On March 24, 2015, Securities and Exchange Commission (“SEC”)Chair Mary Jo White testified before Congress. Her testimony focused on the SEC’s current operations, plans for the future and a $1.722 billion budget request. Chair White explained that the requested money would be primarily used to increase staff, particularly in the Division of Economic and Risk Analysis (“DERA”), and to implement initiatives. Key points of Chair White’s testimony are discussed below.
- Examination Improvements and Expansion
Chair White noted that the Commission’s duties have significantly increased with their new or expanded jurisdiction including over private fund advisers, along with the growth and increasing complexity of the marketplace. Specifically, Chair White noted that the assets under management of SEC-registered investment advisers has grown by 254 percent and assets under management of mutual funds has grown by 143 percent since the millennium. Chair White pointed to the rapidly expanding securities markets and expanding SEC jurisdictions as reasons for the budget request.
- Economic Analysis, Risk Assessment, and Data Analytics
Currently, DERA is the fastest growing division at the SEC. Chair White boasted that a significant number of DERA employees are Ph.D. economists with sophisticated understanding of financial markets. These economists work closely with the rest of the Commission, notably the Division of Trading and Markets, to develop appropriate policies and regulations. DERA also assists the Division of Enforcement (“Enforcement”) to identify potential wrongdoing in the marketplace, calculate proceeds and penalties relating to illegal activities, develop their own and respond to defendant expert testimony, and analyze materiality in insider trading cases.
- Enforcement of the Securities Laws
Enforcement investigates and brings charges against alleged violators of federal securities laws. Chair White stated that in 2014 the division achieved its highest number of monetary remedial orders, $4.16 billion, and its highest number of enforcement actions, 755.
Insider trading continues to be a high priority for Enforcement. Staff is currently working on developing and implementing new technologies for tracking suspicious trading patterns. In addition, Enforcement continues to bring actions against investment advisers that engage in fraudulent conduct, breach fiduciary duty and have deficient compliance programs.
- Fiduciary Duty for Broker-Dealers and Registered Investment Advisers
Chair White opined that broker-dealers and investment advisers should adhere to the same fiduciary standards. Some potential issues in implementing the same standards include: identifying and defining terms that are common to both, formulating meaningful applications for the different businesses and lastly providing equally clear and useful guidance to both investment advisers and broker-dealers. Chair White stated that her fellow commissioners and staff will develop investment adviser and broker-dealer fiduciary duty recommendations in the very near future. The commissioners will be giving serious consideration to the SEC’s staff Section 913 study of 2011, which supports creating a uniformed fiduciary standard. DERA will also provide assistance in defining “fiduciary.”
- Inspections and Examinations
The Office of Compliance Inspections and Examinations (“OCIE”) is inspects a variety of firms throughout the securities industry. Dodd-Frank greatly expanded the duties of OCIE to include municipal advisers, investment advisers to certain private funds, security-based swap dealers, security-based swap data repositories, major security-based swap participants, and securities-based swap execution facilities. OCIE continues to expand its staff in order to examine as many of these firms as possible. Alternative investment firms, particularly, are among the most likely to be examined by OCIE.
- Plans for the Budget
Chair White stated the agency would use the requested funds to create 431 new staff positions focused on enforcement, examinations, and economic risk analysis. Readers may recall that the SEC requested a similar budget allocation last year, which Congress denied.
The budget request is proof of a strong relationship betweenPresident Obama and Chair White. While President Obama wants to expand the SEC’s budget, he sought $35 million less than requested in 2014 for the Commodity Futures Trading Commission. The SEC’s power is growing compared to other regulators, and if the budget request is approved, we can expect to see a more technologically advanced agency. Readers should stay updated on Congress’s decision to approve or deny the SEC’s budget request.