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95–053 PDF 2015

OVERSIGHT OF THE SEC’S 

DIVISION OF ENFORCEMENT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

MARCH 19, 2015 

Printed for the use of the Committee on Financial Services 

Serial No. 114–9 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

ROBERT DOLD, Illinois 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

ROBERT HURT, Virginia, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ANN WAGNER, Missouri 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

BRUCE POLIQUIN, Maine 

FRENCH HILL, Arkansas 

CAROLYN B. MALONEY, New York, 

Ranking Member 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

ED PERLMUTTER, Colorado 

DAVID SCOTT, Georgia 

JAMES A. HIMES, Connecticut 

KEITH ELLISON, Minnesota 

BILL FOSTER, Illinois 

GREGORY W. MEEKS, New York 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

PATRICK MURPHY, Florida 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

March 19, 2015 ................................................................................................. 1 

Appendix: 

March 19, 2015 ................................................................................................. 41 

WITNESSES 

THURSDAY, MARCH 19, 2015 

Ceresney, Andrew J., Director, Division of Enforcement, U.S. Securities and 

Exchange Commission ......................................................................................... 6 

APPENDIX 

Prepared statements: 

Ceresney, Andrew J. ......................................................................................... 42 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Ceresney, Andrew J.: 

Written responses to questions submitted by Representatives Duffy and 

Foster ............................................................................................................. 50 

(1) 

OVERSIGHT OF THE SEC’S 

DIVISION OF ENFORCEMENT 

Thursday, March 19, 2015 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 9:09 a.m., in room 

2167, Rayburn House Office Building, Hon. Scott Garrett [chairman of the subcommittee] presiding. 

Members present: Representatives Garrett, Hurt, Royce, Neugebauer, Huizenga, Duffy, Fincher, Hultgren, Wagner, Messer, 

Schweikert, Poliquin, Hill; Maloney, Sherman, Lynch, Himes, Ellison, and Carney. 

Ex officio present: Representative Hensarling. 

Chairman GARRETT. Good morning. The Subcommittee on Capital Markets and Government Sponsored Enterprises is called to 

order. Today’s hearing is entitled, ‘‘Oversight of the SEC’s Division 

of Enforcement.’’ And I thank our witness for being here today. 

Before I begin today’s proceedings, I will just take a moment of 

personal privilege. When you are on the Floor, and you come to the 

conclusion of a major piece of legislation, whether it is the budget 

or the defense bill or something else, at the very end of that whole 

process, what always happens is that the chairmen from both sides 

get onto the Floor, and they give thanks to all the people who made 

the culmination of that project possible. 

So I am going to do that before we start this hearing today by 

thanking a member of my staff, who has been with me for a very 

long time, for making not just the culmination of this hearing, but 

a culmination of the last 12 years, my entire tenure here in Congress possible, and as successful as it has been. 

It is through this gentleman’s dedication, his interest, his keen 

insight into the issues, and just his general interest in all of the 

topics that we cover in capital markets and the financial services 

generally and specifically, whether they are issues that are fun 

issues, or issues that are totally boring to other people. This gentleman always was there to look at them and make them interesting, and make them understandable not only to me, but to the 

rest of my office, and I think to our committee as well. 

And I very much appreciate all that he has done. As I said, it 

has been 12 years now, which is, in Washington’s time, a lifetime. 

Many people come in every 2 or 3 years, come and go. But 12 years 

is a lifetime. 

2 

And during that lifetime, I have seen this gentleman go from an 

unmarried guy who spent a lot of his time down on the ball fields 

playing sports, and downtown doing other things, which I won’t go 

into, to a gentleman who is now married with a couple of kids, and 

is probably going to spend more or all of his time—some, but all 

of his time, when he is not with me, back at home with his beautiful wife and children, taking care of them, but still able to, at the 

end of the day, make me look good, and make me look as if I actually know all this stuff that I am talking about here today. 

So I would like to take this moment again to thank Chris Russell 

for all that work, and all that dedication, and just being there for 

us, for myself, for our committee, and for my family as well. So 

thank you so very much. 

[Applause.] 

Our loss is, I guess, as I say, downtown’s gain. I have a feeling 

that we will still see him up here on a regular basis, right? Good. 

Because I still have lots and lots and lots more questions to ask 

as we go along. So thank you very, very much, Chris. I appreciate 

it. 

With that said, that brings to a conclusion today’s hearing, because he did not prepare any other opening statements or questions for me since he is leaving now. So I have nothing else to say. 

No, no, no. 

Mr. HURT. We know that is not true. 

Chairman GARRETT. What, that I have nothing else to say? 

Thanks. 

We will now turn back to the matter at hand. Again, we thank 

the witness for being here for today’s hearing on the SEC’s Enforcement Division. We will begin with opening statements, and I 

will yield myself such time—I don’t know where the clocks are 

around here—as I may consume. 

Today’s hearing, as I said, will examine the policies and procedures of the SEC’s Division of Enforcement. Now, while the SEC 

is first and foremost a disclosure agency, I support a strong enforcement function of the SEC. This enforcement function, however, 

must be used in an evenhanded, non-political manner that preserves the due-process rights of issuers, regulated entities, and 

their employees. 

Recently, I heard an interesting distinction between blue-collar 

and white-collar crime. The saying goes, ‘‘With blue-collar crime, 

you know there has been a crime committed, you just have to figure out who did it. With white-collar crime, you know who did the 

crime, you just have to figure out if it actually was a crime.’’ 

This saying implies that there is a degree of nuance required by 

regulators and enforcement officials when making decisions whether and how to bring civil actions against potential violators, one 

area where there is most need in this Commission’s increased use 

of administrative proceedings. While bringing more cases through 

the administrative proceedings can lead to lower costs for the agency and increases in efficiency, it is important to realize that those 

benefits come with a cost. 

The cost is less due-process protections for defendants. Because 

the SEC administrative proceedings use the SEC’s procedural 

rules, respondents are forced to operate on a condensed timeframe, 

3 

and do not have the benefit of many of the fundamental due-process protections provided under the Federal Civil Procedures Act, 

and the Federal Rules of Evidence, such as full discovery rights, 

the right to a jury trial, and the exclusion of hearsay evidence. 

Moreover, initial appeals of administrative law judge (ALJ) rulings must be made to the full Commission, an ALJ’s employer, 

rather than Federal district court. While the Commission’s decision 

may be appealed to the D.C. Circuit Court of Appeals, the SEC’s 

interpretation of the security laws generally will be given significant deference. Appealing an administrative decision is a time-consuming and expensive proposition. 

As a former SEC Division official put it, ‘‘The entire process ordinarily takes years during which many SEC targets are bankrupt 

by legal costs, and their ability to find work with reputable companies. Only after SEC Commissioners decide all appeals can the accused finally seek relief from the Federal court. But appeals rarely 

succeed, because the law requires the court to defer to the agency’s 

judgment, especially on disputed facts.’’ 

So this, coupled with the SEC’s 100 percent success rate—which 

is a pretty good success rate—100 percent success rate from the 

year 2014 illustrates a very troubling pattern of the SEC’s attempting to stack the rules and process in a way that the outcome of the 

case is, well, predetermined. This is not appropriate in a country 

that values appropriate due process for its citizens. Due process is 

a fair process, and fair process is fair play. 

Other issues that I am equally concerned about, and I hope to 

address today, are the inappropriate delegation of authority to SEC 

staff to issue subpoenas and to compel testimony and documents, 

the comments in SEC press releases by Enforcement officials that 

presume guilt instead of innocence of recently-charged market participants, the lack of cases against specific individuals compared to 

cases against the corporation, the lack of any structure or legal 

guidance around determining the sought-after penalties in settlements and cases, and finally, the backdoor changes to Commission 

policies included in the very enforcement actions at the end of the 

game. 

So, let me reiterate. I strongly support the proper and stringent 

enforcing of our Nation’s security laws. However, the enforcement 

of those laws, like any other, should be done in an evenhanded 

manner, removed from politics, with appropriate due-process protections for the defendants. 

The current SEC enforcement policies come into question as to 

whether they meet the standards and need to be improved. The 

SEC should be less concerned about the press releases it sends out, 

and the headlines it receives, and really more concerned about having a clear and consistent approach to enforcing the laws. 

With that, I yield back, and I recognize Mr. Lynch for such time 

as he may consume. 

Mr. LYNCH. Thank you, Mr. Chairman. I, too, want to congratulate Chris Russell on his 12 years. That is a long time to be serving 

here. You have certainly helped the committee out greatly, and we 

appreciate your service as well. And we wish you very good luck 

in your next endeavor. 

4 

I do want to just comment briefly on subpoena power, and about 

the SEC extending subpoena power to its employees. I just want 

to remind my friends—and you are my friends on the other side of 

the aisle—that this Congress, the Republican House, has expanded 

subpoena power among—the woman who runs the elevator has 

subpoena power in this Congress. 

We have expanded the subpoena power for many, many chairmen who never had it before. So I am much more comfortable with 

the SEC having subpoena power, and doing so in a deliberate and 

responsible manner, than I am having it so widely dispersed here 

in the Congress. 

Director Ceresney, I want to just mention one area where I think 

we can do much better at the SEC with the limited resources that 

you have. And that is the revolving door situation with SEC employees. 

We have had situations where—I am completely comfortable 

with folks at the SEC. They work, they learn the system. They understand, they have value in the knowledge that they gain because 

of their service at the SEC. 

And then at some point, they make a lateral move. They go to 

the industry that can pay them much more money. And they have 

earned it. The same thing with our staff here. They toil here for 

a while, they do their sentence, and then hopefully they gain 

enough acumen and ability that someone seeks to hire them. 

This is a different situation that I am addressing here. That is 

when SEC employees are involved in an enforcement action against 

a bank or financial services company, or any entity. And then while 

that enforcement action is ongoing, they leave, and they go to work 

for the other side, for that company that has an enforcement, or 

has a waiver pending. That cannot happen. 

You can’t have somebody working at the SEC, prosecuting an enforcement case, and then all of a sudden, the next week, they go 

out and they are working for the company that they were just prosecuting last week. That cannot happen. 

But it does happen. And so, I recently introduced the SEC Revolving Door Restriction Act of 2015. This legislation will reduce 

the conflicts of interest beyond the current ethics rules; specifically, 

this bill amends the Securities Exchange Act of 1934 to prevent 

former employees of the SEC from seeking employment with companies against which they have participated in enforcement actions 

in the preceding 18 months. It just gives them a little cooling-off 

period. 

You can’t go to work for somebody you just prosecuted or waived 

an enforcement action against within 18 months. That would hurt 

the credibility of the SEC and hurt the integrity of the process. 

If that employee wants to go to work for that person, they can— 

we leave an option here if they are low-level, not very much involved, they can go and get an ethics opinion that says that going 

to work for that company does not present the appearance of impropriety, or compromise the standing of the SEC, or put any party 

in that enforcement action at a disadvantage, or give them an advantage. 

I believe that these added measures will improve confidence in 

the agency’s ability to investigate suspected wrongdoing, and conVerDate Nov 24 2008 15:34 Jul 24, 2015 Jkt 095053 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\95053.TXT TERRI
5 

tinue the SEC’s recent efforts to strengthen the agency’s enforcement actions. The SEC Revolving Door Restriction Act of 2015 is 

supported by the Project on Government Oversight, POGO, a nonpartisan, independent watchdog. 

And POGO has detailed the dangers of the revolving door blurring the lines between the SEC and the interest that it regulates 

in a 2013 report, ‘‘Dangerous Liaisons: Revolving Door at the SEC 

Creates a Risk of Regulatory Capture.’’ 

They lay out the cases, the individual cases where this has happened. It is very powerful. And I want to give credit to POGO, the 

Project on Government Oversight, for the work that they have done 

on this. They really were the catalyst for my legislation. 

The report highlights that some SEC alumni routinely help corporations try to influence the SEC rulemaking. They also help 

them counter the agency’s investigations of suspected wrongdoing, 

and they often try to soften the blow that the SEC might otherwise 

deliver in enforcement actions. 

They also block shareholder proposals, and they also, at times, 

win exemption from Federal law. So as I said, if we are going to 

maintain the SEC’s integrity, and the integrity of this process, that 

cannot happen. I thank you, Mr. Chairman. And I yield back the 

balance of my time. 

Chairman GARRETT. Thanks. And the gentleman yields back. The 

gentlelady from New York is recognized for such time as she may— 

Mrs. MALONEY. Thank you. And my apologies. The meetings get 

earlier and earlier. I have already been in a meeting this morning. 

Thank you, Mr. Chairman, for holding this hearing, and we welcome you, Director Ceresney. 

The SEC’s Division of Enforcement has a very important job. It 

is the sharp end of the spear, so to speak, for the SEC. It investigates and prosecutes individuals and companies for violations of 

securities laws. 

And it is fair to say that the Enforcement Division makes all of 

the other divisions at the SEC matter. After all, there is no point 

in writing rules if they are not enforced. 

