In late July, we attended a seminar at which David Glockner, the new Director of the Securities and Exchange Commission’s Chicago Regional Office, Scott Williamson, a Deputy Regional Counsel in the Commodity Futures Trading Commission’s Chicago Office, and Cliff Histed, an Assistant United States Attorney in the newly-formed Securities and Commodities Fraud Section in Chicago spoke. The three men shared their views on enforcement trends in the securities and commodities industry. It was an insightful discussion, from which we have distilled a few of the nuggets of wisdom they shared. SEC Enforcement Priorities To begin with, Mr. Glockner shared the SEC’s enforcement priorities. He emphasized (no surprise here) that the SEC’s traditional mission of investor protection remains paramount. Next, he alerted the audience that the SEC intends to focus on accounting fraud. According to Mr. Glockner, this is an area that has not been in the spotlight and needs to be. The SEC intends to use data analytic techniques in order to spot anomalies that may indicate fraudulent activity. This is not new news, of course, as the SEC announced, in July 2013, that it was launching the Financial Reporting and Audit Task Force. According to the Commission, the Task Force “will focus on identifying and exploring areas susceptible to fraudulent financial reporting, including on-going review of financial statement restatements and revisions, analysis of performance trends by industry, and use of technology-based tools such as the Accounting Quality Model.” As a result of the Task Force’s work, public registrants and auditors can expect to be subject to informal investigations (largely document requests) when the Accounting Quality Model tools suggest a potential problem. Based on these investigations, we should expect to see—Mr. Glockner said—the SEC pursuing cases against auditors it believes have disseminated false or misleading information or otherwise perpetuated financial wrongdoing. Next, Mr. Glockner highlighted the SEC’s scrutiny of the subject du jour – high-frequency trading. He explained to the audience that the SEC is investing in software tools and personnel to help it analyze large data sets. Based on its data analysis, the SEC will pursue actions against traders engaged in activity that manipulates the market or is otherwise improper. The SEC also intends to address structural issues in the market that might provide high-frequency traders an improper edge or lead to manipulative trading. This, of course, is concordant with the SEC’s current negotiations with BATS, a new exchange that has increased its trading volume over the last several years by—at least in part—catering to high-frequency traders with order-types like the “hide not slide” through which traders display phantom liquidity in the market. See, e.g, Mark Melin, “ SEC-BATS Deal Sign of White’s Plan In Action,” Aug. 6, 2014. Finally, Mr. Glockner noted that the SEC has given “light scrutiny” in the past to municipal securities and public pension funds, but expects that to change given the “volume of investor assets” invested in and through such vehicles. Mr. Glockner’s statement again corresponds with recent SEC activity, including its August 11, 2014, settlement with the State of Kansas over allegations that that the Kansas Development Finance Authority raised more than $273 million through bond sales for the state without disclosing the fact that the Kansas Public Employment Retirement System was the second-most underfunded statewide public pension system. CFTC Enforcement Priorities Mr. Williamson began his comments by noting the significant changes that have taken place over the past year at the CFTC: Gary Gensler and David Meister, the Chairman and Director of Enforcement, respectively, have been replaced by Timothy Massad and Aitan Goelman. Mr. Goelman is a former prosecutor and is bringing a “new tone” to the CFTC’s Enforcement mission. Although the CFTC’s current funding is “inadequate” for it to carry out its mandate (including regulating an entirely new market – over-the-counter derivatives), Mr. Williamson noted that the CFTC is “not going to shy away” from bringing new cases. To begin with, Mr. Williamson explained that Dodd-Frank enforcement is the Division of Enforcement’s “key goal.” According to Mr. Williamson, the Division of Market Oversight is actively analyzing reporting information from market participants, looking to determine whether market participants are fulfilling reporting obligations and complying with core market principles. In particular, of course, he was referring to swaps reporting—the new area of regulation under the CFTC’s umbrella. Mr. Williamson told the audience to expect “global referrals to Enforcement” for those not complying with core-principles obligations. Next, Mr. Williamson