we make an investment, we expect the market to dictate what we receive in return. It stands to reason, therefore, that the capital requirements for broker-dealers must be tailored accordingly.

I’m sure you didn’t need an SEC Commissioner to explain to you the difference between a deposit and an investment.  And yet, when it comes to setting capital requirements, bank regulators seem increasingly determined to seek a one-size-fits-all regulatory construct for financial institutions.  In addition, as noted by my friend Peter Wallison in an important recent op-ed in The Hill, both the Dodd-Frank-created FSOC and the G-20-created – and bank regulator dominated – Financial Stability Board seem intent on applying the bank regulatory model to all financial institutions they deem to be systemically important.[2]

Traditionally, the Fed, as the nation’s central bank, has been known more for its role as the lender of last resort to banks than as a regulator.  By offering access to its discount window to illiquid, but not insolvent, banks offering good collateral, the Fed can provide crucial liquidity and stabilize otherwise solvent banks in times of difficulties.  During the recent financial crisis, however, the Fed went beyond offering access to the discount window to depository institutions in its capacity as the lender of last resort to serving as the investor of last resort.  The acquisition of almost 80 percent of AIG in exchange for an $85 billion loan, for example, as well as the ownership of $29 billion in former Bear Stearns assets, marked a fundamental departure from the Fed’s traditional role.  After Dodd-Frank, there is a confusion about the Fed’s lender of last resort function that is warping regulatory debates and is being used to the advantage of the Fed and central bankers around the world to increase their jurisdiction.  Policymakers today incorrectly conflate ‘lender of last resort’ with the rightly dreaded ‘bailout.’  This confusion must be addressed by policymakers before we can have a constructive discussion about capital and margin requirements for non-bank financial services firms.

The recent FSOC intervention in the money market mutual fund space shined a spotlight on this newly expansive vision of the role of banking regulators.  The money market mutual fund reform debates that raged through 2012 focused in large part on the concept of a “NAV buffer,” which effectively is a capital requirement for money market funds.  This debate culminated in the November 2012 issuance of a report by FSOC which incorporated the concept of a so-called “NAV buffer.”[3]

The reasoning behind capital buffer requirements for money market funds is that they would serve to mitigate the risk of investor panic leading to a run on a fund.  The figures under discussion, however, were far too low to promise any serious effect on panic, while the imposition of real, bank- or even broker-dealer-like capital requirements in this space, on the other hand, would simply kill the market for money market mutual funds.  A 50 basis point buffer, to be phased in over a several year period, would hardly stem investor panic, unless one believes that investors would be comforted by the knowledge that for every dollar they had on deposit, the money market fund had set aside half a penny as a capital buffer.

Crucially, as I’ve noted before, there is no limiting principle to the application of this bank-based view of capital – indeed, last September, Treasury’s Office of Financial Research issued a fatally-flawed “Asset Management and Financial Stability” report featuring similar reasoning, as reflected in its implied support for “liquidity buffers” for asset managers.[4]

It remains unclear as to whether the Fed is indeed seeking to impose bank-based capital charges on non-bank entities in conjunction with granting them access to the discount window - at the cost of submitting to prudential regulation - or whether it is instead proposing those additional capital charges in order to prevent non-prudentially regulated financial entities from ever relying upon the “government safety net” provided by the discount window.[5]

Dodd-Frank Act’s grants of authority and mandates to the Fed further expand its traditional role.  Section 165 of the Dodd-Frank Act requires, among other things, that the Fed’s Board of Governors establish enhanced prudential standards for bank holding companies with consolidated assets of greater than $50 billion.  Although Section 165 nowhere mentions broker-dealers or asset management firms, last month, the Fed issued a final rule under Section 165 that could have a profound impact on the SEC-regulated subsidiaries of large foreign banks, one that would ripple through our capital markets as a whole.[6]

The Fed’s new rule will require foreign banking organizations with U.S. non-branch assets of $50 billion or more to establish a U.S. intermediate holding company over their U.S. subsidiaries.  These new holding companies will be subject to the same risk-based and leverage capital standards that the Fed applies to U.S. bank holding companies. As such, they will be subject to the Fed’s rules requiring regular capital plans and stress tests and will be required to establish a U.S. risk committee and employ a U.S. chief risk officer.  The new holding companies will be required to meet enhanced liquidity risk-management standards, conduct liquidity stress tests, and hold a buffer of highly liquid assets based on projected funding needs during a 30-day stress event.  They will, in short, be subject to the same Fed requirements as domestic banks with assets totaling $50 billion or more.