So the Enforcement Division is facing significant challenges. For 

example, despite a modest increase in your budget, the Enforcement Division is still vastly outspent by the white-collar defense 

bar. And the Second Circuit’s recent Newman decision poses a real 

threat to the Enforcement Division’s ability to police the markets 

for insider trading. 

Nevertheless, the Enforcement Division has made significant 

progress under the leadership of Chair White and Mr. Sorinsky. 

And the SEC has adopted a broken-windows approach to enforcement, in which there is no violation too small to pursue. The goal 

is to make market participants feel like the SEC is everywhere. 

While it is still too early to judge the success of this enforcement 

strategy, I believe we should start thinking about how we should 

measure the success of an enforcement strategy whose main goal 

is deterrence. I look forward to the hearing today. Thank you for 

being here. 

Chairman GARRETT. Thanks for that. And so now we turn to Mr. 

Ceresney, the Director of the Division of Enforcement over at the 

6 

SEC. Thank you very much again for being with us, You are recognized for 5 minutes. 

STATEMENT OF ANDREW J. CERESNEY, DIRECTOR, DIVISION 

OF ENFORCEMENT, U.S. SECURITIES AND EXCHANGE COMMISSION 

Mr. CERESNEY. Thank you, Chairman Garrett, Ranking Member 

Maloney, and members of the subcommittee. Good morning, and 

thank you for the opportunity to be here today. 

A strong enforcement program is at the heart of the Commission’s efforts to ensure investor trust and confidence in the Nation’s 

securities markets. And the Commission and the Division of Enforcement are committed to the swift, vigorous, and fair pursuit of 

those who have broken securities laws. 

The Division investigates potential violations of the Federal securities laws, recommends enforcement actions to the Commission, 

and litigates the enforcement actions to completion. Enforcement 

staff include investigators, accountants, industry experts, trial attorneys, and other employees in Washington, D.C., and the regional 

offices. 

The Division works closely with the other divisions and offices of 

the SEC, and regularly coordinates investigations with other regulators and law enforcement agencies, including the criminal authorities. In Fiscal Year 2014, the Commission brought the highest 

number of enforcement actions to date, 755, and obtained monetary 

remedies at our highest level, totalling over $4.16 billion. 

More importantly, though, these enforcement actions addressed 

significant issues, spanned the entire spectrum of the securities industry, and included numerous first-of-their-kind actions. We punished securities-law violators, returned funds to injured investors, 

and sent important messages of deterrence. 

The Division is focused on a number of important areas that are 

central to protecting investors in the markets. Comprehensive and 

accurate financial reporting is critical to ensuring that investors 

have access to reliable information and can make informed investment decisions. 

Because false or misleading financial information erodes the integrity of the markets, we have intensified our focus on this area 

and recently have seen a significant increase in financial reporting 

and auditing investigations and filed actions. 

Investment advisors and the funds they manage also remain a 

focus of the Division. And we regularly investigate and bring actions against investment advisors for conflict of interest, misrepresentations regarding performance or investment strategies, 

breaches of their duties to their clients, and other fraudulent conduct. 

The proliferation of sophisticated trading technology, such as algorithmic automated trading, has transformed the securities markets. These changes in the markets present significant potential 

risks to investors. The Division has recently filed a number of actions against market participants that pose a risk to the markets 

by failing to operate within the rules and has ongoing investigations into other potential violations of law related to equity market 

structure. 

7 

In the area of municipal securities, which are an important investment vehicle for retail investors, enforcement is focused on investigating misrepresentations in connection with bond offerings, 

failures by underwriters to meet their obligations, undisclosed conflicts of interest, and pay-to-play violations. 

Policing insider trading has long been central to the Commission’s mission of ensuring confidence in the markets. And the Division has sent a strong deterrent message to would-be violators by 

charging more than 590 defendants in civil insider trading cases 

over the last 5 years. 

Pursuing violations of the Foreign Corrupt Practices Act (FCPA) 

remains a critical part of our enforcement efforts. In the last fiscal 

year, the Commission obtained orders for over $380 million in 

disgorgement and penalties in FCPA cases. 

A common thread throughout these priority areas is the emphasis on the importance of gatekeepers to our financial system: attorneys; accountants; fund directors; board members; transfer agents; 

broker dealers; and other industry professionals who play a vital 

role in the functioning of the securities industry. 

When gatekeepers fail to live up to their responsibilities, the 

Commission will hold them accountable. The Commission’s ability 

to successfully litigate cases is critical to the mission of protecting 

investors. When the Division goes to trial, we have had a strong 

record of success, despite the difficulty and complexity of our cases. 

The Division strives to be proactive and efficient as it investigates violations of the securities laws. And we continually work 

to assess and refine our approach. Some recent efforts include requiring admissions of misconduct in certain cases where heightened accountability and acceptance of responsibility by a defendant 

are appropriate and in the public interest, leveraging the knowledge of various experts hired to give insights into the market and 

industry practices in its investigations and litigation, and using 

large-scale data analysis to assist in the identification of misconduct, and conduct more sophisticated investigations. 

Going forward, we will continue to take the steps necessary to 

permit the Division to more effectively and efficiently protect investors and the markets. Thank you again for inviting me to discuss 

the Division of Enforcement. I am happy to answer any questions. 

[The prepared statement of Director Ceresney can be found on 

page 42 of the appendix.] 

Chairman GARRETT. Great. Thank you very much. So I will begin 

with questioning, and recognize myself for 5 minutes. 

Two or three major areas: one is the administrative proceedings, 

which I touched on in my statements. Last year you were quoted 

as saying, ‘‘There have been a number of cases in recent months 

where the SEC has threatened administrative proceedings. It was 

something that we told the other side we were going to do, and 

then they settled.’’ 

Based upon your statement, do you believe it is appropriate to 

use statements like that, I will say it, the threat, if you will, that 

you are going to use administrative proceedings against the defendant in the matter basically as a threat, knowing what the outcome 

is going to be if you go through an administrative proceeding (AP) 

hearing? 

8 

Mr. CERESNEY. Administrative proceedings is a procedure that is 

available to us. And we try to use it when it is appropriate to protect investors. And we look at a whole bunch of factors to determine whether an administrative proceeding is appropriate. 

We have used it for years against regulated entities and individuals. And the only change, frankly, in the recent past that expanded the use of APs was the Dodd-Frank Act, which gave us the 

authority to obtain penalties against non-registered— 

Chairman GARRETT. Why don’t you just stress that point again. 

What is that change in Dodd-Frank? 

Mr. CERESNEY. Dodd-Frank gave us the authority to obtain penalties against non-registered individuals and entities in administrative proceedings; whereas before, we could only obtain those penalties in district court actions. So that is the only expansion of the 

use of— 

Chairman GARRETT. But that is a significant expansion, wouldn’t 

you say? 

Mr. CERESNEY. It is significant. But it allows us now to— 

Chairman GARRETT. Has there been a significant uptick then in 

the number of ALJ cases versus trial cases? 

Mr. CERESNEY. There has been, but most of those— 

Chairman GARRETT. Can you give a percentage or increase or 

anything like that? 

Mr. CERESNEY. I should just say that most of those cases are settled cases. So most of those cases are cases in which the other side 

is agreeing to a settlement with us. And so the uptick, I think, if 

you look at it, is probably more pronounced because we are settling 

more cases. 

Chairman GARRETT. I threw out a number in my opening statement. What is the correct number of your success rate, if you will, 

when you go through ALJ? I said 100 percent, but what is the— 

Mr. CERESNEY. That was for last year. It actually—yesterday, we 

actually lost an administrative proceeding against an individual; 

an ALJ ruled against us in connection with the Penson matter. 

And so—and that has been true in prior years. 

Last year, we did have a unanimous record. I should say that 

doesn’t necessarily reflect that we won every claim, doesn’t necessarily reflect we got the remedies we were seeking. And in many 

cases, the ALJs are pretty— 

Chairman GARRETT. The intention—the way I was toning my 

comments was that you have a fairly high success rate, 100 percent 

or akin to that, or in that area. So what are the rules, what are 

the—not the procedures, what are the guidelines that you use in 

order to make that determination that you are going to go that way 

and make that—I will use the word ‘‘threat’’ against the defendant 

in the case? 

Mr. CERESNEY. We use a number of facts and circumstances. 

First, there are certain proceedings we can only bring as administrative proceedings. So that includes failures to supervise and causing violations. 

Second, in cases where we need quick relief, where we want to 

get a bar very quickly, or we want to get investors relief quickly, 

administrative proceedings can be much quicker than district court 

actions. District court actions will often take years to get a resoluVerDate Nov 24 2008 15:34 Jul 24, 2015 Jkt 095053 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\95053.TXT TERRI
9 

tion in. APs, we can get a decision within 300 days of the institution of the action. So that is important. 

And another important point is where we have technical rules, 

where we have complicated rules, some of our rules are very complicated, we have sophisticated fact-finders who are the ALJs; 

whereas with a jury, it would be much more difficult for them to 

grasp those very, very complicated issues. 

So those are some of the issues. But we also—there are many 

reasons to use district court, including where we can get summary 

judgment. We can’t usually get summary judgment in an AP, including where we need discovery about privilege issues, including 

where we need expedited relief and emergency relief. 

Chairman GARRETT. So you just laid them out here. Is that all 

in written format for your staff to follow? 

Mr. CERESNEY. We do have some guidance internally for our 

staff. 

Chairman GARRETT. Can you supply that to us so we can see 

what those guidelines are and understand them in better detail 

than I can get in 4 minutes here? 

Mr. CERESNEY. Let me consult, but I will come back to your staff 

on that issue, yes. 

Chairman GARRETT. And, this is not just me raising this case, 

this issue. Recently, District Judge Rakoff stated that bringing 

more cases before ALJs ‘‘hinders the balanced development of the 

securities laws. The results would be that law in such cases would 

be effectively made, not by neutral Federal courts, but by SEC administrative judges.’’ 

So even independent bodies, judges, are making the—or calling 

into question what is occurring right now at the SEC. So do you 

agree with what he is saying? 

Mr. CERESNEY. I have great respect for Judge Rakoff. I disagree 

on this fact, which is I think that what you get when you have an 

AP is, you get the Commission weighing in on the securities laws, 

the Commission with the expertise they have. And then you have 

review by the Court of Appeals. 

Chairman GARRETT. But aren’t they developing law then by 

doing that, administrative law judges, when they make some of 

these decisions, making new Federal law? And they are not Article 

III judges, right? 

Mr. CERESNEY. The Commission reviews those decisions. And the 

Commission, I think, is obviously appointed by the President, and 

confirmed by the Senate. And they have expertise in the securities 

laws. And then after that expertise is exercised, the Court of Appeals has the ability to review that. 

So I do not think that you are taking away from the courts the 

ability to shape the law. 

Chairman GARRETT. You laid out somewhat the procedures that 

you use in order to do this. Is it possible that you will bring these 

cases, both similar-situated cases, both in one day, is an ALJ case 

one day, the next day in an Article III judge case? 

Mr. CERESNEY. The last year, if you look at our statistics last 

year, we brought 57 percent of the cases that were litigated in district court, and 43 percent as an AP 

10 

Chairman GARRETT. So does that mean that you get different results because of that interpretation of the law? And then I will 

yield back. 

Mr. CERESNEY. Obviously, you can never tell whether a result 

would be different in one forum or the other. But our overriding 

goal here is investor protection, which is our mission. And we use 

the forum that we think is appropriate for the goals of investor protection. 

Chairman GARRETT. I will yield back at this point. But since we 

don’t have that many people, maybe we will get a second round of 

this. The ranking member of the subcommittee, Mrs. Maloney, is 

now recognized for 5 minutes. 

Mrs. MALONEY. Thank you, Mr. Chairman. And following up on 

your line of questioning, any of us who has been in court knows 

it is incredibly time-consuming, and incredibly expensive. And as 

Mr. Ceresney noted, you can be in court for years without any solution. That doesn’t help investors, and it certainly doesn’t help business having a decision. 

So I supported the expansion that was in Dodd-Frank that expanded the SEC’s authority to try cases in an administrative forum 

where they could be made by administrative law judges in order to 

speed up the system. And some critics have said that the SEC’s administrative proceedings amount to what would be called a ‘‘homecourt advantage.’’ 

And some have even claimed that it deprives defendants of their 

due process. So I would like to ask you to speak to those issues. 

Do you think the SEC gets an unfair ‘‘home-court advantage’’ when 

they try cases in front of an administrative law judge? 

Mr. CERESNEY. I do not. Administrative proceedings have additional protections that actually defendants don’t necessarily have in 

district court, including our obligation to produce Brady material, 

exculpatory material to the defense, Jencks Act material, which is 

prior witness statements. We turn over the investigative files, usually within 7 days of filing our cases, which we do not do in district 

court proceedings. 

There also are exhibit lists and witness lists provided typically 

in administrative proceedings, extensive such. And so there are lots 

of protections. I think the one major difference, defendants also get 

subpoenas if they show good cause, and they can subpoena documents. 

The one major difference is obviously the lack of depositions. And 

I think the fact is if you look at our criminal cases, criminal authorities don’t give deposition authority. That clearly is not a dueprocess violation. So I think it can’t be a due-process violation to 

deprive defendants of depositions in this context. 

