Source: https://www.sec.gov/news/testimony/2013-ts051613mjwhtm
Timestamp: 2019-04-26 00:45:03+00:00

Document:
Thank you for the opportunity to testify on behalf of the Commission regarding the recent activities of the U.S. Securities and Exchange Commission (SEC). I have been Chair of the SEC for only a month, but in this short period of time I have been extremely impressed by the commitment, talent, and expertise of my fellow Commissioners and the agency’s staff. The challenges before us are many, but I am confident that we will work tirelessly together in an effort to fulfill the broad, three-part mission of the SEC: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
The breadth of the SEC’s jurisdiction is vast – our Divisions and Offices are responsible for implementing and enforcing the federal securities laws, overseeing thousands of key participants in the securities markets (over 25,000 entities currently),1 and reviewing disclosures and financial statements of more than 9,100 reporting companies. In recent years, the agency has made significant strides to strengthen its examination and enforcement functions, improve its capacity to assess risks, and enhance its technology, and also has made internal improvements designed to maximize efficiencies and reform its operations. Much more, however, remains to be accomplished.
With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and the Jumpstart Our Business Startups Act (JOBS Act), the agency’s importance and scope of responsibilities are greater than ever, with the Dodd-Frank Act giving the Commission additional responsibilities for over-the-counter derivatives, hedge fund and other private fund advisers, municipal advisors, security-based swap clearing agencies, and the JOBS Act providing for several new or revised exemptions from the registration requirements of the Securities Act, including a new regime for crowdfunding offerings. Although the SEC has proposed or adopted rules for over 80 percent of the more than 90 Dodd-Frank Act provisions that require SEC rulemaking, there is much Dodd-Frank work that remains. Similarly, the JOBS Act requires significant Commission rulemaking which is not yet finalized. I believe that the SEC must complete, in as timely and smart a way as possible, the rulemaking mandates contained in both the Dodd-Frank Act and JOBS Act.
I also believe that the SEC needs to be in a position to provide expert oversight over today’s highly complex and dispersed marketplace so that it can be wisely and optimally regulated. Such oversight must come without undue cost and without undermining market vitality. While this will entail additional investments in technology and expertise, the goal is to help the agency keep better pace with the markets we monitor and regulate while also permitting us to see around corners and anticipate issues that may arise.
Beyond this, I also feel that the Commission needs to further strengthen the enforcement and examination functions of the SEC. Strong enforcement of the securities laws is necessary for investor confidence and is essential to the integrity of our financial markets. Successful enforcement actions result in sanctions that deter and punish wrongdoing and protect investors, both now and in the future. Similarly, our National Examinations Program is critical to improving compliance by regulated entities, preventing and detecting fraud, and monitoring market risks.
A vigorous enforcement program is at the heart of the SEC’s efforts to protect investors and promote the integrity of the marketplace. As the agency’s largest division, the Enforcement Division (Enforcement) investigates and brings civil charges in federal district court or in administrative proceedings based on violations of the federal securities laws. Successful enforcement actions result in sanctions that deter wrongdoing, protect investors, and result in penalties and the disgorgement of ill-gotten gains that can be returned to harmed investors.
In FY 2012, Enforcement continued to perform at a high-level, utilizing its enhanced expertise and specialization capabilities to file tough enforcement actions that sent a strong deterrent message in an increasingly complex and global securities market. In the aftermath of the financial crisis, the SEC obtained orders requiring the payment of $3.1 billion in penalties and disgorgement in its filed enforcement actions in FY 2012, with a total of $5.9 billion in penalties and disgorgement in the past two years. The Commission does not, however, set quantitative targets for Enforcement activity, and quantitative metrics alone are not a complete yardstick of the measure of Enforcement’s effectiveness. Consistent with Commission guidance, Enforcement considers the quality, breadth and effect of the actions pursued.