Now, I should take a moment to make clear that I support stringent capital requirements for all financial institutions that pose risks to our financial system.  Furthermore, it’s certainly not unreasonable in theory to subject foreign bank holding companies operating in the U.S. to the same requirements as domestic ones.  That’s not, however, all that the Fed’s new rules do.  They also require a foreign entity operating non-bank subsidiaries in the U.S. to superimpose an entirely new organizational structure for those non-bank U.S. holdings – one that artificially brings those holdings under the jurisdiction of the Fed and subjects them to regulations crafted to ensure the safety and stability of banking entities.

There’s an old joke about a physicist, a chemist, and an economist finding themselves stranded on a desert island with a supply of canned food.  The physicist says, “Let’s drop the cans from the top of that tree over there – it will hit the rocks below and break open.”  The chemist counters, “No, that would spill too much of the food.  Let’s build a fire and place them in the flames until they burst open.”  As the physicist and chemist argue, the economist silently scratches out equations in the sand.  Finally, he looks up and exclaims, “I’ve got it! First, assume we have a can opener…”  Apologies to all of my economist friends!

The Fed’s new rules come a little too close to turning this joke into reality.  Broker-dealers, of course, are regulated by the SEC, as they have been for almost eight decades now.  The Fed, on the other hand, regulates banks, or more specifically, bank holding companies.  The Fed’s Section 165 rulemaking, in essence, forces a foreign bank organization to impose a bank holding company into existence over its non-bank holdings, thus subjecting those entities’ broker-dealer subsidiaries to regulation by the Fed.  In essence, by requiring a foreign bank to create a wholly new structure for its U.S. operations subject to new regulatory requirements that will have a direct impact on the liquidity available to those operations, including broker-dealers, the Fed in fact assumes a can into which the foreign bank’s U.S. operations must be packed.  Only then can the Fed employ its can opener of regulation to oversee those operations.

Among the other requirements to which these new intermediate holding companies will be subject is the Fed’s leverage ratio.  The Fed has proposed that the largest bank holding companies be subject to an additional 2% leverage buffer on top of the 3% mandated by Basel III.[7]  This will incentivize broker-dealers within bank holding companies to reduce the size of their balance sheets.  Specifically, it could induce broker-dealers to reduce the amount of seemingly highly leveraged but low risk and thin margin transactions in which they engage – most importantly, repo and stock loan activity.  In addition, Basel III contains a so-called net stable funding ratio, which, by favoring long term, “stable” assets, would further constrain the ability of broker-dealers to fund their day-to-day operations through the short-term wholesale funding markets.

The Fed has also proposed a new liquidity coverage ratio that would require a bank holding company to maintain a sufficient amount of high quality liquid assets that could immediately be converted into cash to meet liquidity needs in times of stress.  This could affect broker-dealer subsidiaries of large financial institutions organized as bank holding companies, in that the broker-dealers’ holdings would be taken into account when determining the parent holding company’s ratio.  The same reasoning applies to potential enhanced market risk standards under Basel 2.5 and Basel III, which could also affect the capital holdings of bank-affiliated broker-dealers.

Now, let’s be clear about one thing: whether or not you agree with these proposals and initiatives, their net effect will be a reduction in the amount of liquidity in the securities markets.  This, like the bailouts that led to this regulatory frenzy, is hardly something that Americans would vote for if they had the chance.  From the central banker’s perspective, however, this may be an acceptable cost to bring under its control the short-term wholesale funding markets I just referenced, which have long been a cause of concern for regulators.  

Bank regulators and their wide-eyed admirers have spoken at length about the risks of “shadow banking,” which they define broadly to include the types of “securities funding transactions,” such as repo and reverse repo, securities lending and borrowing, and securities margin lending, used by both banks and broker-dealers for short-term funding.[8]  The loaded term “shadow banking” isn’t exactly used as an honorific, and I find it concerning that so many bank regulators routinely use the term to describe the day-to-day transactions so crucial to ensuring the ongoing operations of our capital markets.

