Yesterday morning SEC Chair Mary Jo White delivered the keynote address at Northwestern Law’s 41st Annual Securities Regulation Institute. Her speech, entitled “The SEC in 2014“, touches on some of the Commission’s recent undertakings and previews certain initiatives on the 2014 agenda.
Below is an excerpt edited to accentuate major points. I’ve omitted some of the footnotes and added some references and emphasis of my own (you can read the text of White’s speech in its entirety here):
The SEC in 2014
… I thought I would speak this morning about some of the transformative changes at the SEC in 2014 and, while doing that, also preview a few of the specific rulemakings and other initiatives that I expect to be on our 2014 agenda.
Evolving with Market Technology …
Our Quantitative Analytics Unit in our National Exam Program has, for example, developed a revolutionary new instrument called “NEAT,” which stands for “National Exam Analytics Tool.”
With NEAT, our examiners are able to access and systematically analyze massive amounts of trading data from firms in a fraction of the time it has taken in years past.
In 2014, our examiners will be using the NEAT analytics to identify signs of not only possible insider trading, but also front running, window dressing, improper allocations of investment opportunities, and other kinds of misconduct.
This past year, we also brought on-line another transformative tool that enables us to collect and sift through massive amounts of trading data across markets instantaneously, an exercise that once took the staff weeks or months. We call this technology MIDAS – the Market Information Data Analytics System.
Every day, MIDAS collects one billion records of trading data, time-stamped to the microsecond. … At the SEC of 2014, we are aggregating this data and presenting it on our website along with a wide range of analyses. …
… We are also focused on ensuring that the technology used by exchanges and other market participants is deployed and used responsibly in a way that reduces the risk of market disruptions that can harm investors and undermine confidence in the integrity of our markets. …
Evolving with New Financial Products
It is not just technology that has changed over the life of the agency. So too have the financial products that investors, businesses, and other market participants use.
The Dodd-Frank Act directed the SEC – for security-based swaps – and the CFTC – for all other swaps – to create an entirely new regulatory regime for this massive market.
The Commission has proposed substantially all of the rules required to implement this new regulatory framework. … I expect the Commission in 2014 to move forward with finalizing and implementing these rules.
Money Market Funds
… Currently, the Commission is considering two significant proposals for additional [money market funds] reform[s] … .
Completing these reforms with a final rule is a critical priority for the Commission in the relatively near term of 2014.
A related effort is the rules we are required to adopt jointly with several other agencies governing the retention of a specified amount risk by the sponsor of an asset-backed security. We re-proposed those rules late last year, and finalizing them will be a priority for 2014.
Evolving with New Paths to Capital Formation
[W]e are at the start of what promises to be a period of transformative change in capital formation.
In 2013, according to our estimates, capital raised in public offerings totaled $1.3 trillion, as compared to $1.6 trillion raised in offerings not registered with the SEC, with over 65% raised in new and ongoing Rule 506 offerings. So the private offering markets already rival the public markets in terms of capital raised.
In July, the Commission adopted rules implementing the JOBS Act mandate to lift the ban on general solicitation, and the rules became effective on September 23, 2013. Preliminary information collected by [DERA] shows that through December 31, approximately 500 offerings were conducted, raising approximately $5.8 billion.
Together, these changes should provide new and expanded ways for companies of all sizes, but particularly smaller companies, to raise capital. The final implementation of crowdfunding and an updated Regulation A is an important priority in 2014, and I expect that the Commission, after thorough consideration of all comments, will move expeditiously to finalize these rules.
These rule changes for the private offering market are just the start of the Commission’s efforts. For the changes demand that the Commission stay focused on the ongoing implementation of the exemptions, what market practices develop, how much capital is being raised, how investors are impacted, and whether fraud or other misconduct is occurring in these markets.