pointed out some already well-known areas on which the Division of Enforcement is focused: index benchmarks with a nexus to the futures market (i.e., LIBOR and the ISDAfix) and the benchmark for currency foreign exchange, known as the WM/Reuters 4pm fix or the “London fix.” See, e.g., Joel Clark, “FX probe digs the dirt to clean-up market structure,” EuroMoney, May 6, 2014. In such investigations, the CFTC (and, often the Department of Justice) are analyzing allegations that traders colluded to fix the benchmarks from which prices are set—allowing them to reap large profits simply by moving the benchmark depending on whether they were buying or selling. Indeed, “a Barclays trader’s instant messages that surfaced during the Libor scandal investigations showed that traders could earn ‘about a couple of million dollars’ for every .01 percent that Libor was manipulated in their favor.” Jesse Colombo, “ This New Libor ‘Scandal’ Will Cause A Terrifying Financial Crisis,” Forbes, June 3, 2014. Mr. Williamson reiterated that the CFTC has new tools, including amended Section 6(c) of the Commodity Exchange Act, for addressing alleged market manipulation and fraud. We have discussed these tools elsewhere (see Trace Schmeltz, “CFTC has new tools and greater authority to pursue wrongdoers,” Futures Magazine, May 2014), but Mr. Williamson’s take on these tools is important. He noted that, under Rule 180.1 (promulgated under the authority of new Section 6(c)), the CFTC can now regulate “manipulative devices,” rather than solely purchases or sales, without proving specific intent. Because this is much simpler, Mr. Williamson noted that market participants can “expect that everything will be a manipulative device” going forward. Finally, Mr. Williamson made a plea to the audience. He said, in words or substance, that is acceptable for traders or other market participants to “tell the government what they do and how they do it” rather than to let the CFTC “get all worked up” over particular trading or market activity in the first place. In separate discussion after the conference, he clarified that this would include situations in which trading appears to be, or is actually, manipulative even though it was not intended to be so. The tone, in other words, is one in which the CFTC understands that complex trading systems may not always work as designed, may produce unintended consequences, or may simply be misunderstood—and the CFTC welcomes a dialogue around these issues. Priorities of the Securities and Commodities Fraud Section According to Assistant United States Attorney Cliff Histed, the United States Attorney for the Northern District of Illinois created the new section in order to “put a spotlight” on securities and commodities fraud. The goal is to develop market and trading expertise within a dedicated group of nine assistants—and these assistants are already interfacing with the Chicago-area exchanges and other market participants to become educated. Echoing the same tone Mr. Williamson had offered, Mr. Histed noted that the new section does not want to turn anything “clumsily into a crime,” but would prefer market participants come in and explain what is happening in the market. The new section will employ typical law enforcement techniques, including recording conversations and working with cooperators. The section is currently building cases in Ponzi scheme matters and disruptive trading, such as bidding through an offer or offering through a bid, banging the close, and spoofing. This would suggest that the new task force is looking at high-frequency and foreign exchange traders, among others. Coordination Each of the panel members emphasized greater coordination and cooperation between agencies. According to David Glockner, for example, the SEC, CFTC, U.S. Attorney’s Office and others “talk as a regulatory community” on a quarterly basis. Mr. Williamson noted that the CFTC’s relationship with the SEC has been “spotty,” but that they are looking for greater coordination now. He also said that the best deterrence is criminal prosecution, so market participants can expect the recent trend of cooperation between the CFTC and the Department of Justice to increase—something that seems particularly more likely given the CFTC’s budgetary constraints.
RELATED ARTICLES
How the SEC Widens Net Over Ethereum
October 14, 2022 | The GEE Blog, SEC
Digital Asset Businesses Amp Up Their Compliance Measures to Avoid Insider Trading Actions
August 26, 2022 | The GEE Blog, Department of Justice, SEC
Is Crypto a Security? Insider Trading Case Leads to DOJ, SEC Scrutiny
July 27, 2022 | The GEE Blog, SEC, Insider Trading
Fifth Circuit Holds That SEC Administrative Law Courts Are Unconstitutional
May 23, 2022 | The GEE Blog, SEC
Will SEC Become the ‘Securities and Environment Commission?’