To me, this onslaught of bank regulator rulemaking impacting non-bank markets is the result of a central, albeit unannounced, pillar of Dodd-Frank: the institutionalization of “too big to fail.”  The continued focus on “going concern” capital for institutions like broker-dealers that should fail when they take on undue risk can mean only one thing – despite the lessons learned from the financial crisis, despite the rightful disgust the American people directed at the bailouts, the U.S. government is focused on propping up institutions instead of refining the processes by which their failures will be handled.  This betrays the tenets of Title II of Dodd-Frank and reflects the absurdity of that portion of the legislation.  Why, after the failure of Lehman, we aren’t focusing on bankruptcy code amendments and related regulatory refinements, as many experts have called for,[9] is beyond me.

To be clear, I respect the Fed’s concerns about capital requirements for bank affiliated non-bank financial institutions, notwithstanding my fears as to the steps the Fed might take to address those concerns.  Our financial institutions are interconnected as never before, increasing the importance of taking a holistic view of those institutions, subsidiaries and all.  In doing so, however, it is crucial that we bring to bear the specialized experience and expertise of the regulators with primary oversight responsibility over the constituent parts of those institutions.  In the case of broker-dealers, this means the Commission, with its nearly eight decades of experiences in this regulatory space.  Since taking the reins of the agency, Chair White has strived to return the SEC to the center of the policy debates taking place with respect to large, interconnected financial institutions, and I commend her for doing so.  For example, we’ve started the process of updating our broker-dealer capital rules, which I believe is particularly important for bank-affiliated broker-dealers.

It’s my hope that the bank regulators constructively participate in this dialogue as well.  The last thing anyone wants is the old Washington cliché of a “turf war.”  For one thing, we’d lose – the SEC will never have the resources of the banking agencies – after all, it’s hard to outspend agencies that can print their own money.  More to the point, however, we’d never want to “win” – not only are we busy enough as it is, with approximately sixty Dodd-Frank mandated rules yet to be completed along with the day-to-day, blocking-and-tackling work that’s so critical to the agency’s mission, but we recognize that the banking regulators are best situated to regulate banks.  When it comes to the broker-dealer subsidiaries of banks, however, we stand ready to work with the Fed and other banking regulators to ensure that any new rules applicable to those entities are enhancements to our existing regime, not duplicative, contradictory or counterproductive regulations inspired by a regulatory paradigm designed for wholly different entities.

Thank you all for your attention this afternoon.  I hope the conference is rewarding for all of you, and I’d be happy to take questions.


[1] See Daniel M. Gallagher, Commissioner, Sec. & Exch. Comm’n, “Ongoing Regulatory Reform in the Global Capital Markets,” March 5, 2012, available at http://www.sec.gov/News/Speech/Detail/Speech/1365171490004#.UxSSz_ldUdU.

[2] See Peter J. Wallison, “Congress should curb the power of the FSOC” (February 24, 2014), available at  http://thehill.com/blogs/congress-blog/economy-budget/198927-congress-should-curb-the-power-of-the-fsoc .

[3] Financial Stability Oversight Council, “Proposed Recommendations Regarding Money Market Mutual Fund Reform” (November 2012), available at http://www.treasury.gov/initiatives/fsoc/Documents/Proposed%20Recommendations%20Regarding%20Money%20Market%20Mutual%20Fund%20Reform%20-%20November%2013,%202012.pdf.

[4] U.S. Department of Treasury, Office of Financial Research, “Asset Management and Financial Stability,” (September 2013), available at http://www.treasury.gov/initiatives/ofr/research/Documents/OFR_AMFS_FINAL.pdf.

[5] See, e.g., William C. Dudley, President and Chief Executive Officer, Federal Reserve Bank of New York, “Fixing Wholesale Funding to Build a More Stable Financial System,” February 1, 2013, available at  http://www.newyorkfed.org/newsevents/speeches/2013/dud130201.html ; Daniel K. Tarullo, Governor, Board of Governors of the Federal Reserve System, “Shadow Banking and Systemic Risk Regulation,” November 22, 2013, available at http://www.federalreserve.gov/newsevents/speech/tarullo20131122a.htm.

[6] “Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organizations,” February 18, 2014, available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20140218a1.pdf.

