New Enforcement Priorities for the SEC

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Mary Jo White, the new chairman of the U.S. Securities and Exchange Commission, will likely set new enforcement priorities for the agency. The first former prosecutor to serve as chairman, she is installing one of her former protégés, Andrew Ceresney, as the head of enforcement. While insider trading prosecution is likely to continue, the agency may put a higher priority on pursuing accounting fraud.

During her Senate confirmation hearing, White promised to focus on high- frequency and automated trading. She has also highlighted the decline in the number of accounting fraud cases the agency has brought in recent years.

Ceresney, the new head of enforcement, was a prosecutor under White when she served as U.S. Attorney for the Southern District of New York. He served under her as a member of the securities and commodity fraud task force and major crimes unit in the Southern District, and then followed her in 2003 to Debevoise & Plimpton LLP, where she was a partner.

Ceresney and White are expected to recuse themselves in cases involving many of Wall Street’s biggest players, since those firms were often clients of Debevoise. To address this, Ceresney will share the enforcement director role with acting chief George Canellos for a year or so.

One of Ceresney’s first decisions will be whether to keep the specialized units that were formed three years ago by Robert Khuzami, who stepped down as enforcement director this year. Khuzami had set up five practices that focus entirely on the following complex, formerly high priority areas: asset management and mutual funds, illegal trading and other market abuses, structured and new products including complex mortgage-related products, foreign corrupt practices, municipal securities and pensions.

Insider trading is likely to continue to be an enforcement priority. For one thing, there is unfinished business in the cases being brought against SAC Capital Advisors LP, with the apparent objective of ultimately bringing a case against Steven A. Cohen. Also, this is an area of cooperation with Preet Bharara’s prosecutors in the U.S. Department of Justice and the FBI, so the SEC does not have unilateral discretion over its involvement.

It is more likely that the SEC will declare victory in its prosecution of mortgage-backed cases and other actions related to the financial crisis, even though some have criticized the SEC’s track record on prosecuting cases related to the financial crisis.

A new area of attention is likely to be accounting fraud. George Canellos, who was acting head of the enforcement division prior to Ceresney’s appointment, said in February that investigators are looking into new ways of detecting accounting fraud, an area that has seen fewer enforcement actions in recent years.

Will a new focus on accounting fraud help or hurt investment research firms focused on forensic accounting research and earnings quality? Probably help in the sense that asset managers will become more attuned to the issue and more likely to incorporate forensic accounting in their investment process if they haven’t already.

Ultimately, the SEC, like most regulators, is largely reactive. It is not uncommon for SEC enforcement to initiate investigations in the wake of major media stories. Despite White and Ceresney’s intentions, the SEC’s enforcement priorities will largely be set by the Wall Street Journal.

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