Mrs. MALONEY. That is the second criticism that I have heard, 

that defendants are still not receiving their full due process. And 

can they appeal the administrative law judges’ decisions? 

Mr. CERESNEY. Yes, they can appeal to the full Commission. The 

Commission hears the appeal in the first instance and then they 

can also appeal after that the Commission’s decision to the Court 

of Appeals. 

11 

Mrs. MALONEY. Could you just outline briefly what are the due 

process protections? You were talking in general, but can you just 

hit them like bullet points? What are the due process protections? 

Mr. CERESNEY. We have obligations to turn over Brady materials, which is exculpatory evidence; and Jencks Act materials, 

which are prior witness statements. We turn over our entire investigative file including any prior testimony by any witness, within 

7 days—typically within 7 days of our institution of the proceeding, 

we provide exhibit lists and witness lists that lay out in great detail what our case is going to look like. And, as I said, defendants 

also have the ability to obtain subpoenas of documents for good 

cause. And so I think the defendants have an extensive record 

which allows them to see exactly what we are charging. 

Mrs. MALONEY. That sounds like a good process to me. Are you 

getting criticism from investors or institutions about the administrative law judge procedures? 

Mr. CERESNEY. I have not heard criticisms from investors about 

the administrative law judge’s procedures. Obviously, there has 

been some public dialogue about it. 

Mrs. MALONEY. Okay. I would also like to ask you about the fact 

that when people talk about the Enforcement Division and whether 

or not it has been successful, they cite statistics on how many cases 

the SEC has brought and how much money they have collected in 

fines, and the bigger the numbers, the ‘‘more successful’’ the Enforcement Division is supposed to have been. 

This has always seemed extremely strange to me. If the SEC is 

bringing a huge number of security fraud cases, for example, 

doesn’t that suggest that there is more securities fraud in the markets? How is that a good thing? And, for me, this just highlights 

how foolish it is to judge the Enforcement Division based solely on 

statistics about the numbers of statistics and the numbers of fines 

and the number of cases. 

For example, how do you quantify the number of violations that 

did not occur because they were successfully deterred by the Enforcement Division? So my question is, should we be looking beyond 

simple statistics and instead looking at a broader range of factors 

to judge the Enforcement Division, even if those factors can’t be 

easily quantified. Could you comment on that? My time is up. 

Mr. CERESNEY. I agree that numbers are easy to come up with 

and, therefore, those are often cited, but I agree with you that is 

not a major touchstone of success of our Enforcement Division. As 

I always say, the numbers are not the most important aspect of 

judging how well we are doing. From my perspective, it is about 

the quality of our cases—are we covering the entire security spectrum, are we bringing cases that have an impact on investors, and 

also deterring and punishing this conduct more broadly. 

So we have tried—it is not easy as you suggest—to look at cases 

more qualitatively and to assign sort of measures qualitatively to 

the cases. And so we are trying to emphasize that we have talked 

about first-of-their-kind actions, where we are bringing cases in 

areas where we haven’t before. I think that is important, as well. 

So there is no question that numbers are not the be-all and endall in terms of measuring our success. 

Mrs. MALONEY. Thank you very much. 

12 

Chairman GARRETT. Mr. Hurt is now recognized. 

Mr. HURT. Thank you, Mr. Chairman. I know the gentlelady 

from Missouri, Mrs. Wagner, has some things she has to do so I 

am going to yield my time to her. 

Mrs. WAGNER. I thank the gentleman very much for his courtesy. 

And welcome, Director Ceresney. Thank you for joining us today to 

discuss some of these enforcement issues with the SEC. 

Earlier this year, a White House memo dated January 13th from 

Council of Economic Advisors Jason Furman and Betsey Stevenson 

was leaked that outlined the rationale for a new rulemaking from 

the Department of Labor to deal with conflicts of interest in the retirement advice market. Are you familiar with this memo? 

Mr. CERESNEY. I am not. The Enforcement Division obviously enforces the rules. We are not really involved in policy decisions 

about what— 

Mrs. WAGNER. Are you aware of the memos then? 

Mr. CERESNEY. I am not. 

Mrs. WAGNER. Commissioner Dan Gallagher recently referred to 

it as a ‘‘thinly veiled propaganda designed to generate support for 

a wildly unpopular rulemaking.’’ Director, I am worried about the 

effects that such a rule would have on low- and middle-income 

Americans seeking financial advice for their retirement. And I 

would like to get your perspective on some of the claims regarding 

this area. 

Mr. CERESNEY. In the Enforcement Division, we are in charge of 

enforcing the rules and the laws as they exist right now. And I 

think what you are referring to is a policy question as to what the 

law should be in the future. Should there be a different fiduciary 

standard, should that fiduciary standard apply to broker-dealers 

and the like. And that is a policy question that really is handled 

by other divisions at the SEC, not the one in which I am involved. 

Mrs. WAGNER. Let me proceed here and say the memo stated 

that, ‘‘Consumer protections for investment advice in the retail and 

small plan markets are inadequate and that the current regulatory 

environment creates perverse incentives.’’ Unfortunately, the memo 

does not analyze regulatory oversight or the protections investors 

currently receive from the SEC or FINRA. In fact, the memo 

doesn’t even mention the SEC at all. 

Isn’t it true that there are rules that require clear disclosure to 

investors about payments and fees, including, sir, incentive fees 

and rules which prohibit the use of manipulation, deceptive or 

fraudulent practices? 

Mr. CERESNEY. There certainly are statutes and rules on the 

books that preclude fraudulent activity and then we certainly vigorously enforce those. 

Mrs. WAGNER. You vigorously enforce those. Could you please 

help us fill in the blanks left on how the SEC currently regulates 

and enforces conflicts of interest and issues of ‘‘perverse incentives 

in the investment advice market?’’ 

Mr. CERESNEY. The law now does have a different standard for 

investment advisors than it does for broker-dealers. The brokerdealers are obviously governed by the anti-fraud provisions, and investment advisors have a fiduciary duty to their clients. So there 

is a difference in some of the standards that apply— 

13 

Mrs. WAGNER. There is a difference in the standards. Does the 

SEC ever bring cases against investment advisors for violations regarding their fiduciary duty? 

Mr. CERESNEY. Yes, we do. 

Mrs. WAGNER. So there are still issues of investor protection even 

with a fiduciary duty at times? 

Mr. CERESNEY. Yes, but there are different standards that govern investment advisors and fiduciary standard does have a different nature to it than the protections that apply to— 

Mrs. WAGNER. There were also claims, sir, that the current regulatory environment incentivizes advisors to recommend excessive 

churning of retirement assets. Doesn’t the SEC have rules that expressly prohibit brokers from churning client accounts? 

Mr. CERESNEY. The anti-fraud laws do prohibit churning, and 

that is governed by a test that looks at things like turn-over ratios— 

Mrs. WAGNER. Right. 

Mr. CERESNEY. —and the like. 

Mrs. WAGNER. From an enforcement perspective, how do you 

handle these cases? 

Mr. CERESNEY. We look for churning and we try—if we see indications of churning, we look to try to prove it by looking at things 

like the turnover ratio and the like. 

Mrs. WAGNER. What further ways can the SEC mitigate potential 

risks associated with conflicts as a deterrent through enforcement, 

sir? 

Mr. CERESNEY. As I said, we in Enforcement enforce the statutes 

and rules that are on the books now. And we do that vigorously. 

Whether there should be a different standard or not is, again, not 

something that is within our purview. 

Mrs. WAGNER. If the Department of Labor potentially steps into 

this space where you have decades of experience in regulating, 

could that make your job through Enforcement perhaps more difficult, sir? 

Mr. CERESNEY. I don’t know. I would have to know more about 

what it is that the Department of Labor is going to do. I will say 

that we enforce the law as we see it. Whenever we see a violation, 

we will bring an action. 

Mrs. WAGNER. Thank you, and I appreciate it. I yield back my 

time, and I thank the gentleman for his courtesy. 

Chairman GARRETT. And I thank you both. 

Mr. Lynch, you are recognized. 

Mr. LYNCH. Thank you, Mr. Chairman. Director, I wanted to talk 

to you about WKSI waivers. As you know, Congress and the SEC 

has the ability to withdraw well-known seasoned issuer (WKSI) 

status to a company if they are found to have, in particular, violated securities law and anti-fraud provisions. 

So I have sort of made a hobby out of tracking how many folks 

actually have their well-known seasoned issuer status withdrawn 

as a result of prosecution. And it is far more common for waivers 

to occur than it is to actually see prosecution. We don’t have a lot 

of success, I think, in—especially looking at the financial crisis, not 

a lot of people were prosecuted, at least high-level folks. Very little 

was done to hold people accountable. But this is a case where I 

14 

think just last year the SEC granted 80 specific waivers when they 

could have penalized these companies for wrongdoing. 

One particular case that I have found troubling was against 

Credit Suisse and they actually pled guilty to a criminal violation 

and yet, when the SEC was asked whether they would withdraw 

their well-known seasoned issuer status—this is someone whose 

employees were guilty of criminal activity—we still didn’t withdraw 

their status. 

So I am just curious as to where is that line? How do we review 

this, because it looks like it is much more likely that you will get 

a waiver from a penalty established by Congress than you might 

ever be prosecuted or be subject to this withdrawal of benefits? And 

of course, I should add that the well-known seasoned issuer status 

allows them to use shelf registrations. So that is a real benefit to 

these companies and it seems to be a good leverage point that we 

could use to require them to refrain from violating the anti-fraud 

provisions or other securities laws that we have established. And 

I am just curious, why don’t we use that tool? 

Mr. CERESNEY. Enforcement is generally not involved in waiver 

recommendations or decisions. Those are typically handled by other 

divisions at the SEC. For example, the WKSI waivers are handled 

by the Division of Corporation Finance. My understanding is that 

waiver requests are carefully evaluated by the Commission staff 

and by the Commission based on the facts and circumstances of the 

case under applicable legal standards. 

It is important to recognize that WKSI disqualifications are not 

enforced from remedies. We have remedies that are available to us 

to punish misconduct and deter misconduct. For example, we have 

disgorgement, we have penalties, we have bars, we have undertakings. We have lots of different remedies available to us. 

But the disqualification and waiver question is a separate question, as Chair White indicated in her speech a couple of weeks ago, 

that is a separate question about whether it is appropriate for that 

particular issuer to function in this particular business activity 

going forward. And whether the conduct that is involved in the enforcement action suggests that they cannot do that responsibly. 

That is a different— 

Mr. LYNCH. So Credit Suisse, you were involved in that prosecution? The criminal prosecution? 

Mr. CERESNEY. I was not involved—we were not. We brought a 

separate case against Credit Suisse that was separate from the 

criminal case— 

Mr. LYNCH. Okay. 

Mr. CERESNEY. —regarding unregistered broker-dealer conduct. 

Mr. LYNCH. I wonder if the prosecuting authority actually recommended that WKSI status be withdrawn or would that be overreaching on their part? 

Mr. CERESNEY. I am not—again, without talking about any particular case, which I don’t know if that would be appropriate for 

me to do, I am not aware of criminal authorities kind of expressing 

a view on a WKSI waiver decision. 

Mr. LYNCH. I am just curious, what is—so you have 80 waivers. 

I am just wondering, do you know if we are using the threat of 

15 

withdrawing that classification, WKSI classification, as a bargaining chip, sort of, in negotiations? 

Mr. CERESNEY. That is exactly why the Enforcement Division is 

generally not involved in the question— 

Mr. LYNCH. I see. 

Mr. CERESNEY. —about whether—because we do not want it to 

be a bargaining chip in our enforcement actions. 

Mr. LYNCH. Okay. Thank you. I yield back. Thank you, sir. 

Chairman GARRETT. Thank you. The gentleman yields back. 

Mr. Huizenga? 

Mr. HUIZENGA. I am up. All right. 

Chairman GARRETT. Yes. 

Mr. HUIZENGA. All right. Well, thank you. Sorry, I have to get 

back, gather my notes. I was being distracted by my Wisconsinite. 

He was bragging about how Wisconsin was going to win the tournament so I don’t know—I have to— 

Mr. DUFFY. Bill agrees Wisconsin is going to win, you guys. 

Mr. HUIZENGA. You are—reclaiming my time. I am not going to 

offer my predictions. Yes. All right, all right. I am getting to the 

penalties phase and all that. Let’s get back to business here. When 

former SEC Chair Schapiro announced her intention to return 

power to staff to determine penalties, it is my understanding she 

received a standing ovation; at least, that is what was reported. 

And I would like to hear your thoughts on, should power to decide penalties really reside with staff or should it reside with the 

five Commissioners appointed by the President and confirmed by 

the Senate? And, you have to understand, I am a former staffer 

myself. I understand the importance and the power of staff but, at 

the end of the day, doesn’t that seem like it should be political appointees and confirmed Presidential appointees who determine 

that? 

Mr. CERESNEY. Every recommendation that we make, including 

about penalties, gets approved by the Commission. So, at the end 

of the day, every penalty decision is approved by the Commission. 

