With Mary Jo White now leading the Securities and Exchange Commission, senior executives of investment management firm and officials of fiduciary fund boards as well as compliance professionals alike should recognize the need to step up their game to avoid a potential run-in with the new cop on the beat.
It should come as no surprise that Ms. White, a former federal prosecutor who on April 10 became the 31st person to chair the SEC, would turn to her prosecutorial roots in setting priorities for the commission. In recent speeches, she has left no doubt that enforcement continues to be at the top of her agenda — and that potential violations of laws and rules by investment management firms are on her radar. Investment management professionals would do well to sit up and take notice of Ms. White's pronouncements and to pay close attention to the steady stream of enforcement cases involving investment advisory firms emanating from the SEC.
In 1993, Ms. White was the first woman appointed as the U.S. attorney for the Southern District of New York. During a decade as a federal prosecutor, Ms. White earned praise for bringing cases against terrorists, including those responsible for the first bombing of the World Trade Center, and gangsters, like John Gotti. She also successfully prosecuted numerous financial fraud cases, including actions against Daiwa Bank, which paid a then-record $340 million fine, as well as Republic Securities and Bankers Trust. And she was involved in several less notorious cases involving Ponzi schemes and fraud by investment management firms.
Ms. White is a no-nonsense enforcer who gets results. In nominating Ms. White to the SEC post, President Barack Obama said: “You don't want to mess with Mary Jo.” Sen. Charles Schumer, D.-N.Y., immediately endorsed her nomination, calling her a “tough-as-nails prosecutor.” Patrick Fitzgerald, former U.S. attorney in Chicago who previously worked under Ms. White, has called her “a force of nature.” While some questioned her commitment to aggressive investor protection during her nomination process due to her tenure as a white-collar criminal defense attorney, no one is questioning her commitment now.
In a series of recent speeches, Ms. White laid out in detail the aggressive enforcement agenda she is pursuing as head of the 4,000-person agency charged with being Wall Street's primary cop. In addressing a conference of the Council of Institutional Investors on Sept. 26 in remarks titled, “Deploying the Full Enforcement Arsenal,” Ms. White noted that a “robust enforcement program is critical to fulfilling the SEC's mission to instill confidence in those who invest in our markets” because when investors realize “there is a strong and effective cop on the beat, they have greater confidence and are more willing to participate in the markets.” Ms. White proceeded to identify several key principles guiding the SEC's enforcement program: (1) being aggressive and creative; (2) demanding accountability; (3) pursuing individuals; (4) covering the whole market; and (5) winning at trial.
On Oct. 9, she expanded on her previous statements, stating: “One of our goals is to see that the SEC's enforcement program is —and is perceived to be — everywhere, pursuing all types of violations of our federal securities laws, big and small.” Citing New York City's strategy two decades ago of pursuing even minor offenses to send a message of law and order, she stated her belief that “the SEC should strive to be that kind of cop — to be the agency that covers the entire neighborhood and pursues every type of violation.”
In yet another speech on Oct. 22, Ms. White focused on the critical role of compliance officers in establishing a strong line of defense against potential wrongdoing. She emphasized the need for management to support the compliance function, voiced her commitment to continue and expand the SEC's efforts to be transparent in communications about its activities and priorities, and described the SEC's efforts to closely coordinate its inspection and enforcement programs.
Ms. White has made it clear that policing the money management industry is high on her list. In her initial appearance on Capitol Hill in May, the first priority she described in testimony outlining the SEC's budget priorities was “expanding oversight of investment advisers and improving their regulation and compliance — a point at which investors are most at risk of being defrauded and harmed.” In a reported interview in June, she volunteered that “(o)ne thing that keeps me up at night is that we essentially examine investment advisers, some 10,000 of them, and we really don't have the resources to sufficiently cover that,” adding that she had requested an additional 250 examiners just for that purpose.
Enforcement cases against investment management firms and their personnel make it clear that Ms. White is backing up her words with strong action. For example, the SEC recently filed its first charge against an individual for misleading and obstructing a compliance officer of an investment management firm. As part of its compliance initiative program, the SEC sanctioned three investment management firms and their principals for repeatedly ignoring problems with their compliance programs. These and similar actions build on efforts of the SEC's asset management division that has nearly doubled the number of enforcement cases against investment management firms during the past two or three years.
The takeaway is crystal clear. The investment management community should be on notice.
As long as Mary Jo White is leading the SEC, senior managers of every investment advisory firm, fund boards, and compliance professionals alike should recognize the need to step up their game in order to avoid a potential run-in with the new cop on the beat.
David Tittsworth is executive director of the Investment Adviser Association, Washington.