May 11, 2009
The Securities and Exchange Commission’s newly-appointed Director of the Division of Enforcement, Robert Khuzami, outlined a plan of aggressive enforcement of securities laws during his testimony to the U.S. Senate Banking Committee on May 7, 2009. Coupled with recent increased activity by the Enforcement Division, including a significant jump in both ongoing investigations and filed cases, Mr. Khuzami’s testimony signaled the SEC’s heightened focus on reinvigorating its enforcement program. Mr. Khuzami summarized organizational and procedural changes designed to maximize the Division’s effectiveness and address the recommendations made by the Government Accountability Office (GAO) in its recent report to improve the utilization of resources in the Division of Enforcement.
Changes to Division of Enforcement
Saying that there was a need to "restore investor confidence and send a strong message to would-be violators that the SEC is on the beat," Mr. Khuzami outlined both procedural and structural changes that are being implemented and that are under consideration to enhance the Division’s enforcement capabilities.
Mr. Khuzami reiterated the changes that Chairman Mary Schapiro instituted shortly after being confirmed, including abolishing the corporate "penalty pilot" program and streamlining the approval of formal orders of investigation. See our prior client alert issued February 6, 2009 for a discussion of these changes.
Mr. Khuzami then discussed ways in which he proposes to reallocate resources within the Enforcement Division to improve efficiency, including:
Mr. Khuzami next outlined organizational changes that he is considering, building on feedback from the staff, with a focus on making the Enforcement Division more "strategic, swift, smart and successful," including:
Chairman Schapiro’s changes and Mr. Khuzami’s proposals anticipated and addressed the recommendations contained in the GAO Report issued May 6, 2009: Securities and Exchange Commission: Greater Attention Needed to Enhance Communication and Utilization of Resources in the Division of Enforcement.
Increased Enforcement Activity
Mr. Khuzami pointed to certain statistics to demonstrate a significant up-tick in enforcement activity in the first few months of the new administration, including:
Mr. Khuzami also pointed to a series of cases filed by the SEC this year, including:
Although not mentioned by Mr. Khuzami, but worthy of note, the SEC last week filed the first case alleging insider trading in credit default swaps. These cases are also notable because, for the most part, they have been filed without settlements, potentially indicating a greater willingness of the staff to litigate cases.
The New Era of Heightened Enforcement
Mr. Khuzami clearly promises increased enforcement activity, noting the need to send an "outsized message of deterrence." The measurable increases in such activity already indicates he will be able to make good on his word. Combined with the likely additional resources from Congress, enforcement scrutiny will continue to rise sharply.
Notably, in a potential hint of things to come, Mr. Khuzami responded to a question from the Committee by harkening back to a prior initiative by one of his predecessors. In 2003, then Enforcement Division Director Stephen Cutler challenged all financial services firms to undertake a comprehensive review of conflicts of interest in their businesses to identify, remediate and report them to the Enforcement Division. Speaking as a former general counsel of a financial services firm that performed such a review, Mr. Khuzami commended the idea for elevating standards in the industry through self-assessment, rather than through enforcement actions. Mr. Khuzami cited this as an example of an agency success not adequately measured by the current exclusive focus on the number of cases filed. Look for Mr. Khuzami to find innovative incentives to shape the industry beyond the traditional enforcement action.
In this era of heightened enforcement, it is more important than ever that financial services firms and public companies make sure their legal and compliance infrastructure is identifying and resolving potential issues of concern to regulators and positioning the company to respond effectively to future regulatory inquiries.
Gibson Dunn is one of the nation’s leading law firms in representing companies and individuals who face enforcement investigations by the Securities and Exchange Commission, the Commodities Futures Trading Commission, the New York and other state attorneys general and regulators, the Public Company Accounting Oversight Board (PCAOB), the Financial Industry Regulatory Authority (FINRA), the New York Stock Exchange, and federal and state banking regulators.
Our Securities Enforcement Group offers broad and deep experience. Our partners include the former Director of the SEC’s prestigious New York Regional Office, a former Associate Director of the SEC’s Division of Enforcement, the former Director of the FINRA Department of Enforcement, the former general counsel of the PCAOB, the former United States Attorney for the Central District of California, and former Assistant United States Attorneys from federal prosecutor’s offices in New York, Los Angeles, and Washington, D.C.
Securities enforcement investigations are often one aspect of a problem facing our clients. Our securities enforcement lawyers work closely with lawyers from our Securities Regulation and Corporate Governance Group to provide expertise regarding parallel corporate governance, securities regulation, and securities trading issues, our Securities Litigation Practice Group, and our White Collar Defense Group.
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