Khuzami Discusses Structural Changes in Enforcement Division

SEC Enforcement Director Robert Khuzami said that most of his time since being appointed division director has been spent on a top-to-bottom review and restructuring of the division. He said that the changes are intended to help the staff be more proactive in investigations, and to identify trends and problems earlier to help minimize investor losses. Khuzami was among the government enforcement panelists at a Practising Law Institute conference on securities regulation.

On the advice of three advisory groups, the division is creating five new units focused on specific products and/or behaviors, Khuzami said. The first unit will cover asset management and hedge funds, and the second unit will focus on market abuse. A third unit will be assigned to structured products and the fourth will examine issues under the Foreign Corrupt Practices Act. The final unit will handle municipal securities and pay-to-play issues.

The groups will be national in scope, according to Khuzami, and directors will be hired for each one. Unit chiefs will have the full range of authority to bring actions, he noted. The staff of each unit will be required to learn its particular products and transactions so that they can be smarter in conducting investigations and in recognizing fraudulent activities earlier in the cycle, he said.

Khuzami was asked what will happen if the division’s priorities change after the specialized units have already been established. He said that one of the reasons the division chose the units it did is because it expects the subject areas to be relevant for a long time. If the division’s priorities change, it can adopt a more traditional working group structure, he said.

He advised that if a market participant feels that it is not the subject of a specialized group, it should not think that the SEC is not watching. The staff is going to start modestly and see what it learns from experience, he said.

Khuzami said that other changes at the division include realigning the structure to rededicate branch chiefs to conducting the front line of an investigation. The realignment will move the center of gravity in the division back to conducting investigations, he noted, and hopefully will make them faster.

The division is setting up an office of market intelligence to handle the thousands of complaints and tips it receives each year, he said. The office will identify trends that will inform the staff as it develops its enforcement strategy. Khuzami said he also will be hiring the first-ever chief operating officer to handle the IT and infrastructure aspects of running the division.

While all of these changes are being implemented, the staff is still busy with its case work, he advised. The division is currently active in the areas of subprime mortgages, insider trading, short sales and pay-to-play issues, he said.

Cravath Swaine’s Mary Jo White asked what the division’s current thinking is on corporate sanctions and bringing actions against individuals instead of companies. Khuzami said that the Commission recognizes that individuals commit misconduct, not corporations. While in some cases it is appropriate to charge only the company, he noted that statistics indicate that very few cases brought by the division are only against a company.

He added, however, that he believes corporate sanctions in enforcement cases are appropriate. They make the misconduct unprofitable and give shareholders a basis on which to judge management, he said.

Sanctions also provide an incentive for companies to change their behavior, he said. Following an action, companies often adopt new controls and terminate wrongdoers. Khuzami believes these corrective steps would be dissipated if the sanctions were not there. He understands the argument that sanctions mean that fines are being paid by shareholders, but reiterated that sanctions are an important part of the enforcement division’s toolbox.