The following is an edited transcript of a speech delivered by Securities and Exchange Commission Chairman Mary Jo White on Sept. 26 at the national fall conference of the Council of Institutional Investors in Chicago.
Until recently, the SEC — like most other federal agencies and regulators with civil enforcement powers — settled virtually all of its cases on a “no admit, no deny” basis. Generally, a party would pay a hefty penalty and agree to an injunction against future misconduct but neither admit nor deny the wrongdoing asserted by the SEC in a court complaint or set forth as findings in an order instituting administrative proceedings.
In most cases, that protocol makes very good sense. It makes sense because the SEC can get relief within the range of what we could reasonably expect to achieve after winning at trial. By settling, the agency is able to eliminate all litigation risk, resolve the case, return money to victims more quickly and preserve our enforcement resources to redeploy to do other investigations — ordinarily, a significant win-win. But sometimes more may be required for a resolution to be — and to be viewed as — a sufficient punishment and strong deterrent message.
In 2012, the SEC changed the “no admit, no deny” language as it applied to settlements with parties who have pleaded guilty in a related criminal action. In these cases, we now explicitly reference these admissions in the SEC settlement. It was a first step toward greater accountability, and a good one.
But when I started at the SEC, I re-examined our approach and concluded that there are certain other cases — not involving any parallel criminal case — where there is a special need for public accountability and acceptance of responsibility.
As you might expect, much of my thinking on this issue was shaped by the time I spent in the criminal arena, where courts cannot accept a guilty plea without the defendant first admitting to the unlawful conduct. Anyone who has witnessed a guilty plea understands the power of such admissions — it creates an unambiguous record of the conduct and demonstrates unequivocally the defendant's responsibility for his or her acts.
But what about resolutions that do not require a guilty plea?
In 1994, when I was a U.S. attorney, I entered into the first-ever deferred-prosecution agreement with a company — a tool the Department of Justice frequently uses today. Essentially, a DPA is an agreement that the government will file a criminal charge but defer its prosecution for a period of time during which the party must demonstrate good behavior and satisfy the other terms of the agreement. These terms can include very significant payments of money, enhanced compliance requirements and sometimes an outside monitor.
PUBLIC ADMISSION
Back in 1994, there was no template for those agreements. Nothing required an admission or confession of wrongdoing. But I decided in that particular case that a public admission of wrongdoing was required for the resolution to have sufficient teeth and public accountability. So considering this history, it should not be surprising that I would follow that same approach in my new role at the SEC.
Since laying out this new approach, the most frequent question we get is about the types of cases where admissions might be appropriate. Candidates potentially requiring admissions include:
• Cases where a large number of investors have been harmed or the conduct was otherwise egregious.
• Cases where the conduct posed a significant risk to the market or investors.
• Cases where admissions would aid investors deciding whether to deal with a particular party in the future.
• Cases where reciting unambiguous facts would send an important message to the market about a particular case.
To reiterate, “no admit, no deny” settlements are a very important tool in our enforcement arsenal that we will continue to use when we believe it is in public interest to do so. In other cases, we will be requiring admissions. These decisions are for us to make within our discretion, not decisions for a court to make.
Another core principle of any strong enforcement program is to pursue responsible individuals wherever possible. That is something our enforcement division has always done and will continue to do. Companies, after all, act through their people. And when we can identify those people, settling only with the company may not be sufficient. Redress for wrongdoing must never be seen as “a cost of doing business” made good by cutting a corporate check.WRONGDOERS RISK IT ALL
Individuals tempted to commit wrongdoing must understand that they risk it all if they do not play by the rules. When people fear for their own reputations, careers or pocketbooks, they tend to stay in line.
Of course, there will be cases in which it is not possible to charge an individual. But I have made it clear that the staff should look hard to see whether a case against individuals can be brought. I want to be sure we are looking first at the individual conduct and working out to the entity, rather than starting with the entity as a whole and working in. It is a subtle shift but one that could bring more individuals into enforcement cases.
When we do bring charges against individuals, we also need to consider all the possible remedies to prevent future wrongs. One of the most potent tools the SEC has is a court order imposing a bar on an individual — a bar from, for example, working in the securities industry or serving on the board of a public company. Such an order not only punishes past actions but also can reduce the likelihood that the defendant can defraud and victimize the public again.
Another principle of a strong SEC enforcement program is aggressive monitoring and covering the whole market — and the “whole market” for the SEC is broad and diverse. We, of course, have limited resources and need more to do a more effective job policing our markets and protecting investors. But we need to have a presence everywhere and be perceived to be everywhere bringing enforcement actions against violators in every market participant category and in every market strata.AREAS OF FOCUS
To just name a few areas:
• We need to continue to direct our attention to protecting investors from misconduct by investment advisers at hedge funds, private- equity funds and mutual funds.
• We need to continue to focus on financial statement and accounting fraud.
• We need to continue bringing insider trading cases, where over the last four years, we have filed an unprecedented number of actions.
• And we need to remain focused on fraud in connection with microcap securities, where abuses have unfortunately increased with the use of social media.
The SEC also must be prepared to bring actions in the new markets and regulatory regimes that follow from the new rules we implement mandated by the Dodd-Frank and [Jumpstart Our Business Startups] Acts.
This broad focus demands that we use all available means to detect and pursue violations. So we will be taking advantage of tips from whistle-blowers, using quantitative data available to us and conducting sweeps and other means of uncovering misconduct. We also will be closely coordinating our enforcement teams and our examination teams, both to ensure that exams are properly focused and that when misconduct is uncovered, it is referred for possible enforcement action.
Finally, we must continue to adapt to the complex, diverse and high-speed marketplace in which we operate.
Already, we have been bringing significant actions in these areas, including cases against Nasdaq, a dark-pool operator, the New York Stock Exchange and the [Chicago Board Options Exchange].
Expect to see more actions relating to sophisticated trading strategies, dark pools and other trading platforms in the coming year.WIN AT TRIAL
Finally, a strong enforcement regime is only effective if we have the ability to back it up in court.
So we need to maintain and enhance our ability to win at trial. For us to be a truly potent regulatory force, we need to remain constantly focused on trial readiness.
Indeed, because of our increased demands for admissions, we recognize that we may see more financial firms that say: “We'll see you in court.” But that will not deter us. The SEC has a well-established record of winning when we go to trial — our recent win in the [Fabrice] Tourre case is just the latest example. We must continue to sustain this successful record and ensure that we have sufficient resources available to litigate cases.
Significant and consistent trial wins also give us the credibility we need to achieve strong and meaningful settlements in every area that we will be pursuing in the coming years.
Going forward, I know you will be watching to see what we produce, as you should. A strong enforcement program provides greater protection for all investors participating in our markets. We should be judged by the quality of the cases we bring, by the aggressive and innovative techniques we use to pursue wrongdoers, by the tough sanctions and meaningful remedies we impose, and, where appropriate, by the acknowledgements of wrongdoing that we require.
Throughout my tenure as SEC chair, I will continuously look for ways to make our enforcement program stronger.
The more successful we are at being — and being perceived as — the tough cop that everyone rightfully expects, the more confidence in the markets investors will have, the more level the playing field will be and the more wrongdoing that will be deterred.