March 30, 2022 | Environmental, Enforcement, The GEE Blog, SEC
How the SEC Widens Net Over Ethereum
October 14, 2022 | The GEE Blog, SEC
Digital Asset Businesses Amp Up Their Compliance Measures to Avoid Insider Trading Actions
August 26, 2022 | The GEE Blog, Department of Justice, SEC
Is Crypto a Security? Insider Trading Case Leads to DOJ, SEC Scrutiny
July 27, 2022 | The GEE Blog, SEC, Insider Trading
Fifth Circuit Holds That SEC Administrative Law Courts Are Unconstitutional
May 23, 2022 | The GEE Blog, SEC
Will SEC Become the ‘Securities and Environment Commission?’
March 30, 2022 | Environmental, Enforcement, The GEE Blog, SEC
The Enforcement Climate is Changing for ESG Disclosures
January 26, 2022 | Environmental, The GEE Blog
SEC Proposes Amendments to the Requirements of Rule 10b5-1 Trading Plans
December 22, 2021 | The GEE Blog, SEC, Financial Regulation, Insider Trading
SEC Announces FY2021 Results With 7 Percent Increase in New Enforcement Actions
November 30, 2021 | The GEE Blog, SEC
How Will the SEC Drive ESG Progress? First, We Measure
August 2, 2021 | Environmental, Environmental News, SEC
ESG Investing Guidance from the U.S. Securities and Exchange Commission
July 29, 2021 | The GEE Blog, SEC
Whistleblower Awards from the U.S. Securities and Exchange Commission
May 24, 2021 | The GEE Blog, SEC
SEC Emerges as Main Regulator of Cryptocurrency
May 14, 2021 | The GEE Blog, Financial Regulation, SEC
SEC Whistleblower Program Continues Record-breaking Performance Amid New Chair's Support
April 28, 2021 | The GEE Blog, SEC
Gary Gensler to Lead SEC
April 16, 2021 | The GEE Blog, SEC
Half a Loaf: Congress Extends the Statute of Limitations on Some SEC Remedies
January 14, 2021 | The GEE Blog, SEC
When a Foreign Corruption Case Is Not a Foreign Corruption Case
December 21, 2020 | The GEE Blog, Department of Justice, White Collar and Investigations
SEC Again Highlights Risks of Investing in Chinese Securities
December 3, 2020 | The GEE Blog, SEC, Financial Regulation
SEC Steps Up Enforcement for Unsuitable Sales of Complex ETPs
November 18, 2020 | The GEE Blog, Financial Regulation, SEC
CFTC Provides Guidance on Cooperation in Enforcement Actions
November 4, 2020 | The GEE Blog, Financial Regulation
President’s Working Group Attempts to Increase Transparency in Chinese Investments
September 2, 2020 | The GEE Blog, SEC
SEC Highlights COVID-Related Risks Facing Broker-Dealers and Investment Advisers
August 31, 2020 | The GEE Blog, SEC, Financial Regulation
SEC Adopts Rule Amendments Regarding Proxy Voting Advice
July 29, 2020 | The GEE Blog, SEC
SEC Hosts Roundtable to Discuss Risks Associated With U.S.-Listed Chinese Companies
July 14, 2020 | The GEE Blog, SEC, Financial Regulation
CFTC Brings First Fraud Case Attributed to Pandemic
July 9, 2020 | The GEE Blog, Financial Regulation
Supreme Court Misses Its Chance To Define Limits of SEC’s Enforcement Authority
June 30, 2020 | The GEE Blog, SEC
First-Time Supreme Court Advocate Appointed to Argue the SEC’s Case in Lucia