[7] “Regulatory Capital Rules: Regulatory Capital, Enhanced Supplementary Leverage Ratio Standards for Certain Bank Holding Companies and their Subsidiary Insured Depository Institutions,” August 20, 2013, available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20130709a1.pdf.

[8] See, e.g., Tarullo, “Shadow Banking and Systemic Risk Regulation.”

[9] See, e.g., Thomas H. Jackson, Kenneth E. Scott, Kimberly Anne Summe, and John B. Taylor, “Resolution of Failed Financial Institutions: Orderly Liquidation Authority and a New Chapter 14, Studies by the Resolution Project at Stanford University’s Hoover Institution Working Group on Economic Policy” (April 25, 2011), available at  http://media.hoover.org/sites/default/files/documents/Resolution-Project-Booklet-4-11.pdf .

SEC CHARGES INVESTMENT BANKER WITH INSIDER TRADING FOR ALMOST $1 MILLION IN PROFITS

FROM:  SECURITIES AND EXCHANGE COMMISSION 
The Securities and Exchange Commission today announced an emergency action against a New York City-based investment banker charged with insider trading for nearly $1 million in illicit profits.

The SEC alleges that while working on Wall Street, Frank “Perk” Hixon Jr. regularly logged into the brokerage account of Destiny “Nicole” Robinson, the mother of his young child.  He executed trades based on confidential information he obtained on the job, sometimes within minutes of learning it.  Illegal trades also were made in his father’s brokerage account.  When his firm confronted him about the trading conducted in these accounts, Hixon Jr. pretended not to recognize the names of his father or his child’s mother.  However, text messages between Hixon Jr. and Robinson suggest he was generating the illegal proceeds in lieu of formal child support payments.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Hixon Jr.

“Hixon Jr. violated the trust of his employer and clients by abusing his special access to nonpublic market-moving information,” said David Woodcock, director of the SEC’s Fort Worth Regional Office.  “Hixon Jr. went to great lengths to hide his wrongdoing and even denied knowing his father or the mother of his child.”

A federal judge has granted the SEC’s request and issued an emergency order freezing Robinson’s brokerage account, which the SEC alleges contains the majority of proceeds from Hixon Jr.’s illegal trading with a balance of approximately $1.2 million.

According to the SEC’s complaint unsealed today in federal court in Austin, Texas, Hixon Jr. illegally tipped or traded in the securities of three public companies.  He traded ahead of several major announcements by his client Westway Group in 2011 and 2012.  He traded based on nonpublic information he learned about potential client Titanium Metals Corporation ahead of its merger announcement in November 2012.  And Hixon even illegally traded in the securities of his own firm Evercore Partners prior to its announcement of record earnings in January 2013.  Hixon Jr. generated illegal insider trading profits of at least $950,000.

According to the SEC’s complaint, when Hixon Jr.’s employer asked him in 2013 whether he knew anything about suspicious trading in accounts belonging to Destiny Robinson and his father Frank P. Hixon Sr., who lives in suburban Atlanta, Hixon Jr. denied recognizing either name.  When later confronted with information that he did in fact know these individuals, Hixon Jr. continued his false claims, saying he didn’t know Robinson as “Destiny” and asserting in a sworn declaration that when approached he didn’t recognize the name of the city where his father lived for more than 25 years.  Hixon Jr. was subsequently terminated by his employer.

The SEC’s complaint alleges that Hixon Jr. violated the antifraud provisions of the Securities Exchange Act of 1934.  In addition to the asset freeze, the complaint seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.  Hixon Sr. and Robinson have been named as relief defendants for the purposes of recovering the illegal trading profits held in their accounts.

The SEC’s investigation has been conducted by Tamara McCreary, Ty Martinez, and Jonathan Scott of the Fort Worth Regional Office.  The SEC's litigation will be led by Timothy Evans and David Reece.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, Federal Bureau of Investigation, and Financial Industry Regulatory Authority.

SEC COMMISSIONER STEIN'S COMMENTS AT "SEC SPEAKS"

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Remarks at the “SEC Speaks” Conference
 Commissioner Kara M. Stein
U.S. Securities and Exchange Commission
Washington, D.C.

Feb. 21, 2014

I am pleased to join you today as Commissioner for my first SEC Speaks.  Before I begin my remarks, I would like to remind you that the views I am expressing today are my own and do not necessarily reflect those of the Commission, my fellow Commissioners, or the staff of the Commission.

