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Thursday,
June 06, 2019 / 08:15PM /
By US SEC Chairman Jay Clayton / Header Image
Credit: Philly.com
Being keynote remarks at the Mid-Atlantic Regional Conference, SEC
Chairman Jay Clayton, Washington D.C., June 4, 2019
Thank
you, Jeff [Boujoukos], for that kind introduction. I am pleased to have the
opportunity to speak with the SEC’s federal and state partners in my home town
of Philadelphia. Thank you to the Philadelphia Regional Office for organizing
this terrific event.[1]
Before
I start, let me remind you that the views I express today are my own and do not
necessarily reflect the views of my fellow Commissioners or the SEC staff.
Today I
will focus on recent legal decisions impacting our enforcement efforts, and how
the thoughtful and responsible use and collection of data from market
participants can strengthen our enforcement and examination functions to
benefit Main Street investors.
I
would also like to highlight the SEC’s important relationships with you—our
state and federal partners. I have previously identified regulatory
coordination as a core principle to guide the work of the SEC.[2] Close
regulatory coordination is particularly important to protect our Main Street
investors. Many of you are the first calls Main Street investors will make when
they have been harmed by unscrupulous actors. And you, our state and federal
partners, may be one of the first calls we at the SEC make when identifying
areas of risk for retail investors.
I am
pleased to mention just a few of the successes resulting from close
coordination between the Philadelphia Regional Office (PLRO) and our partners
here today.
I hope
we can continue to work with our state partners on investor education and
outreach. More specifically, I hope we can work with our state partners in
helping our nation’s teachers, veterans, and active duty military make informed
financial decisions and keep their investments safe. Yesterday, the SEC
announced the formation of two new initiatives aimed at protecting teachers,
active duty military, and veterans.[6] I
have spoken in depth with Michael Pieciak, President of the North American
Securities Administrators Association (NASAA), about coordinating our efforts
in these areas to maximum effect. Closer to home, I note that our Philadelphia
Regional Office has a robust outreach program that has focused on our service
members. I am certain they would be pleased to partner with local regulators on
this new initiative.
Now
let me turn to recent legal developments affecting the SEC.
In the
past few years, there have been significant new court decisions relating to the
SEC’s work. As we assess the long-term impact of these decisions, our Division
of Enforcement will continue to diligently pursue cases to advance our mission
and ensure that we are focused on the interests of our long-term Main Street
investors.[7]
Protecting
retail investors is a multifaceted effort and includes putting money back in
their pockets when they are harmed by violations of the federal securities
laws. In the 2017 and 2018 fiscal years, the SEC returned over $1.8 billion to
harmed investors. We remain committed to this important part of our work.
The
recent Supreme Court decision in Kokesh
v. SEC, however, has impacted our ability to return funds
fraudulently taken from our Main Street investors.[8] In Kokesh, the SEC brought an
enforcement action in late 2009, based on a fraud that began in the 1990s and
continued until 2009. The defendant argued that the Commission was time-barred
from seeking disgorgement, because the fraud began outside the five-year period
under 18 U.S.C. § 2462. The Supreme Court held that our use of the disgorgement
remedy was penal in nature (rather than equitable) and as such was subject to
the five-year limitations period applicable to penalties.
The
impact of the Kokesh decision
was immediate. In that particular case, only about $5 million out of the $35
million sought in disgorgement fell within the five-year period.[9] The
Division of Enforcement estimates that, for Fiscal Year (FY) 2018, the Court’s
ruling in Kokesh may
cause the Commission to forgo up to approximately $900 million in
disgorgement in filed cases, of which a substantial amount potentially could
have been returned to retail investors.
Of
course, statutes of limitation serve many important functions in our legal
system, and penalties should have limitations periods that are reasonable and
reflect practical realities. Civil and criminal authorities should do
everything in their power to bring appropriate actions swiftly.