Enforcement’s specialized units – Asset Management, Market Abuse, Structured and New Products, Foreign Corrupt Practices Act, and Municipal Securities – continue to build institutional knowledge and experience that allow our attorneys to recognize and respond to suspicious activity more quickly. To enhance our knowledge, we have recruited industry experts – non-lawyers with specialized experience in sophisticated products, transactions, and industry practices – to assist us in our investigations.
The SEC continues to hold accountable individuals and institutions whose misconduct contributed to the financial crisis. The SEC filed an additional 42 financial crisis-related enforcement actions since the beginning of FY 2012. Over the last two-and-a-half years, the SEC has filed 94 such actions against 157 individuals and entities, including 66 CEOs, CFOs, and other senior corporate executives. These crisis-related enforcement actions have resulted in 36 individuals being barred from serving in the securities industry or as officers or directors of public companies, as well as orders of nearly $2.7 billion in financial relief for harmed investors.
The SEC continued its aggressive pursuit of individuals who unlawfully traded on material, non-public information. Many of these actions have involved financial professionals, hedge fund managers, corporate insiders and board members, attorneys or other service professionals who unlawfully tipped or traded on material, non-public information.
In November 2012, the staff of the SEC and the Department of Justice issued a 120-page guide providing detailed analysis of the U.S. Foreign Corrupt Practices Act.14 The guide details the SEC and DOJ approach to FCPA enforcement and addresses a wide variety of topics relevant to compliance with the law. The guide, which is available on the SEC’s website at http://www.sec.gov/spotlight/fcpa/fcpa-resource-guide.pdf, is a helpful resource to companies doing business overseas and should further our goals of education and deterrence.
The Office of Compliance Inspections and Examinations (OCIE) is responsible for the Commission’s examination and inspection program. OCIE examines securities firms registered with the Commission, including broker-dealers, municipal securities dealers, self-regulatory organizations (SROs), clearing agencies, transfer agents, investment advisers, and investment companies. Additionally, the Dodd-Frank Act increased OCIE’s responsibilities to include examinations of, among others, municipal advisors, investment advisers to certain private funds, security-based swap dealers, security-based swap data repositories, major security-based swap participants, and securities-based swap execution facilities. The examination program plays a critical role in supporting compliance within the securities industry, which in turn also helps to protect investors and the securities markets generally.
Initiated in FY 2012 (and more fully integrated in FY 2013), the NEP launched a coordinated national examination initiative designed to establish a meaningful presence with newly registered advisers (the “presence exam initiative”).20 Since the effective date of the Dodd-Frank Act, approximately 1,500 advisers to hedge funds and private equity funds have registered with the SEC for the first time. The presence exam initiative hopes to reach a significant percentage (at least 15 to 25 percent) of these advisers by the end of FY 2014 and is intended, among other things, to assess their commitment to compliance and to meeting their obligations under the federal securities laws; raise firms’ awareness about certain higher-risk areas identified; and generate a proactive effort in firms’ compliance departments to strengthen controls and policies on issues beyond the scope of these limited-focus examinations.
Beyond this, the NEP seeks to prioritize examinations where the staff’s analytics indicate higher risks to investors relative to the rest of the registrant population, or find indicia of fraud or other serious wrongdoing. OCIE recently issued a risk alert on compliance with the SEC’s custody rule for investment advisers.21 The alert came after a review of recent examinations that identified significant custody-related issues in about one-third of the firms examined.
Following the establishment in the NEP in FY 2011 of specialized working groups in key areas including derivatives, hedge funds, private equity, valuation, new and structured products, market structure and trading practices, fixed income and municipal securities, risk management, quantitative analytics and technology, OCIE has continued recruitment of industry experts who bring deep technical experience to our exam program in these areas. A new Quantitative Analytics Unit (QAU) also gives the NEP the expertise to engage and examine the most sophisticated investment firms and programs, including the expertise to identify and understand risks in the algorithms, models, and software on which our registrants increasingly rely for investment decision-making and trading. Additionally, the NEP continued developing a Certified Examiner Training program that will enhance examiner skills, expertise and provide ongoing technical and leadership training.
continued to improve coordination with other regulators, including other federal and state regulators as well as counterparts in other countries.