This summer will mark the 80th anniversary of the Securities and Exchange Commission, which is a testament not only to the mission of the Agency, but also to the dedication of the thousands of people who have worked for it over the decades.  Since joining the Commission, I’ve been impressed by the incredible amount of work that the SEC staff-members do each and every day.

In my office, I have copies of the original securities laws and a picture of the first Commission, with Chairman Joseph Kennedy and Commissioners Ferdinand Pecora and James Landis.  These men were extraordinary public figures.  Ferdinand Pecora led the investigation into the causes of the Great Depression, and used that knowledge to help shape the new Commission.  James Landis helped draft the Securities Act and was instrumental in developing the modern securities regulatory regime.  And Joe Kennedy, who was a leading investor, businessman, and statesman, worked as a powerful chairman driving the new agency.  That Commission was well-informed by the causes of the Great Depression.  And they acted boldly—even during a struggling economy—to help bring stability and fairness to the financial markets.

Those first Commissioners would likely be surprised to see how much the Commission has evolved over these past eight decades.  We’ve grown quite a bit.  We oversee whole industries that didn’t even exist back then.  And we also now have a little division that I think you might have heard of—the Division of Enforcement.

One of the greatest surprises for me when I joined the Commission was coming to grips with the vast scope of our enforcement efforts.  As many of you know, each week Commissioners are asked to review hundreds of pages of documents, and pass judgment on as many as two dozen cases covering any number of complex legal issues.

Chair White and Enforcement Director Ceresney have set a fantastic tone for the Commission’s enforcement efforts.  They have made it clear that the SEC will use its tools to vigorously protect the public interest and investors.    Under their guidance, the Commission is seeking admissions of culpability.  And we are now focusing more than ever before on firms’ internal controls.  That holds true whether at a trading desk, in an accountant’s office, or in the executive suite.

I am also strongly interested in seeking greater individual accountability for gatekeepers, including executives, compliance officers, accountants, and attorneys.  Just within the last few months, we’ve brought a case against a small auditor for entirely failed audits of shell public companies, a case against a large accounting firm for violating auditor independence rules, a case against a compliance officer of an investment adviser for egregious violations of custody and compliance rules, and a financial fraud case against the CFO of a large public company.  I applaud our Enforcement Staff for bringing these kinds of tough and important cases.

Gatekeepers fulfill a critical role in allowing participants to access the capital markets.  As the Commission is being tasked with overseeing more, with fewer resources, the focus on gatekeepers is both an efficient and effective approach to policing the securities marketplace.

This focus on gatekeepers will empower securities professionals, compliance officers, accountants, and lawyers to actively look for red flags, ask the tough questions, and demand answers.  Actions will be brought when professionals fail to fulfill their responsibilities.

I also think we should look at some of the other tools we have in our toolbox to see if they can enhance our ability to protect the public interest and investors.  For example, I think we should review our policies for waiving automatic disqualification provisions, sometimes called “bad actor” provisions.

Currently, there are over a half-dozen bad actor provisions.  If a firm violates the law or hits some other defined trigger, then it is precluded from obtaining certain privileges, engaging in some types of offerings, or even conducting a certain type of business.  These bad actor provisions exist to protect the public interest and investors, and so we should be very careful in granting waivers from them.  We should consider the initial purpose for the disqualification provision, and we should consider how that policy is impacted by a decision to waive it.

We must ensure that we have a fair, sound and consistent basis for granting or denying a waiver request.  Firms and investors both deserve to know what factors we, or our staff, will use to evaluate waiver requests, and we must be able to support our decisions to grant or deny waiver requests with documented policies and facts.

I am pleased to be working with my colleagues to ensure that we have clear waiver policies that I think will buttress our efforts to promote the public interest and protect investors.

As important as enforcement is, of course, that is not all that we do.  We also write rules.  Like the first Commission, we all come to our work informed by a financial crisis.  In fact, like Ferdinand Pecora, both Commissioner Piwowar and I came to the Commission, shaped by our time as Senate Banking aides.

Also like that first Commission, this Commission has received strong direction from Congress on how to help address the underlying causes of the crisis.  Following years of investigations and dozens of hearings detailing the causes of the crisis by the Senate Permanent Subcommittee on Investigations, the Senate Banking Committee, the House Financial Services Committee, the Senate Agriculture Committee, and the House Agriculture Committee, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act.