We recommend to the Commission what the penalty should be, but 

it is up to the Commission to approve that. 

Mr. HUIZENGA. But the staff determines the level and then how 

often is that overturned by the Commission? 

Mr. CERESNEY. I would say in the vast majority of cases, the 

Commission accepts our recommendation. That is true of penalties 

and other things. In the vast majority of cases, our recommendation is accepted. Occasionally there is an issue, but every penalty 

recommendation gets approved by the Commission ultimately. 

Mr. HUIZENGA. All right. Tell me a little bit about company 

versus individual penalties on that. I have a quote here from you 

from 2013: ‘‘Monetary penalties speak very loudly and in any language a potential defendant understands. Enforcement needs to be 

aggressive in our use of penalties.’’ And I am curious, do you believe that penalties against corporations actually deter actions and 

conduct that violates the rules? Or why are they easier to levy 

these against companies versus individuals, and is there some sort 

of level where the SEC isn’t going to go after an individual or an 

employee at a certain level where public securities are—have 

been—there has been fraud within these public companies? 

16 

Mr. CERESNEY. There is no question that cases against individuals are the greatest deterrent. I think individuals who feel like 

they are at risk will be deterred in their conduct. I think that is 

the case. And actually, 70% of our cases last year were brought 

against individuals—involved individuals being charged. 

Having said that, I do think that there is an important place for 

monetary remedies against corporations. I think those kind of penalties have great impact. I think they encourage the increase in 

compliance, they encourage increased focus on compliance, they encourage shareholders and directors to pay attention and to ensure 

that executives are focused on making sure that there is compliance. So, for all of those reasons, I think corporate penalties are 

important but individual cases are critical. 

Mr. HUIZENGA. Is there a written policy as to what determines 

that for the recommendations? 

Mr. CERESNEY. A written policy for corporate penalties? 

Mr. HUIZENGA. No, is there a written policy that staff follows as 

they are trying to determine corporate versus individual? 

Mr. CERESNEY. There are internal guidelines about generally 

how to look at penalties but I don’t— 

Mr. HUIZENGA. There are always internal guidelines. 

Mr. CERESNEY. Right. 

Mr. HUIZENGA. We have internal guidelines in my family but 

that doesn’t mean they are necessarily written down. How are they 

written, are they policy when someone comes in and is new to this, 

is there something for them to review? 

Mr. CERESNEY. I believe we have internal guidelines but they 

generally set forth factors to consider in each case. So, in other 

words— 

Mr. HUIZENGA. So do you or don’t you know whether they are 

written down? 

Mr. CERESNEY. Well, there—for example, there is a 2006 release 

that the Commission put out on corporate penalties that contains 

9 factors that are relevant to corporate penalties. And in every 

case, we consider how those factors impact the case, and in a particular case, we may look at couple or two or three of those as 

being more important than the others. But, yes, that is one example. 

Mr. HUIZENGA. Okay. Would you be willing to provide this committee with those written policies? 

Mr. CERESNEY. Sure. I am happy to provide the 2006 statement 

to the committee. 

Mr. HUIZENGA. Okay. And that is the extent of any of the guidelines that you deal with and staff would deal with? 

Mr. CERESNEY. I believe we do have some internal factors to be 

considered. I would have to go back and look at our internal guidelines. But the public around this—also I should note cases out 

there—case law that articulates particular factors that should be 

considered in looking at penalties and we obviously follow those, as 

well. 

Mr. HUIZENGA. My time is expiring but I think what I would like 

to do is follow up in written form with you— 

Mr. CERESNEY. Sure. 

17 

Mr. HUIZENGA. —and see what we can pull together. Okay. 

Thank you, Mr. Chairman. And I yield back. 

Mr. HURT [presiding]. Thank you. 

The Chair now recognizes the gentleman from Delaware, Mr. 

Carney, for a period of 5 minutes. 

Mr. CARNEY. Thank you very much, Mr. Chairman. And thank 

you for coming in today, Director Ceresney. Just a couple of quick 

questions. One, and it has been referred to a little bit before, is 

that we as Members hear from our constituents all the time about 

the fact that so few people were prosecuted or went to jail. That 

is what I hear specifically from constituents, as a result of the big 

financial crisis. How would you respond to that? 

Mr. CERESNEY. I would say—obviously, I can’t speak to the criminal authorities, because we don’t have criminal authority at the 

SEC, and I can’t speak for the Department of Justice, which does. 

I will say that I think our record in the financial crisis was very 

strong. We brought cases against 175 entities and individuals including 70 CEOs, CFOs, and senior executives. We got tremendous 

amounts of relief and disgorgement and penalties as a result of the 

financial crisis cases. 

And so I think when you look at our efforts during the financial 

crisis, they were extremely strong. One example, just to point to, 

is the Bank Atlantic case which we tried in Miami a couple of 

months ago and we got a verdict against the CEO and the firm for 

misrepresentations relating to loans arising out of the financial crisis. That is just an example of a case we brought that was very 

strong and important. 

Mr. CARNEY. Could you characterize some of the other cases. 

What generally were you—or is it just a broad range of things? 

Mr. CERESNEY. It was a broad range of things. I think it included 

cases like the case against Citi’s CFO relating to the disclosure of 

the subprime exposure. A case against Countrywide Financial relating to issues relating to their mortgages. Cases against Thornburg Mortgage relating to representations they made to investors. 

A case against BankAtlantic involved misrepresentations by a CEO 

regarding the performance of loans on the books of the bank. Those 

are just some examples. 

Mr. CARNEY. Shifting gears, considerably actually, I am interested in your reflections here. A number of us have heard presentations about the possibility of a venture-type exchange. And I have 

talked to folks in the business and there—some of the concerns 

they raise are around fraud and that kind of thing, and the example in Canada, there actually has been some fraud. What concerns 

would you have with respect to a venture exchange, if you will, 

from an enforcement—from a fraud perspective and if you are familiar with that at all? I would be interested in your viewpoint on 

that. 

Mr. CERESNEY. Obviously, the question about venture exchanges 

is one for the Division of Corporation Finance or for the Division 

of Trading and Market— 

Mr. CARNEY. But my question is more of what should we be concerned about and— 

Mr. CERESNEY. Sure. I think it is—I wouldn’t characterize it as 

anything different than we are often concerned about, which is inVerDate Nov 24 2008 15:34 Jul 24, 2015 Jkt 095053 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\95053.TXT TERRI
18 

vestor protection and whether investors are being misled. You obviously want to make sure that any representations the company 

that lists on a venture exchange are accurate. And so we would obviously monitor that just like we are monitoring all kinds of other 

things. Like, for example, Rule 506 Jobs Act, and other types of initiatives that relate to raising money from investors. We do look for 

fraud and all. So I don’t know whether venture exchanges would 

present a larger— 

Mr. CARNEY. Yes, I think that is really the question. 

Mr. CERESNEY. I don’t know— 

Mr. CARNEY. You don’t have a view on that? 

Mr. CERESNEY. —to have a view on that, yes. 

Mr. CARNEY. Well, thanks very much. Thanks for being here. I 

yield back. 

Mr. HURT. The gentleman yields back. The Chair now recognizes 

the gentleman from Texas, Mr. Neugebauer, for a period of 5 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman, and thank you, 

Mr. Ceresney, for coming today. 

Under Sarbanes-Oxley, the Commission is authorized to take 

pools of cash collected from defendants in the SEC enforcement actions and distribute the money to injured investors. I think they 

call those Fair Funds. The penalties are deposited into the Fair 

Fund which functions like a private class action settlement. 

In an op-ed in November of 2014 in The Wall Street Journal, 

SEC Commissioners Gallagher and Piwowar expressed concerns 

about the use of those funds and said they believed that class action lawyers have an incentive to round up potential victims in the 

SEC insider trading cases and arrange a substantial contingency 

fee, then lead Fair Fund campaign under the guise of grassroots 

movement by harmed investors. 

I think the particular case that Commissioners Gallagher and 

Piwowar were referring to was the SEC v. CR Intrinsic Investors. 

I think in that case there were thoughts that it was difficult to 

really tell who the injured parties were in that case, and that a 

substantial amount of money was involved in that transaction. And 

so I guess the question is, were you aware that before the vote, the 

Commissioner’s office received dozens of suspiciously similar letters 

from purported victims urging the Commission to petition for a 

Fair Fund? 

Mr. CERESNEY. The CR Intrinsic case did involve proceeds from 

a settlement that involved insider trading. Our assessment, based 

on the WAU and Congress’ prior activity in this area, is that contemporaneous traders—that is, traders who traded at the same 

time as the insider trading occurred—were victims under the law 

as it has been defined by both the case law and by Congress in the 

past. 

And so our recommendation to the court was that a Fair Fund 

be established both from the disgorgement and from the penalty 

amounts in that case and distributed appropriately, and we also reminded the court that the statute does not allow for the use of attorneys’ fees—the use of the funds to pay attorneys’ fees as part of 

that distribution. 

19 

And so our perspective was that a fund should be created and an 

administrator should be appointed to determine who the victims 

were, and then distribute the money, but that it shouldn’t go to attorneys’ fees. 

Mr. NEUGEBAUER. You may not directly pay attorneys’ fees, but 

if a bunch of trial lawyers get together and go out and solicit people 

who could have—say they could have been injured in that trading 

or that specific case, they get a contingency fee, while the funds 

from the pool don’t directly go to pay those attorneys, indirectly 

they would go to the attorneys. I guess they would be netted from 

the settlement with the individual who claimed their damages. 

Wouldn’t that be correct? 

Mr. CERESNEY. I don’t know what arrangements there are between investors and their attorneys and, obviously, we don’t look 

into—we award a settlement—if money is awarded out of the Fair 

Fund to a particular investor what they then do with that money 

is not something that we can have visibility into. And so I think 

the only question that we were faced with was whether those contemporaneous traders were victims, and a majority of the Commission obviously approved the recommendation that we recommend 

to the court the creation of the Fair Fund. 

Mr. NEUGEBAUER. What is the current policy of when you establish a Fair Fund and when you don’t establish a Fair Fund? 

Mr. CERESNEY. Whenever we have investors that have been 

harmed that we can identify, and wherever the money is sufficient 

such that it makes it justifiable to create a fund, we will recommend a Fair Fund. It obviously is a facts-and-circumstances determination based on the amount of money, who the victims were, 

what the conduct was, et cetera. 

Mr. NEUGEBAUER. What is the current status of the Intrinsic 

case? 

Mr. CERESNEY. I am not 100%—I think an administrator has or 

will be appointed, I am not 100% sure of exactly where—I am 

happy to get back to you with the current status if I can go back 

and check. I believe it was in the planning stages still where we 

had—I think there had been an administrator appointed and now 

they have to come up with a plan. 

Mr. NEUGEBAUER. And how many Fair Funds have you set up 

since the authorization in Sarbanes-Oxley, do you know? 

Mr. CERESNEY. I don’t have a number of Fair Funds. I can tell 

you the amount of money we distributed through—since SarbanesOxley. It is almost $10 billion. 

Mr. NEUGEBAUER. But you don’t how many funds? 

Mr. CERESNEY. I can’t tell you. It is hundreds, but I don’t know 

the exact number. I can get back to you with that if you would like. 

Mr. NEUGEBAUER. And when you say you distributed $10 million, 

that was the amount of money that went into the fund? 

Mr. CERESNEY. $10 billion. 

Mr. NEUGEBAUER. $10 billion. 

Mr. CERESNEY. Yes. I think that is the amount distributed. There 

are occasions I think where money goes into a fund but there is excess and it comes back, so I am not sure whether that—I think that 

$10 billion is actually disbursements. 

20 

Mr. NEUGEBAUER. I would be interested to know the current status of the Intrinsic case. 

Mr. CERESNEY. Okay. We can get back to you on that. 

Mr. NEUGEBAUER. Thank you. 

Mr. HURT. The gentleman yields back. The Chair now recognizes 

Mr. Sherman for a period of 5 minutes. 

Mr. SHERMAN. Thank you. I want to focus a little bit on some of 

the less sophisticated, more clearly illegal, but sometimes not detected, fraud that goes on out there. The best example is Madoff. 

I want to make sure that we have learned all the lessons that can 

be learned there. 

One of the things with Madoff is he submitted audited financial 

statements, audited by a firm so small that they could not have 

done an audit of his operation. You might also have a circumstance 

where the firm is just barely enough to have done the work, but 

if they did it, that would have to be like half their fees for the year 

and they would have lost independence. You may have a circumstance where the audit firm doesn’t exist. And you may have 

a firm that does exist but the issuer just steals a piece of stationery. What systems have you done—gone through to make sure 

that the auditor sends you a copy of the audit opinion, or emails 

it in to you, so you know that the issuer is not submitting a forged 

audit opinion? 

Mr. CERESNEY. Obviously, the PCAOB was created by part—Sarbanes-Oxley to oversee the audit—public audit of public companies, 

and I think that they have— 

Mr. SHERMAN. This is more, how do you— 

Mr. CERESNEY. Is your question in connection with— 

Mr. SHERMAN. Yes. When a registration statement is submitted— 

Mr. CERESNEY. Right. 

