PrintThe future direction of SEC enforcement was described in broad terms by Robert Khuzami, the new Director of the SEC’s Division of Enforcement, in a speech to the New York City Bar earlier this month. Khuzami characterized his short tenure at the commission as a time of rapid change, driven in large part by the repercussions and criticisms resulting from the Madoff scandal. The speech laid out new guiding principles for the Division, including a focus on strategic cases involving major breaches or the potential to deter violations, swift SEC action after a violation, allocation of Division resources to maximize their impact, and increased litigation success based on building stronger cases.
Khuzami announced several specific initiatives related to those principles.
Structural Changes
The proposed changes are responsive to the criticisms raised in the GAO Report on the Enforcement Division, which was delivered this past March and reviewed in a Senate hearing in May. During the hearing, Richard Hillman, the responsible GAO manager, discussed a number of shortfalls in the Division and a series of recommended changes, which were agreed to by Director Khuzami (who also testified) and are now closely paralleled in the changes he is adopting for the Division. In particular, the Division will create five specialized units, each having the expertise to enforce a particularly complex area of securities law, with the goal of becoming more efficient and effective in selecting the tips to be investigated and in following up quickly where violations are suspected. Of particular interest to the hedge fund community, an Asset Management Unit will focus on hedge funds, investment advisors, investment companies, and private equity funds. Disclosure, valuation, portfolio performance, due diligence and diversification, transactions with affiliates, misappropriation, and conflicts of interest were identified as expected areas of concern.
An Office of Market Intelligence will be created to support the specialized units by collecting, analyzing, risk-weighting, triaging, referring and monitoring progress on tips, complaints and referrals. The unit will apply internally-developed risk criteria and priorities, possibly reflecting a movement toward a risk-based examination model, as was championed by SEC Chairman Mary Schapiro when she led the NASD/FINRA.
Branch chiefs will be redeployed to conduct investigations in order to increase investigative resources and eliminate duplicative efforts, unnecessary internal reviews and delays in decision-making.
Given the resources being added to investigations and the increase in the Division’s willingness to go to trial, plans call for adding staff to the Trial Unit. The Division also plans to hire a Chief Operating Officer to manage IT, internal projects, and workflow improvements, along with added support and technical personnel to free up the front-line lawyers who are now responsible and provide them with additional tools for doing their jobs.
Realigned Decision-Making
The Director struck a tough note on enforcement while discussing shits in decision-making authority for a variety of actions. The net effect appears to be to push authority to proceed lower into the organization while restricting decisions that could slow the progress of investigations.
First, the Commission approved delegation of authority to issue formal orders of investigation, including subpoena power, to Mr Khuzami, who in turn will delegate the authority to senior officers throughout the Division. As a result, when investigatees decline to produce documents or witnesses voluntarily, or are seen as dilatory in their production, investigators will be able to put a “subpoena on [their] desk the next morning.”
Second, a range of senior officers will be given power to approve routine case decisions, a power previously held by the Deputy Director. Conversely, the Director’s approval will be required for all tolling agreements, which he sees as having become too common. Memoranda to the Commission recommending enforcement actions will be shorter, subject to fewer reviews, and require quicker turn-around.
Third, the Division is pursuing four initiatives to incentivize cooperation by individuals, including adoption of Seaboard-like standards for evaluating individual cooperation, creation of expedited procedures for submitting immunity requests to the DOJ, providing early oral assurances to witnesses where there is no intent to charge them, and the use deferred prosecution agreements. These tools will only be used to reward extraordinary cooperation, not routine or expected actions.
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