That ground-breaking law built upon the lessons from the collapse of AIG, and created a new regulatory regime for derivatives.  It built upon the lessons from the collapse of the housing and securitizations markets, and established new rules to make mortgages and securitizations safer.  And it built upon the explosive losses at many of the largest banks and placed new limits on banks’ risky trading.

These are only a few parts of the Act that were designed to make our financial system safer, more transparent, and more fair. The Dodd-Frank Act directed the Commission to write or modify over 90 rules, and authorized the Commission to write dozens more.  Over three years later, the Commission’s work to implement those rules is not complete.  We need to finalize, this year, our derivatives reforms, including the cross-border application of our rules and our business conduct rules.

We also need to finalize rules about executive compensation, including provisions requiring issuers to have policies in place to claw back compensation.  We should be empowering shareholders to take money back from executives who put their own personal gain ahead of the interests of shareholders and the firm.  And we should be working with the banking regulators to finalize a rule that would help ensure that our largest financial firms don’t have executive compensation structures that encourage risky and potentially disastrous behavior.

We also need to finally and firmly address the conflicts of interest in asset-backed securitizations and the provision of credit ratings.

We should move carefully but quickly to finish these rules.  And if a rule is rejected by a Court, we should dust ourselves off, make the rule better, and finish it.  We should not be intimidated into backing off our obligation to implement the law.  We should not be leaving any of our statutorily required rulemakings behind —even those that some of us may not like.

Our lessons from the financial crisis are not exclusively addressed by the Dodd-Frank Act.  We must also think proactively of ways to mitigate threats to our financial system.  During the depths of the financial crisis, the true fragility of our financial system was revealed as financial tidal waves washed over the global economy.  I was working in the Senate as the crisis unfolded, and I can assure you that I will forever remember those frightening times in 2008 and 2009.

Our government took extraordinary measures to save the world economy, pouring trillions of dollars into the markets and financial firms.  Many of us remember the Troubled Asset Relief Program, which provided billions of dollars in capital to banks.  But that was just one small part of the picture.

As financial institutions struggled for funding amidst the sharp pullback of the short term lending markets, the Federal Reserve eased the rules, and expanded the ability of firms to tap the discount window. It created several unprecedented programs out of thin air with technical-sounding names, such as the Term Auction Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility.

To help provide liquidity directly to borrowers and investors in key credit markets, the Federal Reserve also created the Commercial Paper Funding Facility, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Money Market Investor Funding Facility, and the Term Asset-Backed Securities Loan Facility.

Some of these programs worked, and others didn’t.  But collectively, these and other efforts helped stem the tide of the credit crisis.  I also note that most of these markets, and those who participate in them, are regulated by the Commission.

Now, several years removed, some seem determined to forget what happened, arguing that we should ignore the inter-relationships that nearly caused global economic collapse.  I cannot forget.  I will not ignore the relationships between banks, broker-dealers, funds, and investors.  Nor will I forget how those relationships nearly unwound our financial system.

For example, the short term funding market is a complex ecosystem in which investors, including money market funds, interact with broker-dealers, banks, and non-bank issuers.  Behavior by one sector in the market will have repercussions for the rest.  For example, if the demand provided by money market funds for short term paper dries up, even if there isn’t a so-called “run,” what happens?  Similarly, if lenders refuse to accept even high-quality, stable-value collateral, to support their short term loans, what happens?

We learned that supposedly well-capitalized firms could quickly fall victim to liquidity crises.  And we learned that highly leveraged, affiliated broker-dealers can threaten even some of the largest banks.

Since the crisis, regulators around the world have been working to improve capital, leverage, liquidity, and margin rules.  There is a reason why Congress and regulators have been working to tighten the definition of what constitutes “capital” in the years since the crisis.  There is a reason why our fellow regulators care deeply about the risks posed by securities lending and the tri-party repo markets.[1]  And there is a reason why the Financial Stability Oversight Council (FSOC) has been working with the Commission to address risks posed by money market funds.  Our government put trillions of dollars on the line to bail out, directly and indirectly, our entire financial system, and each of these areas played a key role in the crisis.

