SEC Chair Mary Jo White is bringing the New York cop-on-the-beat attitude to the SEC’s enforcement of securities law violation. In a speech before the Securities Enforcement Forum on October 9, 2013, Chair White indicated that on her watch, the SEC will pursue enforcement in a manner not unlike that of New York City in the 1990s. New York law enforcement in that era implemented its “broken windows” strategy — no infraction was too small to be uncovered and punished because an environment of disorder encourages more serious crimes to flourish.
Chair White wants the SEC to undertake a similar strategy to achieve its mission of investor protection. According to Chair White, “[i]nvestors do not want someone who ignores minor violations, and waits for the big ones that bring media attention. … [T]hey want someone who understands that even the smallest infraction have victims … .”
The SEC is taking a three part approach to pursuing all violations. First, the SEC is expanding its reach by leveraging its exam program for securities intermediaries, incentivizing whistleblowers, collaborating with other regulators, and using use of technology to spot fraudulent behavior.
Second, the SEC will be putting increased focus on securities intermediaries that are supposed to act as gatekeepers to prevent unscrupulous actors from being able to reach unwary investors.
And third, the SEC is putting measures in place to identify where the “broken windows” currently exist in the securities markets.
Obviously, the resources at the SEC’s disposal are finite, and its mission of investor protection will still require the SEC to prioritize major offenses that impact the markets to a greater extent than the small violations. But players in the space would be unwise to believe the SEC is not serious about casting a wider net.
Participants in the small online securities offering space should take note of the specific areas identified by Chair White. Broker-dealers and other securities intermediaries will be the focal point of much of the SEC’s “broken windows” enforcement. This is a logical step — intermediaries are already registered with the SEC or state regulators, and so there is information already available on who exactly committed the violation that was reported to the SEC or discovered during examinations.
What can also be inferred from the focus on gatekeepers is that the SEC will be going after unregistered securities bulletin boards that cross the line into broker-dealer activity. Bulletin boards are growing in prominence because they feature offers and incentives in a similar manner to donation-based crowdfunding sites. That prominence may expose bulletin boards to more scrutiny, especially if the bulletin boards are offering scalable fees and promoting securities offerings.
As Chair White noted, the SEC cannot be everywhere, but it will strive to be in more places than it has been before, and that includes in the online securities offerings space.