January 23, 2018 | SEC, The GEE Blog
SEC’s Appointments Clause Dilemma Gets Worse
January 16, 2018 | SEC, The GEE Blog
SEC Scrutiny Brings Sanity to Hot ICO Market
November 9, 2017 | SEC, The GEE Blog
Who’s Watching the Watchdog? SEC Deals With Its Own Data Breach
September 25, 2017 | SEC, The GEE Blog
Don't Let DOJ Defections Fool You: Corporate Conduct Still in the Crosshairs
September 6, 2017 | Department of Justice, The GEE Blog
Corporate Law Alert - SEC Issues Guidance on Initial Coin Offerings and Cryptocurrencies
August 2, 2017 | The GEE Blog, SEC
SEC Chairman Announces 8 Core Principles
July 31, 2017 | SEC, The GEE Blog
U.S. Supreme Court Delivers Blow Limiting SEC Disgorgement Power
June 12, 2017 | SEC, The GEE Blog
The SEC’s Appointments Clause Dilemma
January 24, 2017 | Case to Watch, SEC, The GEE Blog
SEC Changes Some of Its Procedural Rules After Constitutional Challenges
September 7, 2016 | SEC, The GEE Blog
D.C. Circuit Affirms Constitutionality of SEC’s In-House Tribunals
September 2, 2016 | SEC, The GEE Blog
Accounting Fraud Getting Increased Attention from the SEC and Class Action Counsel
April 29, 2016 | SEC, The GEE Blog
SEC Completes Municipal Underwriter “Enforcement Sweep”
February 8, 2016 | SEC, The GEE Blog
SEC Reduces Dodd-Frank Whistleblower Award for "Unreasonable Delay," Announces Policy of "More Heavily" Punishing Delay After Award Program's Implementation
November 16, 2015 | SEC, The GEE Blog
Regulation S-P Violation: Are You Prepared For A Cyber-Security Breach?
October 8, 2015 | SEC, The GEE Blog
INSIDER TRADING AND ADMINISTRATIVE COURTS – MORE ON TWO HOT TOPICS THAT HAVE NOW CONVERGED
September 28, 2015 | Insider Trading, SEC, The GEE Blog
WHY NEWMAN MIGHT NOT BE HEADED TO THE SUPREME COURT
August 11, 2015 | Insider Trading, The GEE Blog
NINTH CIRCUIT SLAPS BACK REMOTE TIPPEE’S NEWMAN DEFENSE
July 15, 2015 | Insider Trading, The GEE Blog
CFTC and CME Collaborate to Chase Alleged Spoofers
June 5, 2015 | Financial Regulation, The GEE Blog
THE BENEFITS OF COOPERATION – HYPERDYNAMICS AVOIDS INDICTMENT
May 29, 2015 | FCPA, The GEE Blog
THE SEC EXPLAINS ITS RATIONALE IN FORUM SELECTION IN CONTESTED CASES
May 26, 2015 | SEC, The GEE Blog
THE SEC EXPLAINS ITS RATIONALE IN FORUM SELECTION IN CONTESTED CASES
May 22, 2015 | SEC, The GEE Blog
Self-Reporting: A Wise Strategy or Chasing Unicorns?
April 28, 2015 | SEC, The GEE Blog
What you need to know about United States of America v. Michael Coscia
April 17, 2015 | Financial Regulation, The GEE Blog
Recent Enforcement Trends in the Commodity Markets (Part 1)
April 13, 2015 | Financial Regulation, The GEE Blog
Uniform Fiduciary Standards on the Horizon for Brokers and RIAs
April 10, 2015 | SEC, The GEE Blog
“HELLO, NEWMAN” -- GOVERNMENT CONTINUES TO LITIGATE REVERSED INSIDER TRADING CONVICTIONS
March 9, 2015 | Insider Trading, The GEE Blog
M&A DUE DILIGENCE FAILURES: FCPA & GOODYEAR
February 27, 2015 | FCPA, SEC, The GEE Blog
PART I - CORRUPTION ENFORCEMENT IN BRAZIL: WHAT DOES IT LOOK LIKE?
