Enforcement Director Robert
Khuzami reviewed the events of
his first year at the SEC in a
March 19
speech to the Society of
American Business Editors and
Writers. Khuzami said the
environment has changed
significantly since last year
when the SEC was the subject of
withering criticism in light of
the financial crisis and the
Madoff scandal. The SEC is a
completely different place
today, he said.
Congress increased
the SEC’s funding for fiscal
year 2009 and Khuzami is hopeful
it will do so again in 2010. He
noted how underfunded the agency
is when considering the
magnitude of its regulatory and
enforcement responsibilities.
Congress is
considering legislation that
would increase the SEC’s
authority with respect to hedge
funds and derivatives. Khuzami
said the legislation would make
available more trade data that
would enable the SEC to do its
job more effectively.
In the past year,
Khuzami reported that the SEC
has attracted a lot of new
talent, including individuals
with expertise in risk
management, derivatives, rating
agency operations and portfolio
management. He credited Chair
Mary Schapiro for reinvigorating
the Commission. Khuzami added
that the SEC has learned from
its mistakes.
Khuzami reviewed
the changes in the Enforcement
Division which began with an
in-depth self-assessment. The
result was the creation of
specialized units where the
staff could develop expertise
and receive specialized
training. Khuzami believes that
specialization will give the SEC
a better chance to catch those
who otherwise may go undetected.
Khuzami noted that
the masterminds of white collar
crime leave the fewest
footprints. They are often
planning their defense at the
same time they are committing
the fraud. He gave the example
of insider traders who
accumulate research papers on a
company whose shares they have
illegally purchased to show to
enforcement staff in an
investigation.
The masterminds
also use the complexity of
products or the opacity of
markets to conceal their
misconduct, according to Khuzami.
For example, he said they may
rely on over-the-counter
derivatives trading, accounting
tricks or difficult-to-value
assets. The specialized units
will help the staff make
informed decisions about where
to focus their enforcement
efforts, he said.
Khuzami gave a
brief description of each of the
units. The structured and new
products unit will focus on
complex financial instruments
such as credit default swaps,
collateralized debt obligations,
securitized and other structured
products. The group will follow
market trends and the
development of new products, or
new twists on old products, he
explained.
Khuzami cited as
an example the “maturity wall”
that will hit in 2012 at the
beginning of a three-year period
in which more than $700 billion
in high yield corporate debt
issued as part of the past wave
of private equity acquisitions
comes to market. He said the
maturity wall raises concerns
that the debt may overload the
market, which in turn may create
incentives to engage in improper
pricing, disclosure or offering
prices.
The specialized
units are still in formation but
should be fully staffed by
around mid-April, according to
Khuzami.
Khuzami also
reviewed the adoption of new
cooperation tools, including
cooperation agreements. Khuzami
said that one who has flipped
and agrees to cooperate in an
investigation can provide the
missing link in connecting
someone to wrongdoing or to
unlocking complex transactions.
The Division
flattened its management
structure and redeployed
personnel to the frontlines of
conducting investigations.
Khuzami said this change will
increase the resources dedicated
to investigations and will avoid
some of the extra processes that
result from an overly managed
organization.
The Division also
has its first managing
executive. Khuzami believes that
a 1,200 person division, whether
public or private, needs a chief
operating officer type of role.
Many tasks were handled by
investigative personnel who did
not have the training or
expertise, he said, and it
distracted from the
investigative focus.
A new office of
market intelligence will
centralize the intake and
analysis of tips, complaints and
referrals. The office will be
staffed by people with
cross-discipline expertise, he
said.
Schapiro also
created a new Office of Risk,
Financial Innovation and
Strategy which is staffed with
experts in a variety of market
disciplines. Khuzami believes
the expertise in the office will
greatly assist the specialized
units with its data analysis.
He closed with a
review of some of the
challenging cases the Division
has brought over the past year,
even while it was in the midst
of what he called the most
profound reorganization in its
history. Khuzami said he is very
optimistic about the future of
the Division and the SEC as a
whole.