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Enforcement Director Reviews Division's Priorities

In a keynote address at last month's Chamber of Commerce capital markets summit, SEC Enforcement Director Linda Chatman Thomsen advised that evidence suggests that financial markets succeed because of enforcement and regulation, not in spite of them. Transnational studies have found a strong correlation between the maturity and size of financial markets and the aggressiveness of the enforcement effort on behalf of investors, she added. While many U.S. securities laws have been criticized, Thomsen said a growing number of countries have adopted similar laws.

Thomsen noted that no law as extensive as the Sarbanes-Oxley Act would be without controversy. She pointed to parallels between the criticism of SOX and those that accompanied the 1933 Act. It will be interesting to see how history judges SOX in 75 years, she said.

Thomsen reviewed the Division's priorities and recent trends that have emerged. Among the areas of concern is fraud by the largest firms in the financial markets, such as Enron, WorldCom and Tyco. On the other end of the spectrum, she said that microcap fraud in the over-the-counter markets is receiving increased focus. Thomsen noted that the smaller scale frauds often are facilitated by developments in communications technology including the Internet, fax blasts and mass voicemail messaging to millions of potential investors.

A permanent staff section focuses on microcap fraud, according to Thomsen. The group has been successful with an anti-spam campaign which suspended trading in the securities of 50 issuers. Thomsen reported that online complaints about promotional spam have dropped by 68% since the launch of the anti-spam initiative a year ago.

Thomsen said that the continuing volatility in the credit markets ensures that subprime and credit issues will remain a high priority. The municipal securities working group has also been active. Thomsen expressed concern that the case against the city of San Diego may not be isolated and that other cities with financial obligation disclosure problems may emerge. The municipal working group has also focused on instances of pay-to-play and bid rigging in municipal securities auctions.

Thomsen addressed the widespread perception that hedge funds engage in insider trading ahead of the public announcement of significant corporate transactions. The perception is harmful to the markets' reputation, she said, and merits further investigation.

The Division is also focusing on fraud against seniors and fraud affecting pension funds. All of the regional offices are conducting educational and outreach programs aimed at protecting seniors from financial predators, she said.

Thomsen said the SEC's focus on protecting the integrity of the markets is not a burden to global competitiveness, but an essential element to its success.