We, at the Commission, are working on rules to prevent runs on money market funds.  Those are valuable efforts, but they do not go far enough to address systemic risks.  Our regulations shape the role that money market funds play in providing short-term funding for issuers, particularly the largest financial firms.  We must consider whether regulations need to be updated. We should consider whether enhanced capital, leverage, liquidity, and margin rules would help mitigate risks at the firms, and in the markets, we regulate.

And we should also empower market participants to help prevent systemic risks. One way may be to improve disclosures regarding issuers’ reliance on short term funding.  Investors should be aware of a firm’s susceptibility to a liquidity crunch, and be able to demand higher interest rates or other concessions.   That is how the capital markets should work when these risks are understood.

Our efforts to avoid another financial crisis also should not be confined to simply attempting to prevent the last one.  Since the financial crisis, we have also seen new issues emerge in how stocks, options, futures, and increasingly other products, are traded.  In recent years, the plumbing of our markets has evolved dramatically.  Today, there are 16 registered securities exchanges, dozens of so-called “dark pools,” and hundreds of so-called “internalizers.”  Markets and traders are connected at near-light speeds.  Telephone lines have given way to fiber optic cables, microwave towers, and now, laser beams.[2]

When this system works well, futures, options, and equities trade nearly seamlessly around the world.  Yet when something goes wrong, the results can be severe for the businesses and investors who rely on our capital markets.

As we all know, on May 6, 2010, an investment adviser selling E-mini futures, on a day filled with fears about the European debt crisis, helped trigger collapses in futures, options and equities.  Futures, options, and equities are inextricably linked, and our oversight of them must be too.  While this task may be made somewhat more complex because it involves two primary regulators, it is not impossible.  We simply must work together to oversee these markets.  For example, rules for systems and testing should be coordinated, as should safety measures.

We also must have a comprehensive vision and understanding of the markets.  The Consolidated Audit Trail, or CAT, is desperately needed and long overdue.  But we should not stop with what we have proposed already.  To be most useful, the CAT should be comprehensive, including data from all of the inter-related markets, not just those principally overseen by the Commission.

Critical market infrastructure should be both reliable and resilient.  It is not good enough to say that the system is operational 99 percent of the time.  It also must not be catastrophic if something unexpected or unknown occurs.  Traders, exchanges, dark pools, clearing firms and others need to anticipate, and plan for, the unexpected.

All market participants need to have the appropriate systems and controls in place to ensure that they don’t trigger market failures.  We, as a Commission, need to be working on improving expectations and standards for those systems and controls.

Our Enforcement staff has been doing great work in bringing some of these hyper-technical, often difficult cases against traders and execution venues.  These types of cases help send strong messages that good systems and good people are vital, not only to the health of one market participant, but to all of them.

Efforts to address all of these risks, and prevent the next financial crisis, should not fall victim to agency turf wars.  The FSOC was created to help break down some of the silos and end some of the jurisdictional divides that exacerbated the last crisis.  The Commission needs to be a helpful contributor to the FSOC.  As a Commissioner, my responsibility is to the American public, to investors, and to the businesses who rely on our capital markets every day.  While I work at the SEC, I work for the American people.  In that regard, I have the same goals as our fellow regulators.

We should embrace our fellow regulators’ efforts and work to improve them.  We do not lose power as an agency by working with other regulators, we leverage it.  We gain knowledge and expertise in new areas.  And other regulators gain knowledge and expertise by working collaboratively with us.  If we are to be successful in protecting American families and businesses from the damage of another financial crisis, we must work together.  And we must be bold.

Eighty years from now, I hope history will show that our Commission lived up to the high standard set by our very first Commission.  I hope history will show that we had the expertise and the courage to think boldly, and act carefully, to reduce risks in our financial system, promote the public interest, facilitate capital formation, and protect investors.

We have come a long way since 1934, and we have a long way to go.  I know those of us on stage today will be working hard to keep us moving, and ahead of the curve.  I hope you will help us.

[1] See, e.g., Adam Copeland, Antoine Martin, and Michael Walker, Fed. Reserve Bank of N.Y., The Tri-Party Repo Market before 2010 Reforms, (Staff Rep. No. 477, 2010).

[2] Scott Patterson, Race to Zero: Traders With Need for Speed Turn to Laser Beams, Wall St. J., Feb. 12, 2014.