Mr. SHERMAN. —it is submitted by the issuer. How do you— 

when a reg D document is submitted, et cetera. At all levels from 

public to A plus to A minus to A triple plus, whatever, reg A, reg 

D. How do you make sure that, in fact, the CPA firm did in fact 

sign that opinion? It is not a forgery? 

Mr. CERESNEY. Well, the Division— 

Mr. SHERMAN. Do you bother to contact the firm? 

Mr. CERESNEY. The Division of Corporation Finance reviews filings by companies. 

Mr. SHERMAN. Do they have a system, or you don’t know if they 

have a system? 

Mr. CERESNEY. Sitting here today, I can’t tell you what their system is. I know if they were to find a red flag that suggested there 

was an issue they would refer it to us. 

Mr. SHERMAN. The answer, I believe, last I checked is that they 

have no system. Madoff happened because 10 or 12 of the barn 

doors were open. They have closed one or two, and they have gone 

on to other things. There will be more fraud, and then there will 

be more work for you folks to do and more big fines to collect, 

which will get the agency more big and good headlines. 

What does your Enforcement Division do with regard to the 

Ponzi schemes that are out there being sold to people who wouldn’t 

know a registration statement if it hit them in the face? Are you 

21 

trolling the internet and finding the Ponzi schemes or are you 

going to tell me that, well, you are not a law enforcement agency 

so you won’t do that? 

Mr. CERESNEY. We do do that, amongst many other things. We 

obtain over 15,000 TCRs, tips, complaints and referrals a year. 

Mr. SHERMAN. I am not talking about—I am talking about, are 

you trolling or are you just waiting for people to tell you? 

Mr. CERESNEY. We do have proactive efforts in a number of 

areas, including pyramid schemes, microcap fraud, and that kind 

of— 

Mr. SHERMAN. You actually have at least one employee who is 

trolling the internet, finding the bogus offers that are out there to 

investors? 

Mr. CERESNEY. We do in a number of areas, including microcap 

fraud, pyramid schemes and the like. We do do affirmative 

proactive surveillance. 

Mr. SHERMAN. Got you. Now, you are asking for a 7 percent increase in the budget. How would that be spent? Why is it necessary? 

Mr. CERESNEY. Yes, the portion of that budget that is related to 

the Enforcement Division relates to 93 positions that we have 

asked for. I think the way we break it down is really three categories of additional needs. One is data analytics. We anticipate 20 

people would be into analytics. We have a huge amount of data 

now available to us. Using that to detect misconduct is a great opportunity and something that we really need to be doing. 

The second is for investigators, about 50 additional people there. 

And there, I think the point is we have just tremendous resources 

that are necessary to investigate complex schemes. And the third 

area is trial attorneys—about 20 or so trial attorneys. And we have 

seen an increase in trials— 

Mr. SHERMAN. And these 93 positions, that would be roughly a 

7 percent increase of your Division or is it somewhat different than 

that? 

Mr. CERESNEY. Our Division now is about 1,300 or so employees— 

Mr. SHERMAN. It is pretty close to 7 percent. 

Mr. CERESNEY. I guess it is close to 7 percent. 

Mr. SHERMAN. Close enough for government work. 

I yield back. 

Mr. HURT. The gentleman yields back. It is my understanding 

that votes have been called. So what I would like to do is to have 

questions for—what I would propose doing, without objection, is 

that we have questions from Mr. Royce and then Mr. Himes and 

we would then recess. 

So with that, I recognize Mr. Royce for a period of 5 minutes. 

Mr. ROYCE. I thank the chairman. 

Director, as you point out in your testimony, policing insider 

trading is central to the mission of ensuring confidence in the markets. And I assume that you often get anonymous tips on insider 

trading cases or have things referred to you from the Division of 

Corporation Finance. 

I am wondering what other avenues you look to for information. 

For example, if a Federal judge raises serious questions about inVerDate Nov 24 2008 15:34 Jul 24, 2015 Jkt 095053 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\95053.TXT TERRI
22 

sider trading in a ruling, is this something that could trigger the 

commencement of an investigation into securities laws violations? 

Or is an investigation—let’s say there is an ongoing investigation, 

are issues raised in a court proceeding potential evidence for the 

Division of Enforcement? 

Mr. CERESNEY. We have a number of sources of information relating to insider trading cases. A prominent source is SRO referrals, FINRA and ORSA refer cases to us often. We also now have 

developed internally a mechanism for finding insider trading 

through data that we have—blue sheet data that we have. Obviously, if a court decision were to come out which suggested there 

was insider trading, it clearly is also something we would look at. 

Mr. ROYCE. The judge raised those serious questions, I see. As 

for what makes up the insider trading, do you look to the law for 

guidance? Do you discuss potential investigations with your colleagues in Corporation Finance? I assume it is not always as easy 

as Justice Potter’s storage rule that you know it when you see it. 

Mr. CERESNEY. We do. Obviously, we have dialogue internally, 

including with the Division of Corporation Finance about violations 

of the insider trading laws. 

Mr. ROYCE. And it is clear to me that sometimes you have to answer complicated questions in order to bring an insider trading 

case to the Commission. Under the Securities and Exchange Act, 

and specially Rule 14e-3, there are many hurdles that have to be 

overcome. And I was hoping you could help me understand some 

of those today. 

The first is this question of what constitutes a substantial step 

or steps toward a tender offer? Do you look for tactics commonly 

associated with a hostile bid? Say, for instance, Company A is making an offer to buy Company B. If Company A begins a PR campaign and hires financial and legal advisers and sends multiple 

threatening letters to Company B’s Board of Directors, directly 

communicates with Company B, its customers and employees, 

would this not meet the threshold of commencing a hostile tender 

offer? 

Mr. CERESNEY. I think it is a facts and circumstances inquiry. 

You know, what a substantial step towards a tender offer is really 

a—can be a complicated question, in certain cases, obviously. So I 

think it really depends on the facts and circumstances. 

Mr. ROYCE. And here is a follow-up on this: What if Company A’s 

board meeting materials clearly reflect a recognition by the board 

that a move to acquire Company B would most likely require a hostile takeover? Or what if Company A simply makes a self-serving 

statement that it is not taking a substantial step towards a tender 

offer. Is this enough to establish that as fact? 

Mr. CERESNEY. Again, I think it is a facts and circumstances inquiry. I need to really sort of examine the set of facts and circumstances on that. 

Mr. ROYCE. And another question that has only recently been 

raised is what is the SEC’s definition of who would be considered 

a co-bidder or a so-called co-offering person and therefore exempted 

from the scope of the rule? 

Mr. CERESNEY. Again, it depends on the facts and circumstances 

and what kind of conduct the individual or the entity takes. 

23 

Mr. ROYCE. Would a person or persons brought on as a strategist 

or financier by Company A qualify as a co-offering person under 

the rule? What would have to be established for this person to 

qualify for the exemption from the disclosed or abstain rule that 

applies to those with material non-public insider information. 

I am hopeful that the SEC will provide some clear guidance on 

these issues in the future. And so, that is why I asked the question 

for the record. If I could have a response on those? 

Mr. CERESNEY. Again, it is a facts and circumstances inquiry. I 

would really need to examine the facts more closely. 

Mr. ROYCE. Thank you, Director. 

Mr. CERESNEY. Thank you. 

Mr. HURT. The gentleman’s time has expired. 

The Chair now recognizes Mr. Himes for a period of 5 minutes. 

Mr. HIMES. Thank you, Mr. Chairman. Thanks for being with us, 

Director Ceresney. I have two questions pertaining to insider trading. Like my colleague, Mr. Lynch, I am working on a bill that 

takes a slightly different approach. 

And my two questions are this. First, there is some ambiguity in 

the press reporting about the SEC’s beliefs around the implications 

of the Second Circuit’s Newman decision. Law 360—I think they 

quoted you as saying you have the ability to adapt, late January 

Southern District prosecutors say they are going to drop some prosecutions. And of course, we are hearing lots of talk about the possibility of convictions being overturned. 

So my first question is, regardless of the future of the Newman 

decision, do you think we would be well-served, big picture, by 

clear statutory liability, in other words, a law prohibiting insider 

trading? 

Second—I will let you divide up the remaining time in terms of 

how you want to answer these—and this would be helpful in thinking through the legislation that I am working on, how does the 

SEC think about the threshold between civil and criminal liability? 

I guess the right way to ask that is when do you and how do you 

take the decision to refer a case like this to the DOJ for criminal 

prosecution? 

Mr. CERESNEY. First, let me just comment on the impact of Newman. I think it is fair to say it is a very significant decision and 

it will impact certain of our cases. Whatever has been reported 

about our views, it is very significant. It also, though, as I have 

said before, does not mean that we don’t have insiding trader cases. 

We brought cases against 16 defendants since Newman and we will 

continue to do that. We will work within the confines of Newman. 

We have a lower standard of proof on the civil side, where we 

have to show negligence by knowledge of a tippee, and so that 

helps. We have other circuits we can go to. So, there are ways we 

can deal with Newman. And I think courts may well distinguish 

the facts on Newman, as they did in the last couple of weeks in 

the Southern District. So, that is just our views on Newman. 

And we filed an amicus brief. The rehearing is still pending. And 

so, obviously, whatever happens with that will impact our views. 

As for the views on legislation, I think that obviously is a decision for the Commission to make about what their position is on 

legislation. And they have not taken a position yet. What we have 

24 

said and we will continue to do is, we are happy to supply technical 

expertise, as you and others work on bills. 

And I think Chair White said last week—and I think this remains our overriding view—strong insider trading laws are critical 

to the markets. And we think that is important. And we think that 

is critical. So, that remains our overriding goal, making sure that 

insider trading laws are strong, and that people have confidence in 

the markets. 

Now, as to the question about civil and criminal— 

Mr. HIMES. Can I stop you there? Because, of course, some might 

argue that there are no insider trading laws, that you rely on antifraud provisions. So, can I interpret what you just said as encouragement that perhaps we should do away with some of the ambiguity emerging from the way these cases have been prosecuted? 

Mr. CERESNEY. No, I think I am saying it is really up to the 

Commission, and they haven’t expressed a view on this. And I don’t 

want to be interpreted one way or the other on this. I think Section 

10b-5 does prohibit insider trading, as the case law has shown. It 

is deceptive conduct, and it is illegal under Section 10b-5. So, that 

is really what I was saying. 

And just on the civil/criminal question that you asked, obviously, 

violations of the securities laws—the only—the thing that makes it 

criminal is intentional conduct, where we can show intentional conduct beyond a reasonable doubt. That is what makes it criminal. 

Obviously, every violation to securities law could be criminal if it 

is done intentionally and we can prove it beyond a reasonable 

doubt. 

And so, in insider trading cases, what we do is we often work 

with criminal authorities, as well. They have tools that aren’t available to us, including undercover operations and the threat of jail 

and those kinds of things. And the question about whether something goes criminal versus civil is often a question of the evidence. 

Typically, you will have a cooperator in a criminal case, or you 

will have a recording. Or you will have some sort of definitive evidence that can prove it beyond a reasonable doubt. 

In our civil cases, we often have circumstantial evidence. You see 

somebody trading right before an announcement. You see them getting a call from an insider right before they trade. You see evidence 

of suspicious trading, where they are trading two thirds of their net 

worth right before an announcement. They have a relationship 

with somebody who is an insider. 

So, there is lot of circumstantial evidence that shows it, and we 

think that can prove it by a preponderance of the evidence. But 

that is not always sufficient to show beyond a reasonable doubt. 

Mr. HIMES. Last question. Newman hinged on the knowledge of 

the tippee, of the tipper’s personal gain and the existence of that 

personal gain. Do you think that the tippee’s knowledge of the possibility of personal gain on the part of the tipper—do you think 

that is sort of an essential feature to liability of the tippee? 

Mr. CERESNEY. Well, that is what Newman says. And we had 

previously—our view was that it wasn’t. But the Southern District 

didn’t appeal that portion of the Newman case—didn’t seek rehearing on that portion of the Newman case. And so, I think it will 

stand. So Newman, at least in the 2nd Circuit, governs there. 

25 

As I mentioned, the way we deal with that is we have a lower 

standard of proof on that. We just have to show that the tippee 

should have known that the tipper had a personal benefit. And 

that gives us an ability to show, for example, that the nature of the 

information was such that the tippee should have realized that it 

came from somebody who had personal benefit. 

Mr. HURT. Thank you, Mr. Ceresney. 

The gentleman’s time has expired. 

The list that I have now is Mr. Schweikert, Mr. Poliquin, Mr. 

Hill, and Mr. Duffy are the ones that we will expect to hear from, 

or have questions when we get back. 

And, without objection, we will recess until 10:45. 

[recess] 

Mr. HURT. The subcommittee will come back to order. Thank 

you, Director, for your patience. 

And what I have like to do is go ahead and recognize the gentleman from Wisconsin, Mr. Duffy, for a period of 5 minutes, starting now. 