The Division of Corporation Finance (Corporation Finance) regularly and systematically reviews the disclosures and financial statements of reporting companies as required by the Sarbanes-Oxley Act of 2002, and selectively reviews documents that companies file when they engage in public offerings, business combination transactions, and proxy solicitations to ensure that investors have access to material information for informed investment and voting decisions. Corporation Finance also maintains specialized offices with legal and accounting experts that support filing reviews, undertake reviews of specialized filings, provide interpretive guidance on rules and regulations, participate in Commission rulemaking projects, and provide specialized expertise in enforcement matters. Below is an overview of several key Corporation Finance initiatives.
In August 2012, pursuant to Title II of the JOBS Act, the Commission proposed rules to allow general solicitation and general advertising for offers and sales made under Rule 506, provided that all securities purchasers are accredited investors and issuers take reasonable steps to verify that purchasers are accredited investors.34 The comment period for the proposal ended in October 2012. The Commission and Corporation Finance staff continue to work on implementing this provision of the JOBS Act.
In addition to requiring the Commission to conduct rulemakings, the JOBS Act required the Commission to conduct several studies. The Commission was required to examine its authority to enforce the anti-evasion provisions of Exchange Act Rule 12g5-1 and submit recommendations to Congress.35 A report on the study was submitted to Congress in October 2012.36 Corporation Finance also assisted in conducting a study on the transition to trading and quoting securities in one penny increments – also known as decimalization – and the impact decimalization has had on the number of initial public offerings since its implementation.37 The report was submitted to Congress in July 2012.38 Finally, the JOBS Act required a review of Regulation S-K to determine how it may be modernized and simplified to reduce the costs and other burdens for emerging growth companies.39 The staff is in the process of preparing its recommendations and is working to complete its review in the near future.
The Division of Trading and Markets (Trading and Markets) seeks to establish and maintain standards for fair, orderly, and efficient markets, while fostering investor protection and confidence in the markets. Trading and Markets supervises the major participants in the U.S. securities markets, and also works closely with the Commission’s Office of Credit Ratings to supervise 10 nationally recognized statistical rating organizations (NRSROs) and with the Office of Municipal Securities to supervise the Municipal Securities Rulemaking Board (MSRB) and municipal advisors.
The Dodd-Frank Act and the JOBS Act added substantial new responsibilities to Trading and Market’s portfolio, with the division being responsible for more than 30 separate rulemaking initiatives and studies under the two statutes, including a number that will create new ongoing supervisory responsibilities upon completion. I would like to highlight several of these activities.
implementation by OAR of a new Market Information Data Analytics System (MIDAS) to collect and analyze market data from both the public consolidated data feeds and the “proprietary” data feeds offered by the exchanges to their customers.
Trading and Markets staff is also continuing to develop recommendations for final rules required by Title VII that have been proposed but not yet adopted.
Section 619 of the Dodd-Frank Act generally prohibits banks and their affiliates from engaging in proprietary trading, and also prohibits these entities from sponsoring or investing in a hedge fund or private equity fund. Also known as the Volcker Rule, the statute provides limited exceptions to the prohibition on proprietary trading for: (1) underwriting; (2) market making-related activities; (3) risk-mitigating hedging; (4) trading in certain government obligations; and (5) trading on behalf of customers.
In October 2011, the federal banking agencies and SEC jointly proposed rules to implement the Volcker Rule.53 In January 2012, the CFTC issued a substantially similar proposal. To date, we have received over 19,000 comment letters in response to the proposal. Going forward, SEC staff will continue to engage in regular and active consultation with the staffs at our fellow federal financial regulators in order to develop recommendations for implementing Section 619 of the Dodd-Frank Act.
expanding the Commission’s oversight of existing clearing agencies, particularly those that are designated as systemically important by the Financial Stability Oversight Council (FSOC).
