“With only 4200 employees, the SEC must rely on force multipliers”, said Valerie Szczepanik, Assistant Director of the Asset Management Unit, Division of Enforcement, Securities and Exchange Commission. She was the second of four panellists at the GARP webinar “Fixing the Financial Industry’s Broken Windows” held on March 11, 2014.
SEC Chair Mary Jo White has emphasized the SEC must be everywhere and appear to be everywhere, said Szczepanik, who outlined six factors helping the SEC carry out its mission in the face of increasing complexity in the financial world.
The SEC is increasing its collaboration with other regulators and prosecutors such as the US Attorney for the Southern District of New York (SDNY) and the FBI.
The Whistleblower Program has been beefed up through provisions of the Dodd-Frank Act as a means to “encourage and incentivize compliance.” She praised the program for the “high quality information [that] has helped the Commission work more efficiently.”
There is also a Cooperation Program that encourages parties involved to come forward and provide useful information to investigators so they can take enforcement actions earlier, or have stronger cases to prosecute. The credits can range from reduced charges to “deferred or non-prosecution agreements,” Szczepanik said.
The SEC has struck a task force on technological tools to improve data analytics and related technology. The SEC recently implemented MIDAS (Market Information Data Analytics System), a market-surveillance system that combines advanced technologies with empirical data to understand patterns within the markets.
“An expansion of technology will help us analyze massive amounts of trading data,” said Szczepanik, referring to NEAT, the National Exam Analytics Tool announced by Chair Mary Jo White in January 2014.
To assist with integration of financial economics and rigorous data analytics, the SEC created a “think tank,” the Division of Economic and Risk Analysis (DERA) in September 2009. It promotes collaboration between different groups and provides subject matter experts in nine specialized offices, including asset management, financial intermediates, corporate finance, and risk assessment and interactive data.
Szczepanik said the SEC plans include a focus on financial gatekeepers, which includes attorneys, auditors, and the compliance experts within a financial institution. It is vital to have a “consolidated audit trail,” said Szczepanik.
The SEC has established a Digital Forensics Lab for more efficient forensic examination of software and hardware evidence. It has advanced cell phone, smart phone and email processing capabilities (see video on the Digital Forensics Lab).
The results of the force multipliers thus point to new efficiencies. Over the past year, the SEC has followed 200 insider trading allegations.
In response to a question from the audience regarding use of data analytics to understand high-profile events, Szczepanik said that, “yes, trading patterns have been reverse-engineered by SEC staff to develop diagnostics.” ª
Go to Part 1, an overview of Fixing Broken Windows in the financial sector. ª
Go to Part 3, the FBI perspective on Fixing Broken Windows. ª
Go to Part 4 (final), on reducing exposure to insider-trading investigations. ª