Mr. DUFFY. Thank you, Mr. Chairman. 

Mr. Ceresney, you are a lawyer, correct? 

Mr. CERESNEY. I am. 

Mr. DUFFY. And you used to be a Federal prosecutor, correct? 

Mr. CERESNEY. I was. 

Mr. DUFFY. And now you have moved over to the SEC? Yes? 

Mr. CERESNEY. Yes. 

Mr. DUFFY. Yes. Very easy questions. 

And you care about due process, I would imagine? 

Mr. CERESNEY. Yes, I do. 

Mr. DUFFY. Who hires the ALJs who work at the SEC? 

Mr. CERESNEY. I am not sure of the exact process and I am not 

involved in the process— 

Mr. DUFFY. But the SEC hires the ALJs, right? 

Mr. CERESNEY. I believe, actually— 

Mr. DUFFY. You should know the answer to that. It is not some 

outside group, right? 

Mr. CERESNEY. I don’t—I think that the chief judge, Judge Murray, may be well involved in it. I assume ultimately, it is approved 

by either the Chair or the Commission. I am not sure. 

Mr. DUFFY. At the SEC? So the ALJs are hired by the SEC? 

They are paid by the SEC, correct? Yes. 

Mr. CERESNEY. They are paid by the government. I don’t know 

exactly where the money— 

Mr. DUFFY. In the administrative law proceedings, who makes 

the rules in regard to those proceedings? 

Mr. CERESNEY. The Commission. 

Mr. DUFFY. The SEC does, right? 

Mr. CERESNEY. That is correct. 

Mr. DUFFY. Right. So, not some third party. You actually make 

the rules by which you get to litigate cases or prosecute cases, correct? 

Mr. CERESNEY. I think they are subject to notice and comment, 

but yes, it ultimately is— 

26 

Mr. DUFFY. But you make the final rule. You can say, ‘‘I will listen to you, I will hear you, but I am going to make the final decision.’’ 

Mr. CERESNEY. Like other rules, that is correct. 

Mr. DUFFY. So with regard to discovery in the ALJ proceedings, 

do you have the same discovery requirements going the ALJ route 

as you do in Federal court? 

Mr. CERESNEY. Actually, you have more extensive discovery. 

Mr. DUFFY. More extensive? 

Mr. CERESNEY. Yes. We turn over our whole file, typically within 

7 days of— 

Mr. DUFFY. Are you required per your rules to turn over those 

documents? 

Mr. CERESNEY. Yes, we are. 

Mr. DUFFY. So you are—your testimony is, the discovery requirements at the SEC going the administrative route is more extensive 

than the Federal courts? 

Mr. CERESNEY. Our obligation to produce documents and items 

that are in our file is more extensive. 

Mr. DUFFY. So do you have a duty to disclose exculpatory evidence to the defendant? 

Mr. CERESNEY. In an administrative proceeding, we do, not in a 

district court action. 

Mr. DUFFY. So you are required to—per your guidelines, to disclose exculpatory evidence? 

Mr. CERESNEY. Per the rules of practice, yes. 

Mr. DUFFY. Okay. And what happens if you violate that rule? 

Mr. CERESNEY. I assume there are implications for the proceeding, but I am not familiar with instances where that has occurred. But I imagine there would be implications in the proceeding. 

Mr. DUFFY. In regard to the admissibility of hearsay, is that admissible in Federal court? 

Mr. CERESNEY. Hearsay is, unless it is subject to an exception— 

there are obviously a number of exceptions to hearsay— 

Mr. DUFFY. It is not admissible, right? 

Mr. CERESNEY. Hearsay that is not subject to an exception is not 

admissible. 

Mr. DUFFY. Is it admissible in your proceedings? 

Mr. CERESNEY. The rules of evidence are relaxed in an administrative proceeding, but the administrative law judge has discretion. 

Mr. DUFFY. So the point is, you don’t have the same rules on 

hearsay at the SEC as you do in Federal court. 

Mr. CERESNEY. They could, although one thing to say is the administrative law judge decides on the weight of the evidence. 

Obviously, if evidence is hearsay— 

Mr. DUFFY. The administrative law judge that is employed by 

the SEC, that one? 

Mr. CERESNEY. The administrative law judge— 

Mr. DUFFY. —what was the—I thought I heard that incorrectly— 

what was the win rate last year in the cases you brought, in those 

administrative cases? 

Mr. CERESNEY. Last year— 

Mr. DUFFY. Did I hear it was 100 percent? 

27 

Mr. CERESNEY. Last year, but— 

Mr. DUFFY. But 100 percent? 

Mr. CERESNEY. Not in prior years, though. 

Mr. DUFFY. But last year was 100 percent? You won every case? 

How about with regard to the cases that you brought in Federal 

court? Was it 100 percent there? 

Mr. CERESNEY. No— 

Mr. DUFFY. No? You won 11 out of 18? 

Mr. CERESNEY. That is correct—11 out of— 

Mr. DUFFY. Do you think there could be any correlation when 

you actually hire the judges and you set the rules that you win all 

the cases? Do you see a correlation there? 

And you might say, you know what? I want to bring more cases 

in front of the judges that I hire and abide by the rules that I set 

as opposed to letting these cases go into Federal court. And low 

and behold, wow, I win them all. And I believe in due process. 

This is a great way to administer justice when you work at the 

SEC. 

Mr. CERESNEY. I will just say this: We are not afraid to try cases 

in Federal court. In fact, we have won 11 of our last 13 jury trials 

in Federal court. We just won one yesterday. 

And we still bring a majority of our cases in district court, so we 

are not shying away from using district court. 

Mr. DUFFY. With regard to press releases, I read a few of your 

press releases. I don’t know if you would agree, but when I read 

your press releases, I read them and say, ‘‘This defendant, man, 

the SEC says they are guilty. They lay out the case, they lay out 

the facts, and they conclude guilt.’’ 

As a former Federal prosecutor, from the U.S. Attorney’s Manual, there is a requirement that says, ‘‘A news release should contain a statement explaining that the charge is merely an accusation, that the defendant is presumed innocent until and unless 

proven guilty.’’ 

And I was a former prosecutor, only a lowly State prosecutor, 

and we would abide by that rule as well. 

I read this, and I am amazed at the stuff you put in your press 

releases with regard to defendants. 

Thoughts on that? 

Mr. CERESNEY. I think our press releases always make clear that 

the allegations are being alleged, and they make it clear that they 

have not been proved and they are subject to being— 

Mr. DUFFY. What do you think a Federal judge would do if you, 

as a Federal prosecutor, put out a press release about a defendant, 

like you do, about a defendant at the SEC? Do you think he would 

say, ‘‘Oh, wow, that is right in line with Federal procedure?’’ 

Mr. CERESNEY. I think it is in line. 

Mr. DUFFY. You think it is? 

Mr. CERESNEY. Yes, I do. 

Mr. DUFFY. I would disagree in the most strong way. 

I see my time— 

Mr. HURT. Thank you, Mr. Duffy. 

Mr. DUFFY. —is up. I yield back. 

Mr. HURT. Thank you, Mr. Duffy. And the gentleman’s time has 

expired. 

28 

The Chair now recognizes Mr. Poliquin for a period of 5 minutes. 

Mr. POLIQUIN. Thank you very much, Mr. Ceresney, for being 

here this morning. I appreciate it. 

And I want to thank you also for the good work of you and your 

staff in pursuing the bad guys in the financial services space. I 

know that you are doing the best you can to make sure you protect 

our consumers. 

Now, if you don’t mind me beginning by reminding both of us 

that the reason we have such a strong economy, in great part, here 

in America is because we have such a diverse and creative and liquid capital market and also financial services sector. Not only do 

they provide the capital that we need as an economy to grow and 

create better lives and more jobs for our citizens but it also provides the tax revenues we need to defend ourselves and take care 

of those who are truly in need. 

Now, we both know that this country is a country of laws, and 

it is very, very important that whomever comes before you—and I 

am sure you would agree with this, Mr. Director—has a fair hearing. This is embedded in our Constitution, the 4th and 5th Amendments. 

And I am sure you want to make sure that anybody who is 

brought before you folks has an opportunity to defend themselves 

in a fair and predictable way, whether you are in front of a traffic 

court in Bangor, Maine, or someone here in Washington who is in 

the financial services sector before you folks. 

Now, one of the concerns that I have, to be very candid about 

with you, as we discussed a little bit this morning, Mr. Ceresney, 

is that during the past few years, you seem to have relied much 

more on an in-house administrative process to chase down those 

you think are—or have been accused of violating our securities 

laws. 

Now, if I am not mistaken, internal in-house procedures are located and they take place at your offices. Is that correct? In-house? 

Mr. CERESNEY. In D.C., we have a hearing room in the SEC— 

Mr. POLIQUIN. Okay, so it is that essentially at your building? 

Mr. CERESNEY. In the regions, actually, often, the hearings are 

not held in our offices; often, they are held in Federal courts or 

other places. 

Mr. POLIQUIN. Okay, but I am just talking about your administrative process. And if I am also not mistaken, Mr. Ceresney, you 

folks actually select the administrative law judges who oversee 

these proceedings. Is that correct? 

Mr. CERESNEY. As I mentioned, I am not 100 percent sure of the 

process by which the ALJs get hired. I know that the— 

Mr. POLIQUIN. Okay, but you folks pay them. 

Mr. CERESNEY. They are paid by the government. 

Mr. POLIQUIN. Okay, they are paid by the government. Paid by 

the SEC in this case, part of your budget. 

Mr. CERESNEY. I assume that is right. But I don’t know where 

the money comes from. 

Mr. POLIQUIN. Okay. I would make the case, if I may, sir, that 

if you are not in Federal court to pursue these alleged violations 

of the securities law and they are held, effectively on government 

property, your government property or thereabouts, and you folks 

29 

are involved in some way, are hiring and paying for these judges, 

I would make the argument with you or make the point that they 

might not be completely impartial. 

And I want to just bring that to your attention. 

Also, it is my understanding that there is no jury involved, correct? 

Mr. CERESNEY. There is no jury— 

Mr. POLIQUIN. Okay. And also, hearsay is admissible as evidence 

in these proceedings, is that correct? 

Mr. CERESNEY. As I said before, hearsay evidence can be admissible. It is at the discretion of the ALJ and the amount of weight— 

Mr. POLIQUIN. Okay. And these folks are the people that you hire 

for these proceedings. 

And if someone comes before you and they—or they come out on 

the other side of the fence, and they want to appeal it, they appeal 

it before your people, right? 

Mr. CERESNEY. They appeal it to the Commission. 

Mr. POLIQUIN. Okay. So they— 

Mr. CERESNEY. Presidential appointees. 

Mr. POLIQUIN. Okay, so they appeal it to your organization, not 

an independent outside entity, correct? 

Mr. CERESNEY. They ultimately can appeal to a court of appeals. 

Mr. POLIQUIN. Okay, but the first appeal is to you folks, right? 

Mr. CERESNEY. The first appeal is to the Commission. 

Mr. POLIQUIN. Okay. Here is where I am going with that, Mr. 

Ceresney. Everybody wants to make sure that our investors and 

our consumers are protected, but we also want to make sure that 

the folks that you bring before you also have a fair and honest 

process. That is part of our Constitution. 

Now, I would also, if I may, remind you that the financial services industry employs about 6 million people in this country in various functions. And they are good-paying jobs. And they provide opportunities for their families. 

And what I am concerned about is that if you have a process that 

is perceived to be unfair or unpredictable, where it is stacked 

against the person that you bring before you or the company you 

bring before you, that this will have a negative impact on this part 

of our economy, which provides so much vibrancy and so much 

depth to our economy and so much employment, that this could actually hurt the folks whom you are trying to help. 

Let me give you an example. If you are talking about a paper 

maker in Rumford, Maine, that I represent, or a teacher from Bangor, Maine, or a nurse from Lewiston, Maine, and they are preparing and saving for their retirement or to put their kids through 

college with savings, and they are dependent upon a mutual fund 

company or an investment management firm that helps them grow 

that retirement nest egg or that nest egg to put their kids through 

college, and all of a sudden the firms in this space are dragged before the SEC and there is not a fair opportunity to be heard, then 

that will have a negative impact and raise the cost, raise the fees, 

and reduce the performance of that nest egg that those retirees are 

trying to accumulate. 

So I know there is all kinds of room to make improvement. And 

I would just encourage you, Mr. Ceresney, as you go through this 

30 

process, to make sure you are looking out for these middle-class 

families who are trying to prepare for their retirement by being fair 

to the people who are brought before you. 

I bet there are ways you can make adjustments to make that 

happen. 

Mr. HURT. Thank you, Mr. Poliquin. 

The gentleman’s time has expired. 

The Chair now recognizes Mr. Messer for a period of 5 minutes. 

Mr. MESSER. Thank you, Mr. Chairman. 

And thanks to the Director for being here today. I appreciate 

your willingness to withstand testimony. 

We all support the vigorous enforcement of Federal securities 

laws and believe that it is important that you go after bad actors. 

