When the SEC swore in Mary Jo White as chair in April, it was clear there was a new sheriff in town. White is a former U.S. attorney for the Southern District of New York with decades of experience as a federal prosecutor and securities lawyer, so it really was no surprise when she said in her confirmation speech that her top priorities included strengthening the SEC’s enforcement program.
Now she’s laying down the law. In July, the SEC announced three new initiatives building on the Division of Enforcement’s ongoing efforts to concentrate resources on high-risk areas and employ cutting-edge technology. And in a September 26 speech called “Deploying the Full Enforcement Arsenal,” White focused on the consequences for companies when fraud is discovered.
Here’s the SEC’s plan of attack:
Engage data-mining bounty hunters: Focusing on accounting and disclosure fraud, the Financial Reporting and Audit Task Force will target areas it considers susceptible to fraud, including restatements and revisions, and analyze performance trends by industry. Further, they plan to detect fraud using technology-based tools such as the Accounting Quality Model, which is being designed to provide quantitative analytics that will help the SEC identify high-risk companies.
Corral virtual outlaws: The Microcap Fraud Task Force will develop and implement long-term strategies for detecting and combating abusive trading and fraudulent conduct in securities microcap companies. In its July announcement, the SEC stated that abuses in this area “frequently involve serial violators and organized syndicates that employ new media, especially websites and social media, to conduct fraudulent promotional campaigns and engage in manipulative trading strategies.” No doubt the SEC’s efforts will increase significantly once crowdfunding is permitted.
Collect ammunition and deploy: Coordinating with the Division of Enforcement and other SEC offices, the Center for Risk and Quantitative Analytics will support risk identification, risk assessment and data analysis activities. It will serve as an analytical hub that provides the SEC with information about characteristics and patterns indicative of possible fraud or illegal activities, along with guidance on strategically allocating resources in light of identified fraud risk.
With these initiatives, we expect that more companies will soon receive calls from the Division of Enforcement. And while a showdown with the SEC sounds bad, the aftermath could be worse. In her September 26 speech to the Council of Institutional Investors, White emphasized the need for strong penalties. While supporting legislation to increase limits on monetary penalties, she also plans to make the most of the Commission’s existing penalty authority, saying “we need to make sure our settlements have teeth.” Further, she stressed the relationship between financial penalties and personal accountability, stating that “Redress for wrongdoing must never be seen as a ‘cost of doing business’ made good by cutting a corporate check.”
Think that your company might be living in the Wild West but you’re not sure? Be prepared for the SEC to come at you with guns a-blazin’—or better yet, take action to keep the peace. Here are some tips to help prevent a potential showdown:
Beef up your Disclosure Committee process: Your leadership team knows a lot about the business, what’s on the horizon and where the risks are. However, discussions with the Disclosure Committee are too often about what’s in the draft 10K or 10Q filing, when sometimes the most important discussions are about what’s not in the SEC filing.
Be strategic with internal audit: Internal audit might help with SOX compliance or assist with the external audit process, but if that’s all they’re doing, it’s an opportunity lost. Internal audit can help assess areas of risk in your organization, develop and implement process reviews and, even if no fraud or other issues are detected, make recommendations for improving efficiency.
Get a grip on your D&O insurance: Director and officer insurance provides executives with some protection, but it’s not a bulletproof vest. All bets are off when you’re dealing with the Division of Enforcement. Talk with your corporate counsel and make sure you understand what’s at stake.
And if Sheriff White calls you out, just remember the words of John Wayne: “When you come slam bang up against trouble, it never looks half as bad if you face up to it.”
https://roseryan.com/wp-content/uploads/2017/09/LOGO_ROSERYAN-1.svg00Kelley Wallhttps://roseryan.com/wp-content/uploads/2017/09/LOGO_ROSERYAN-1.svgKelley Wall2013-10-03 07:30:352013-10-03 07:30:35There’s a new sheriff in town: will you be meeting the SEC at high noon?
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