But I
am troubled by the substantial amount of losses that we may not be able to
recover for retail investors as a result of Ponzi schemes and similar long-running,
well-concealed frauds that are perpetrated by smooth talking “investment
professionals.” I have testified to Congress about the impact of Kokesh on Main Street
investors and welcome the opportunity to work with Congress to address this gap
in investor protection.[10]
Lucia
v. SEC was a constitutional challenge to the
Administrative Law Judges (ALJs) in our administrative proceedings.[11] In
short, the Supreme Court held that the SEC’s ALJs had not been appointed in a
manner consistent with the Constitution. After Lucia, approximately 200 administrative
proceedings had to be reassigned to new ALJs. Many of those proceedings have
now been substantially resolved, but the remaining reassigned administrative
proceedings may require substantial litigation resources going forward.[12]Thanks
to the skilled work and dedication of our Enforcement staff, and the Office of
General Counsel, this was a speed bump, not a long-term issue.
One
additional thought on administrative proceedings. The SEC has the flexibility
to bring many of its contested actions in district court or through
administrative proceedings. As Chairman, I am committed to using the
administrative process only for the cases that are most appropriate for that
forum.
Last
month, the D.C. Circuit issued an opinion involving misstatement liability for
investment advisers. In The
Robare Group, Ltd. et al. v. SEC,[13] the
D.C. Circuit held that an investment adviser does not “willfully” omit material
facts under Section 207 of the Investment Advisers Act if the adviser acted
negligently. It is important to note that the Robare decision did not disturb the
decades-old standard that has been adopted by most courts of appeals—that a
willful violation of the securities laws means that the person intentionally
committed the act that constitutes the violation, with no requirement that the
person also be aware that they are violating the law. Nevertheless, the Robare decision requires
us to carefully consider the appropriate standard for future Investment
Advisers Act cases in light of the specific language found in Section 207 of
the Act.
I want
to end this discussion on a high note—the SEC’s victory in Lorenzo v. SEC.[14] In Lorenzo, the Court affirmed
the SEC’s long-held position that a person could be liable under the anti-fraud
provisions for the knowing dissemination of false or misleading statements,
even if he or she did not make the statements. Lorenzo reinforces the SEC’s continued
ability to bring charges against those involved in the dissemination of
misstatements. This decision will help us to ensure that those who engage in
deceptive conduct—particularly in private placements and schemes involving
offshore actors—are held appropriately liable.
Despite
some of the challenges I mentioned earlier, the Division of Enforcement—headed
by Co-Directors Stephanie Avakian and Steve Peikin—have continued to achieve
results. As described in the Enforcement Division’s FY 2018 report, Enforcement
measures its success by asking themselves tough questions:
This
new legal landscape may frame some of our decision-making in pursuing new
enforcement actions, but under Stephanie and Steve’s leadership, the answers to
each of these questions will continue to be a resounding “Yes.”
In
addition to certain of the legal constraints I have discussed, the SEC faces
operational constraints as well. For example, we were, until very recently,
subject to an agency-wide hiring freeze. And this year’s government shutdown
significantly affected our ability to continue non-emergency examinations and
enforcement actions, among other areas.
These
challenges, which we have faced head on with our eyes wide open, make our data
analytics work more important than ever. Data analytics can help us use our
existing resources more efficiently and effectively. I would like to highlight
some specific issues around data collection and analytics that support our
efforts to protect our markets and our Main Street investors.
Before
I begin, however, I want to emphasize that at the SEC, our people—our human
capital—are our most important resource. To be effective, data analytics needs
smart people to support and advance the work of our experienced and dedicated
staff.
As a
threshold matter, it is important to note that data collection is not an end to
itself, and the SEC must not be in the business of ill-defined and indefinite
data warehousing. To remain a trusted, respected, and effective regulator, we
must be mindful of the volume of data we collect, and its sensitive nature, and
be principled and responsible users of data.
The
Office of Compliance Inspections and Examinations (OCIE), led by Pete Driscoll,
conducts the National Examination Program—one of many examples in which the SEC
has focused on doing more with our available resources.
OCIE
completed over 3,150 examinations in FY 2018, a 10 percent increase over FY
2017.[16] The
size of the securities industry precludes a comprehensive examination of each
registrant by SEC examination staff each and every year. OCIE has made it a
priority to channel its limited resources by implementing a risk-based strategy
across the entire examination program.