February 23, 2015 | SEC, The GEE Blog
Chasing the Gatekeepers
January 22, 2015 | SEC, The GEE Blog
DODD-FRANK WHISTLEBLOWER ACTIVITY GETTING EVEN HOTTER
September 23, 2014 | SEC, The GEE Blog
DODD-FRANK WHISTLEBLOWER LITIGATION HEATING UP
September 10, 2014 | SEC, The GEE Blog
Foreign Corrupt Practices Act - Keeping the Wolf at Bay
September 5, 2014 | FCPA, The GEE Blog
JUDGE RAKOFF CONTINUES TO QUESTION ADEQUACY OF JUDICIAL OVERSIGHT OF SEC
August 7, 2014 | SEC, The GEE Blog
Reader Responds to Recent Law Judge Blog Post
July 21, 2014 | The GEE Blog, SEC
The Gabelli Effect: How the Supreme Court’s Decision is Impacting Enforcement Actions
July 16, 2014 | SEC, The GEE Blog
REDUCING THE COST OF FCPA MONITORING
June 11, 2014 | Bank Securities Fraud, The GEE Blog
BELATED VINDICATION FOR THE SEC’S (PRIOR) SETTLEMENT POLICY
June 6, 2014 | Bank Securities Fraud, The GEE Blog
“Gatekeepers” Beware: A New Tool of the SEC
June 4, 2014 | Bank Securities Fraud, Financial Regulation, The GEE Blog
District Court Bolsters the Five-Year Statute of Limitations Defense to SEC Civil Enforcement Actions
May 20, 2014 | Bank Securities Fraud, The GEE Blog
Disgorgement in the Second Circuit: Equitable Relief or Punishment?
April 15, 2014 | Bank Securities Fraud, The GEE Blog
Alert: SEC creates team to examine private equity and hedge funds
April 9, 2014 | The GEE Blog
Heightened SEC/DOJ FCPA Standards Offer Risks and Opportunities to Companies and Their Lawyers
March 18, 2014 | Financial Regulation, The GEE Blog
Is the FTC The Latest Weapon of Aggressive Short Sellers?
March 17, 2014 | Government Investigations, The GEE Blog
Top 10 Takeaways from ABA White Collar Crime Conference 2014 (Part 2 of 2)
March 13, 2014 | Government Investigations, The GEE Blog
Top 10 Takeaways from ABA White Collar Crime Conference 2014 (Part 1 of 2)
March 12, 2014 | Government Investigations, The GEE Blog
SEC’s New Priorities Continue to Come into Focus: Admissions of Liability
March 11, 2014 | Bank Securities Fraud, The GEE Blog
The SEC and Its “Strange Bedfellows” Argue Against Investors Seeking Damages for Fraud – Are Rebuffed by the Supreme Court
March 3, 2014 | Bank Securities Fraud, The GEE Blog
The CFTC: Armed and Dangerous
February 13, 2014 | Financial Regulation, Government Investigations, The GEE Blog
SEC Continues to Struggle in Insider Trading Jury Trials
February 7, 2014 | Insider Trading, The GEE Blog
Securities Regulators’ Increasing Use of Real-Time Monitoring Systems - Is Skynet Next?
January 31, 2014 | Financial Regulation, Government Investigations, Insider Trading, The GEE Blog
Going South: What U.S. Companies Need to Know About the FCPA and Doing Business in Latin America
January 30, 2014 | Criminal Procedure, Government Investigations, The GEE Blog
Welcome to The GEE Blog
January 18, 2014 | The GEE Blog
Let the Light of Day Shine
January 18, 2014 | Financial Regulation, The GEE Blog
Barnes & Thornburg Legal Alert - Government Regulators Continue to Make Insider Trading a Trial Priority
January 16, 2014 | Financial Regulation, The GEE Blog
SEC Highlights 2013 Accomplishments and Outlines 2014 Enforcement Priorities
January 2, 2014 | Financial Regulation, The GEE Blog
RELATED PRACTICE AREAS
Subscribe
Do you want to receive more valuable insights directly in your inbox? Visit our subscription center and let us know what you're interested in learning more about.
View Subscription Center