When, though, those bad actors are penalized, at times the payment for that falls upon innocent shareholders, who, of course, 

weren’t a direct part of the bad activities that may have been prosecuted. 

Could you talk a little bit about what, if anything, the SEC does 

to ensure or try to mitigate the impact on innocent shareholders of 

enforcement efforts? 

Mr. CERESNEY. We have a number of factors that we consider 

when we think about corporate penalties. And I think you are focused on issuers that are not regulated. I think that is the area 

folks have focused on when it comes to shareholders and the like. 

And there are a bunch of factors that we consider. We consider 

the conduct. We consider whether or not there was intent. We consider cooperation, remediation. We also consider whether there was 

a corporate benefit, that is, whether the shareholders got some benefit from the conduct. That is obviously an important factor. And 

then, also, what is the impact on the shareholders. We consider all 

of those things. 

And in every case, we decide on the appropriate penalty that 

would be important and useful for punishment and deterrence, and 

that is really our goal, making sure that we are punishing and deterring. So in every case we weigh those factors and reach that conclusion. 

Mr. MESSER. You have agency guidelines, as I understand it, 

that say that you can consider the impact on shareholders? 

Mr. CERESNEY. There was a 2006 release that outlined a number 

of factors that should be considered. One of those factors was impact on shareholders. So it is one of the factors that is looked at 

in connection with a corporate penalty. But it is only one of the 

nine factors. 

Mr. MESSER. And make sure when you say release, those releases are a set of guidelines of how you will analyze things, they 

are not requirements. 

Mr. CERESNEY. They are not requirements. They were never 

binding on the Commission. 

Mr. MESSER. Okay. So there is no assurance that each and every 

time the impact on innocent shareholders is required to be analyzed as part of the penalty? 

Mr. CERESNEY. I will tell you that when it comes to making recommendations, we in the action memo will typically discuss all 

nine factors and how they impact a particular case. So one of the 

31 

factors we will discuss is impact on shareholders and inform the 

Commission of that. But there may be other factors that we will 

consider more compelling or important in a particular case that 

compel a penalty. 

Mr. MESSER. I just would make the case that certainly it is important that we have strong enforcement. The bad actors ought to 

be penalized. But often innocent shareholders get caught up in the 

midst of this, at no fault of their own. 

And we certainly, as a committee, are looking at a requirement 

that the SEC must consider the impact on innocent shareholders 

as part of your analysis. Do you have any thoughts on implementing that requirement? 

Mr. CERESNEY. As I say, in almost every case, we consider it. It 

is one of the factors we look at. And then we weigh that against 

the other factors. 

Mr. MESSER. Okay. Thank you very much. 

Mr. CERESNEY. Thank you. 

Mr. HURT. The gentleman yields back. 

What I would like to do, without objection, maybe, is to start a 

second round of questions. And I know there are a couple of Members who are on their way back, so hopefully that will give them 

time to get back here. And I think the ranking member also had 

some questions. 

But I would like to recognize myself for 5 minutes. 

First, I think a common theme that we have heard here today 

certainly focuses on our system of justice and the rule of law and 

making sure that there is fairness in these processes. 

One of the things I think that has been said is that the administrative procedure is not as time-consuming as the Federal court 

system, and I understand that. And perhaps there are efficiencies 

going through the administrative process. But I think that we 

should never, ever, ever take a shortcut for times’ sake in pursuit 

of something that is not square with justice and fairness. 

And I know you agree with that. But there are some questions 

that have been raised that I think are worth exploring. 

One of my first questions is, what was the reason, if you know, 

that the nonregistered registrants were excluded from the administrative process from the beginning? Because, obviously, DoddFrank included nonregistrants. There must have been a reason for 

that. And I was wondering if you could speak to that? 

Mr. CERESNEY. I am not familiar with the history. I just know 

that for a very long time, administrative proceedings have been 

available. Penalty authority was only given to us about 20 or 25 

years ago. And so, when penalty authority was provided, we could 

obtain penalties against registered entities in administrative proceedings. 

I don’t know the history and that— 

Mr. HURT. But it probably had something to do with the fact that 

registrants are submitting themselves voluntarily to the SEC and 

its processes, and nonregistrants are not, they are just regular citizens, whether they are bad actors or not. 

Mr. CERESNEY. I think that was probably part of it, yes. I imagine that there could have been other issues, but, yes, I imagine 

that was part of it. 

32 

Mr. HURT. Now, with respect to the due process issues that have 

been raised, hearsay can be allowed in the administrative process. 

There is no jury trial. 

Those are two fundamental constitutional rights that are afforded defendants in criminal trials, correct? 

Mr. CERESNEY. That is right, although I should note that the Supreme Court had ruled in Atlas Roofing, which is a case from some 

years ago, that there is no Seventh Amendment right to a jury trial 

in connection with administrative— 

Mr. HURT. But we are concerned with fairness and due process 

regardless of whether it is strictly required by the Constitution or 

not, correct? 

Mr. CERESNEY. Oh, undoubtedly. I am concerned with fairness, 

and my view is that administrative proceedings do provide that 

fairness. 

Mr. HURT. Okay. And so when you look at the appeals process, 

the way it would work is if a ruling is made within the administrative process, and then it gets appealed to the SEC, to the Commission, itself. 

And then it bypasses any district proceedings and goes to the 

court of appeals. So that is not a trial court and they are not reviewing anything de novo, they are reviewing it is not de novo, is 

it? 

Mr. CERESNEY. The Commission review is de novo. The court of 

appeals review is not de novo. 

Mr. HURT. And so, what are the standards of review as it relates 

to this Commission’s action? Do they give deference to the SEC in 

interpreting its own enforcement actions? 

Mr. CERESNEY. There is some deference given to the SEC with 

regard to findings of fact. I think when it comes to legal matters, 

obviously the court of appeals reviews that, and legal matters are 

not—are subject to the court of appeals views. But there could be 

deference there, as well, based upon Chevron deference. 

So there is a fair amount of deference that does exist for the 

Commission’s rulings. 

Mr. HURT. Now, as a part of the penalties that are assessed, 

there is something called ‘‘undertakings’’ that are sometimes part 

of the order of the—in the administration process. 

Mr. CERESNEY. Sometimes the— 

Mr. HURT. Administrative process. 

Mr. CERESNEY. Sometimes in settlements, we will agree to certain undertakings that the defendant has to undertake, yes. 

Mr. HURT. Is there any concern, because there has been a concern expressed, do you have concern that those undertakings 

amount to rulemaking outside of the Administrative Process Act? 

Mr. CERESNEY. I do not. 

Mr. HURT. And why is that? 

Mr. CERESNEY. Because I think in every case, the undertakings 

are tied to the actual conduct that is involved in the case and designed, typically, to ensure the conduct does not recur. 

Mr. HURT. But, do you think that there is a danger that other 

participants in the marketplace look at these undertakings and 

then that creates uncertainty? And also of course, avoids the AdVerDate Nov 24 2008 15:34 Jul 24, 2015 Jkt 095053 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\95053.TXT TERRI
33 

ministrative Process Act, which allows for public comment and 

public notice? 

Mr. CERESNEY. I don’t think so. We are pretty sensitive to not 

doing rulemaking by enforcement. And those undertakings are only 

obligations of the particular party to the enforcement action— 

Mr. HURT. Sure, but— 

Mr. CERESNEY. —and they are typically closely, closely tied to 

the conduct. 

Mr. HURT. Okay. My time has expired. Thank you Director, and 

I now recognize the ranking member, the gentlelady from New 

York, for a period of 5 minutes. 

Mrs. MALONEY. Thank you. 

You noted in your testimony that the SEC’s Fiscal Year budget 

for 2016 requests money for 93 additional Enforcement staff positions. Can you describe the impact of having these additional people? And what would you do with 93 additional people in enforcement? 

Mr. CERESNEY. There are three areas in which we would deploy 

people. First, data analytics, I think about 20 people for identifying 

misconduct. There is tremendous amounts of data now available to 

us, and developing tools that allow us to use that data to detect 

misconduct is critical. So, that is one area. The second area is investigative activities, I think approximately 50 employees would go 

in this area. 

And here, I think I would point to the increase in resources that 

we need to devote to investigate complicated, large scale issues like 

financial reporting, like market structure, like asset management 

issues and the like. 

These schemes have become much more sophisticated. There is 

tremendous amounts of email data and other data that is required 

to be reviewed, and so having additional people as well as experts 

in the area would be important. 

And the third area is trial attorneys, approximately 20 people for 

trials. We have seen an uptick in the number of trials that we 

have. There could be many reasons for that. But we think that will 

continue, probably not as many as last year. I think last year was 

probably more than we will have this year, but we will still see an 

increase from historical levels. And the trials do take lots of resources, particularly district court actions. 

Mrs. MALONEY. Are you active in cybersecurity in any way? This 

is something that I would say everyone in Congress is deeply concerned about. The private sector is deeply concerned about it, and 

it is a threat, really, to our national security and our economic security. 

What are you doing in cybersecurity? 

Mr. CERESNEY. We are very active in the cyber area. The number 

of ways in which that impacts SEC enforcement, obviously, there 

are lots of aspects of cyber that we don’t have involvement in, but 

there are many that we do, including whether companies are disclosing cyber attacks promptly and appropriately, whether information is being stolen through hacking and used for insider trading 

or other misconduct. Also, where the registrants are developing 

policies and procedures that are necessary to guard against the 

misuse of information. 

34 

So, we have regulations like Reg S-P that is out there, where 

dealers have to develop policies and procedures to safeguard customer information. We brought five cases under that regulation, so 

we are very active. There were other regulations that also could 

apply, like Reg SCI, when it comes, is now online. But when it becomes effective and when companies have to comply, when investment advisors have to, when broker-dealers have to comply with it, 

as well as the market access rule and some other rules that do provide requirements for policies and procedures. So, we are very focused on this area. It is something that we obviously are devoting 

resources to. 

Mrs. MALONEY. I believe that there would be bipartisan support 

for increased personnel in cybersecurity. And I think that would be 

an area that we really need to focus on. We know it, and we need 

to work in that area. 

I want to thank you for your testimony today. Thank you so 

much. 

Mr. HURT. The gentlelady yields back. 

The Chair now recognizes Mr. Hultgren for a period of 5 minutes. 

Mr. HULTGREN. Thank you, Mr. Chairman. 

Thank you so much Director, we appreciate you being here. 

I would like to bring up the issue of well-known seasoned issuer 

waivers, which I believe should not be in consideration for an additional penalty outside of the SEC’s formal enforcement process. My 

understanding is that there was already a thorough review process 

in place to determine whether a waiver is appropriate and that this 

process was recently reviewed and tightened in April of this year, 

I wonder if you could walk us through the WKSI waiver review 

process, and the steps the SEC has recently taken to make this 

process even more thorough? 

Mr. CERESNEY. Sure. The Enforcement Division generally doesn’t 

make waiver recommendations or decisions. And so we are not— 

we don’t make those kinds of recommendation decisions. That typically is handled by the other divisions, including in the case of 

WKSI, the Division of Corporation Finance. 

Having said that, my understanding is that the Division of Corporation Finance follows the guidance that they have issued, and 

as you mentioned, they did update that guidance in April of this 

past year. 

In determining whether a WKSI waiver should be provided, I understand it is a facts and circumstances determination based on the 

applicable legal standards, which include whether there is good 

cause to issue such a waiver. 

Ultimately, I think it is important to recognize that the waivers—the disqualifications are not enforcement remedies. We have 

significant remedies for enforcement violations, including 

disgorgement penalties, bars, et cetera. 

But the WKSI determination is really a determination about 

whether, going forward, the entity can be trusted to comply with 

these obligations under WKSI. 

Mr. HULTGREN. Let me get into that a little bit more. Registration requirements for a new stock offering I know can be burdensome for a public company. The added red tape leads to a delayed 

35 

offering oftentimes, which can run up against changing market 

conditions, which certainly can adversely impact the issuer. WKSI 

is able to file an automatic shelf registration statement on Form S3 when preparing a stock offering. 

What does the accelerated process mean for those companies 

looking to raise capital? 

Mr. CERESNEY. I would have to defer to the Division of Corporation Finance on the impact of that. 

That is really a policy question, which is not really one in which 

I am involved. 

Mr. HULTGREN. Okay. Let me move on then. 

SEC maintains the authority to deem a WKSI an ineligible 

issuer and revoke its WKSI status for 3 years if the Commission 

views the company as having disclosure practices that would be 

less reliable than the disclosure of other issues, and thus unsuitable for short-form registration or ineligible for disclosure-related 

relief. 

This authority, paired with the annual and quarterly filings, to 

me seems sufficient to address any issuers that may potentially 

abuse their WKSI status. 

Do you agree with that? 

Mr. CERESNEY. Again, I think that would be a question really for 

the Division of Corporation Finance, which is the policy division involved in determining WKSI waivers. 