Data
analytics is an increasingly important part of OCIE’s risk-based program, and
OCIE has developed proprietary tools for analyzing data in support of the
program:
The
Division of Enforcement uses a number of tools to identify suspicious trading
and abuses perpetrated on retail investors by financial professionals. In one
recent case, we charged an investment banker with misusing his access to
confidential information. This is a good example of the SEC’s use of trading
pattern recognition (trading in front of deals advised by a single investment
bank) to uncover a scheme.[17]
This
year, we also charged nine defendants—including a Ukrainian hacker—for their
alleged roles in a scheme to hack into the SEC’s EDGAR system and extract
nonpublic information for use in illegal trading. This case required careful
analysis of trading in the window between when the material nonpublic
information was extracted and when it was disseminated to the public.[18]
SEC
staff also trace digital asset transactions on the blockchain. This tracing has
been critical to several actions, including two cases in which the Commission
obtained preliminary injunctions to stop alleged frauds.[19]
Another
example of the Enforcement’s use of data analytics is the establishment of the
Retail Strategy Task Force (Task Force).[20] The
Task Force, headed by Charu Chandrasekhar who is here with us today, has two
primary objectives: (1) to develop data-driven, analytical strategies for
identifying practices in the securities markets that harm retail investors and
generating enforcement matters in these areas; and (2) to collaborate within
and beyond the SEC on retail investor advocacy and outreach. Although it has
been in operation for less than two years, the Task Force has already undertaken
a number of lead-generation initiatives built on the use of data analytics.
A
final example of Enforcement’s use of data analytics is the ATLAS initiative,
developed in the Philadelphia Regional Office by OCIE working with the Division
of Enforcement. ATLAS is an example of how the Commission’s employees are
collaborating to develop efficient and effective tools to identify misconduct
in our markets. ATLAS allows our staff to harness multiple streams of data,
including blue sheets, pricing, and public announcements. Typical use cases of
ATLAS include:
The
ATLAS team recently used advanced data analysis technology to identify firms
that failed in their obligation to submit accurate blue sheet data to the SEC.
ATLAS-generated leads led to the identification of over 80 million erroneous
reports by three firms resulting in civil enforcement actions assessing over $6
million in penalties. ATLAS has also generated many other promising leads using
sophisticated artificial intelligence software.
These
are just a few examples of how the SEC is successfully leveraging data
analytics. But, as I mentioned earlier, it is very important to recognize the
great responsibility we have with respect to the data entrusted to us by our
registrants and the public. I would like to illustrate my approach to this
issue by describing a few of our recent challenges.
One
ongoing data analytics project highlights the complexities of handling
sensitive data. When completed by the self-regulatory organizations (SROs), the
Consolidated Audit Trail (CAT) will provide a single, comprehensive database
enabling regulators to more efficiently and thoroughly track all trading
activity in equities and options throughout the U.S. markets. However, given
the nature of the data stored in the CAT, there have been substantial, and
serious, concerns about the protection of investors’ personally identifiable
information (PII). In order to reduce the PII footprint in the CAT, we support
eliminating the requirement to maintain social security numbers in the CAT
while still allowing regulators to track the activity of a single individual
trading in multiple markets across multiple broker-dealers. We continue to
monitor the SROs’ progress in this area. These are important issues. For that reason,
I am pleased that Manisha Kimmel has recently joined the SEC to coordinate the
SEC’s oversight of the SROs’ creation and implementation of the CAT, including
with respect to the issues around PII and cybersecurity.[21]
We are
also working to strengthen security safeguards on our systems. A few months
after my arrival at the Commission, I learned about an intrusion into the SEC’s
EDGAR system that occurred in 2016. As a result of this intrusion, we initiated
a number of different work streams to look at, among other things, the areas
where we could make enhancements. We have made progress to address these issues
but work remains, and, to be sure, we are faced with the reality that no system
can be 100 percent safe from a cyber intrusion.[22] We
are fortunate, though, to be aided in our efforts by the addition of two key
officials. We now have a Chief Risk Officer who helps coordinate our risk
management efforts across the agency.[23] In
addition, I have added a Senior Advisor for Cybersecurity Policy to my
staff. [24]
We
hope that our state and federal partners can benefit from our experiences in
particular when thinking about your own data security. Every agency in this
room is undoubtedly a target of cyber attacks. We must all devote substantial
resources and attention to cybersecurity, including the protection of PII.
One
area in which we can collaborate with you on data security is when we share
with you, our state and federal partners, nonpublic information that we have
collected.[25] For
example, as part of any data sharing arrangement, we should ask:
We
look forward to working with you on these important data security issues.
Thank
you all for coming here today and for your collaborative work on behalf of our
markets and Main Street investors.
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