So, staff from across the agency is also set to monitor the developments in the markets following all of these changes. An agency-wide working group has been formed to monitor offering practices and other developments in the Rule 506 market. I have also directed the staff to form similar working groups for both crowdfunding and the new Regulation A.
One key step in the effort to improve our monitoring of Rule 506 offerings will be the adoption of final rules – also proposed in July – relating to amendments to Regulation D, Form D and Rule 156. … Advancing these important rules, after due consideration of the comments we have received, is another important priority for me in 2014.
As we move to complete our rulemaking in the private offering area, it is important for the SEC not to lose focus on the public markets.
I recently spoke about some of my ideas about disclosure reform and in December the staff issued a report mandated by the JOBS Act that gives an overview of Regulation S-K and the staff’s preliminary recommendations as to how to update our disclosure rules. I have asked the staff to begin an active review of our disclosure rules.
We can all probably identify particular disclosure requirements that we might eliminate or modify, but that is not the kind of review and reform I am primarily focused on – and it certainly is not the kind of thoughtful and comprehensive review that I think our disclosure rules demand. I believe we should rethink not only the type of information we ask companies to disclose, but also how that information is presented, where and how that information is disclosed, and how we can take advantage of technology to facilitate investors’ access to information and make it more meaningful to them.
I have asked the staff to seek input from issuers, investors, and other market participants in 2014 …
Vigorous Enforcement in 2014
… The coming year promises to be an incredibly active year in enforcement, as we continue to vigorously pursue wrongdoers and bring enforcement actions across the entire industry spectrum.
… [T]he SEC, like virtually every other civil law enforcement agency, typically did not require entities or individuals to admit wrongdoing in order to enter into a settlement. This no admit/no deny settlement protocol makes a great deal of sense and has served the public interest very well. …
So, why modify the no admit/no deny protocol at all? … Because admissions can achieve a greater measure of public accountability, which can be important to the public’s confidence in the strength and credibility of law enforcement and the safety of our markets. …
After studying and discussing the issue with the staff and my fellow Commissioners, I decided to modify the SEC’s protocol to demand admissions in an expanded category of settlements. That change occurred in June and you have begun to see it play out in a number of cases. When we first announced the change in approach, we outlined broad parameters of the types of cases in which we will consider requiring admissions as part of any settlement. And now, we have a number of cases with admissions that illuminate those categories.
… [C]ases involving egregious conduct, where large numbers of investors were harmed, where the markets or investors were placed at significant risk, where the wrongdoer poses a particular future threat to investors or the markets, or where the defendant engaged in unlawful obstruction of the Commission’s processes. ….
As we go forward in 2014, you will see more cases involving admissions. ….
… Last fall, the Enforcement Division formed a Financial Reporting and Audit Task Force. This dedicated group has very talented accountants and attorneys who will broaden and thereby improve the way we look at financial reporting misconduct.
The Task Force is pursuing a number of goals, including building a deep understanding of the state of financial reporting fraud … how it happens and in what specific areas.
[W]e look closely at the auditors in every financial reporting case, but we are also closely focusing on senior executives for possible misconduct warranting charges. The message is that critical accounting issues are the responsibility of all those involved in the preparation and review of financial disclosures.
… In the last two years, we have tried to send a strong enforcement message to the exchanges and alternative trading systems that play critical roles in securities market transactions that they must operate fairly, within the rules and with a close eye on their responsibilities to safeguard their technology. … Market structure integrity actions will remain a priority in 2014.
[T]here are many other enforcement priorities for 2014 that you should be aware of. These include, but are by no means limited to, FCPA, insider trading, and microcap fraud. It will, in short, be a very busy year in enforcement.
… There is more, of course, we will be doing and considering in the coming year, both on our own initiative and as required by the Dodd-Frank and JOBS Acts – equity market structure, duties of brokers-dealers and investment advisers, the management and responsibilities of clearing agencies and credit rating agencies, Dodd-Frank executive compensation, target date funds, systemic risk issues, broker-dealer financial responsibility, and more.