Mr. HULTGREN. Yes, I have one more question to see if you are 

able to answer this. On the issue of well-known seasoned issuer 

waivers, or WKSI waivers, my understanding is that there was already a thorough review process in place to determine whether a 

waiver is appropriate, and that—let me—any further thing? Let me 

just understand a little bit more about your role with WKSI, any 

suggestions you have there. I know it came up earlier in the hearing. I wasn’t here, but I wonder if you could maybe just talk a little 

bit, again, about your role and suggestions we have, concerns certainly that we are hearing of maybe overstepping or additional 

problems that are being handed out? 

Is there any other further involvement that you have or your Division has? 

Mr. CERESNEY. We investigate the misconduct, so we know better 

than anyone, I think, at the Commission, what the nature of the 

misconduct was, who was involved, what was the duration, et 

cetera. 

So, we provide all that information to the Division of Corporation 

Finance or the Division of Investment Management and provide 

our views on that. 

They then go and apply the applicable legal standards to determine whether a waiver is appropriate. 

And my understanding is that it is a rigorous process where they 

review the facts and circumstances closely to determine whether 

the applicable legal standards are met. 

Mr. HULTGREN. Well, I would agree with you. My understanding 

is it is a rigorous process, the thorough review process is already 

in place, and with it being recently reviewed, I have some concerns 

of additional action being taken there. 

36 

I appreciate it. We will follow up with other authorities as well, 

just to get some more clarity for ourselves and to see if there is 

anything else we need to do. 

With that, Mr. Chairman, I yield back. 

Mr. HURT. The gentleman yields back. 

And the Chair now recognizes the gentleman from Arizona, Mr. 

Schweikert, for a period of 5 minutes. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. And Chairman 

Hurt, that seat sort of—you look good there. 

Mr. HURT. Thank you. 

Mr. SCHWEIKERT. We will explain the joke later. 

Forgive me, but a lot of the obvious questions have already been 

asked, so could you help walk me through just a couple of things, 

you know, for the education of David? 

One of my great frustrations is that 3-plus years ago, this body, 

and this committee did things like the JOBS Act. There is Reg A 

and crowdfunding, and apparently in the rulemaking side of the 

ledger, those things are backed up. 

Will they ever reach out to you and your Division and say, ‘‘We 

are doing a rule set. Tell us how to keep the consumers safe?’’ Do 

you ever have input and dialogue in the crafting design of those 

rule sets? 

Mr. CERESNEY. Obviously, rulemakings are handled primarily by 

the Policy Division, and we are not directly—they obviously handle—but in cases in which there is an enforcement angle that—on 

which we can be helpful, we obviously do provide—they do consult 

with us, they do ask us our views, and we provide input as requested to the Rulemaking Policy Division. 

Mr. SCHWEIKERT. That doesn’t bother me. 

Mr. CERESNEY. Yes. 

Mr. SCHWEIKERT. In some ways, that seems absolutely appropriate, whether it be in writing or watercooler conversation. 

For some of the new technologies, whether it be crowdfunding or 

some of the new uses where we see people using 506 and sort of 

regional bases of those, from your sort of enforcement side and observations, has access to information very open disclosures and 

sometimes a readable fashion, is that an interest? Have you seen 

it done? Have you seen benefits from that? 

Mr. CERESNEY. Again, I don’t know that I am in a position to 

really judge the impact that has on capital formation, on the raising of capital, because I think that is a question for others. I am 

really focused more on the issue of, is there fraud, is there misconduct in connection with the offerings? 

And when there is, obviously, we are very involved. 

Mr. SCHWEIKERT. When you design, because you will be part of 

designing a consent decree or an agreement. 

Mr. CERESNEY. A settlement agreement, yes. 

Mr. SCHWEIKERT. Forgive me. All right, a settlement agreement. 

Mr. CERESNEY. Yes, an order. 

Mr. SCHWEIKERT. In that settlement agreement, have you ever 

done part of the mechanics for fixing the bad acts or the agreedupon bad acts, the way the bad actors tell their story, or disclose 

risk, or put out information so for the investor or the consumer, the 

product, they are doing better decision-making? 

37 

Mr. CERESNEY. What we sometimes will do, if we see if there is 

a case involving failure of disclosures, for example, an investment 

advisor that has failed in their disclosures and misled investors, we 

sometimes will, as part of the undertakings, require them to craft 

policies and procedures aimed at ensuring that their representations to investors are accurate. 

So yes, if—what we often do is we will design undertakings designed to try to get at the misconduct. And if the misconduct involves material misrepresentations and marketing materials, we 

very well may include a requirement that they have a consultant 

come in and provide advice on policies and procedures going forward. 

Mr. SCHWEIKERT. Is some of your staff behind you? 

Mr. CERESNEY. Yes, some of them. 

Mr. SCHWEIKERT. I can almost tell generationally, because I don’t 

see any gray hair. I have realized Washington is run by a bunch— 

Mr. CERESNEY. I have gotten more gray hair since I have been 

here. 

Mr. SCHWEIKERT. —of 30-year-old brilliant servants. For many of 

the young folks we work with who are entering into the investment 

world, they want to see it online. They want to see a blog discussion about the investment. They want to see sort of open dialogue 

where people are on each side of the trends—the good idea, bad 

idea. 

You may actually have a very unique window, as part of your 

settlement operations to sort of reach out into that world and say, 

maybe it is time to enter this century of disclosure, instead of giving me another half-inch-thick binder with micro type that, with 

my aging eyes, I have trouble reading. So just one sort of suggestion, as we start to move into this generation, this century of regulation. 

One last thing and this is a little bit more of a narrative than 

a question. How many enforcement actions were there in the last 

calendar year? 

Mr. CERESNEY. In the last fiscal year, there were 755. We don’t 

track it by calendar year. 

Mr. SCHWEIKERT. Any sense of what the average settlement cost 

was? 

Mr. CERESNEY. Well, it was—$4.16 billion was ordered. In some 

cases— 

Mr. SCHWEIKERT. You have more of a mean. 

Mr. CERESNEY. Yes, in some cases— 

Mr. SCHWEIKERT. You probably have some very large ones. 

Mr. CERESNEY. It is very hard to say, because some cases, obviously, have large large monetary remedies. Others have none. So 

it really varies. 

Mr. SCHWEIKERT. For almost every Member, right and left, we 

have had that person who comes into our office and say, ‘‘I am subject to an action. I don’t think I broke the rule. My lawyers are telling me it is cheaper just to agree and write a check.’’ 

I may send you sort of a little narrative question in writing. And 

I know that may be hard to quantify, but I am sort of curious how 

many of the settlements are actually—I admit I screwed up or I 

38 

admit it is cheaper to write you a check and admit than it is to 

defend myself. 

Mr. CERESNEY. I can’t comment on what the reasoning of somebody in settling with us is. I can only say that when we charge 

someone with misconduct, we believe that there is a violation of 

law and believe that, based upon our understanding of the law and 

the facts. 

Mr. SCHWEIKERT. Thank you. 

And thank you, Mr. Chairman. 

Mr. HURT. Thank you. The gentleman’s time has expired. The 

Chair now, on the second round of questioning, recognizes Mr. 

Poliquin for 5 minutes. 

Mr. POLIQUIN. Thank you, Mr. Chairman. 

And thank you, Mr. Ceresney. Again, I appreciate you being 

here. I would like to pursue a little bit more of what we were discussing a little bit ago. And again, I want to make sure that I salute you for your goal and your hard work and that of your staff 

for pursuing the bad apples in this particular industry. But I do 

want to continue to ask a few more questions about your in-house 

administrative procedure. 

I think it was said just a moment ago that last year, you had 

a very high success rate, with respect to your in-house administrative procedures, as far as finding I am not sure—I am not an attorney, a conviction rate is concerned, about 100 percent. 

Mr. CERESNEY. Liability. And yes, although as I said, yesterday 

we just lost one. 

Mr. POLIQUIN. You poor thing. Yes, I am talking about last year. 

So you were completely successful. 

Mr. CERESNEY. Yes, yes. And that was unusual. 

Mr. POLIQUIN. Yes, okay. If I am not mistaken, last year also, 

when you went to Federal court to pursue some of these bad apples, that turned out not to be bad apples, you had about a 60 percent success rate. Is that right, roughly? 

Mr. CERESNEY. Can I just— 

Mr. POLIQUIN. Quickly, because my time is expiring. 

Mr. CERESNEY. It was a little over 60 percent. 

Mr. POLIQUIN. Okay. But there is a big difference. 

Mr. CERESNEY. I would say most of the losses were in insider 

trading. 

Mr. POLIQUIN. Okay. But when you have an in-house procedure, 

if I may—so I will ask you, Mr. Ceresney, where you select the administrative law judges, you pay them. They are held on-property 

and the home-court. And you can admit most heresy evidence and 

so forth and so on. But I would argue with you that you have to 

be really, really careful to make sure this is a fair process. 

Now it seems to me that this process might be a little bit more 

art than science. And let me go down there, just a little bit, if I 

may. Do you have a written in-house set of benchmarks or procedures whereby you determine if you are going to pursue this case 

internally or you are going to let it play itself out in Federal 

courts? Do you have a written set of procedures on that? 

Mr. CERESNEY. We have factors that people should consider, but 

we don’t have a written set of procedures. 

39 

Mr. POLIQUIN. Okay. So, you don’t. I might recommend that you 

think about doing that. I don’t want to tell you how to do your job, 

but that would make me feel much more comfortable. Along that 

same line, sir, do you have a written set of procedures that allows 

you to determine which administrative law judges you are going to 

select for this particular case? 

Mr. CERESNEY. We don’t select the administrative law judge. 

Mr. POLIQUIN. Okay. And do you have written procedures on how 

to determine what fines or penalties would be imposed on those 

you found to be in violation of the law? 

Mr. CERESNEY. As I said, there are factors. 

Mr. POLIQUIN. Okay. So it is really more of an art than a 

science? 

Mr. CERESNEY. It is, yes. 

Mr. POLIQUIN. Okay. You know what would be really helpful to 

me is if you could get those guidelines, if you will, to my office or 

our office or—my LD right back here will be in touch with your office. Because I would like to see your written documentation on 

what the SEC follows to make sure we have a set of fairness when 

it comes to how you go through to determine who is going to meet 

internally in front of your people and who the judges are going to 

be and what fines will be imposed. That will be really helpful. And 

if you don’t have those, and I think you just said that you do not, 

then we may come back to you with a few suggestions. But that 

would be very helpful. 

Sir, may I ask you also, Mr. Ceresney, have you ever worked in 

the investment management industry? 

Mr. CERESNEY. I have not. 

Mr. POLIQUIN. You have not. Have any of your senior people who 

are involved with enforcement of the financial services industry 

who are around you, have they ever worked in the investment 

management business? 

Mr. CERESNEY. Yes. We have industry experts who have 

worked— 

Mr. POLIQUIN. Good. Industry experts. I don’t mean academics, 

I mean folks who have actually worked in the industry. 

Mr. CERESNEY. Yes, we do. 

Mr. POLIQUIN. Okay, good. But you have not? 

Mr. CERESNEY. I have not. 

Mr. POLIQUIN. Okay. 

Mr. CERESNEY. No. I have represented people from the industry, 

but I am— 

Mr. POLIQUIN. Great, great. Well, we just had a new investment 

company move to our district with 200 new jobs in Lewiston, 

Maine. And we are thrilled to death to have these folks there. 

There are new jobs, they are good-paying jobs with benefits. And 

I would submit to you, as you consider these enforcement actions 

at the SEC, that you consider that the most important thing a mutual fund company or a pension investment firm has is their reputation and their good word, their good name. It is so important 

to make sure that investors and folks saving for their retirement 

or saving for their college education have trust in that firm. And 

part of that is making sure that if there is an allegation that they 

violated the law, there is a fair process. And that is why I was askVerDate Nov 24 2008 15:34 Jul 24, 2015 Jkt 095053 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\95053.TXT TERRI
40 

ing just a moment ago—and I know your office will get back to us 

with some paperwork on this—to make sure there is confidence in 

what you are doing. 

And I will tell you the reason why I am concerned. Because if 

you look at the EPA or you look at the Internal Revenue Service, 

there has been a pattern during the last few years of overreach by 

these government agencies that causes American families to lose 

confidence in our government, that they are being treated fairly. 

I know you don’t want to go there and I am not saying that you 

are there. But what I am saying is that it would be terrific if you 

would think about people’s reputation, their firm’s reputation, and 

the confidence that people need to invest, to save for their retirement and their kids’ college education. And that comes with, I 

think, due process or as close to due process as you can, given the 

guidelines that you have. The Fourth and fifth Amendments, all 

the things we have talked about, I would really appreciate it if you 

would consider that as you go forward and also make sure you get 

that paperwork to us in our office. I would be very grateful. 

Thank you, sir. 

Mr. HURT. Thank you, Mr. Poliquin. The gentleman’s time has 

expired. I want to thank you, Director, for being with us today and 

being generous with your time. 

The Chair notes that some Members may have additional questions for this witness, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to this witness 

and to place his responses in the record. Also, without objection, 

Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record. 

Without objection, this hearing is now adjourned. 

[Whereupon, at 11:28 a.m., the hearing was adjourned.] 

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