The staff has been actively engaged with advisers to hedge funds and other private funds as they register with the SEC pursuant to the rules the Commission adopted to implement the Dodd-Frank Act’s adviser registration mandate. The SEC now has an adviser population that includes approximately 40 percent of SEC-registered advisers managing at least one private fund, which presents several challenges, including the fact that these advisers generally are more complex and require greater resources to examine. Additionally, the staff is examining many of the SEC’s existing rules applicable to advisers that were not written with private fund advisers necessarily in mind.
Throughout the past year, SEC staff has been assisting private fund advisers as they file their initial Form PF data. Form PF is a confidential data reporting form providing data about private funds’ risk characteristics.58 The form was developed by the SEC and the CFTC, in consultation with FSOC, pursuant to a Dodd-Frank Act mandate. We are starting to use the data collected on Form PF to assist us in carrying out our regulatory mission, and going forward, we will seek to expand and improve our use of it, while also sharing the information with FSOC for their systemic risk analysis functions as contemplated by the Dodd-Frank Act.
A rule proposal pertaining to money market mutual fund reform is well underway at the SEC and has been the product of a comprehensive and collaborative process. Any proposal that results would seek to preserve many of the benefits of money market funds for investors and the short-term funding markets while lessening money market funds’ susceptibility to runs; improving their ability to manage and mitigate potential contagion from high levels of redemptions; and increasing the transparency of their risks.
On April 10, 2013, my first day as Chair, the Commission unanimously voted to adopt a joint rule with the CFTC that fulfilled the Dodd-Frank Act mandate to transfer regulatory and enforcement authority for identity theft red flag programs from the Federal Trade Commission to the SEC and CFTC for the entities each agency regulates.59 The rule will help protect investors from identity theft by requiring that broker-dealers, mutual funds, and certain other SEC-regulated entities create programs to detect and respond appropriately to red flags.
Investment Management also is seeking to update and put in one place guidance available to funds and their boards of directors as they value portfolio holdings and calculate a daily net asset value – the price at which most mutual funds transact. The bulk of the existing Commission guidance in this area was issued in 1970, long before the advent of significant derivatives investing, the emergence of pricing services, or the development of complex pricing techniques.60 Investment Management and other SEC staff have been meeting with interested parties to develop a recommendation of updated fund valuation guidance for the Commission’s consideration.
Investment Management recently established a new Risk and Exam Office (REO) dedicated to risk analysis and examination of funds and investment advisers. Examiners are included within REO to give effect to the Dodd-Frank Act’s mandate that examiners be included within the Division of Investment Management. It is expected that the work of the REO’s new examiners will inform the division’s regulatory initiatives. In addition, REO’s mission is to conduct rigorous quantitative and qualitative financial analysis of the investment management industry. This should greatly improve the staff’s analytical capability with respect to asset managers.
The Division of Risk, Strategy, and Financial Innovation (RSFI) was formed in September 2009 in part to integrate rigorous data analytics into the core mission of the SEC. RSFI has a broad role in Commission activities, interacting with nearly every Division and Office. Much of RSFI’s staff time is dedicated to developing economic analysis in connection with Commission rulemaking. In addition, the Division provides economic research, risk assessment, and data analysis to help focus the agency’s resources on matters presenting the greatest perceived risks in litigation, examinations, and registrant reviews.
In addition, as the industries we regulate use increasingly sophisticated technology and high-frequency trading algorithms, our ability to use statistical and trend analyses to identify potentially inappropriate or risky industry practices is essential to help inform our enforcement, examination, and rulemaking efforts. RSFI has already shown great success with the development of an analytical model that uses performance data to identify hedge fund advisers worthy of further review by Enforcement or OCIE. Currently, RSFI is developing a new data analytics model that could be used across the SEC to assess the degree to which registrants’ financial statements appear anomalous. This “Accounting Quality Model” is intended to be useful to many offices and divisions within the SEC, such as in helping the Division of Enforcement target their investigations and informing the filings review process by the Division of Corporation Finance. Going forward, RSFI plans to continue to develop and implement robust analytical models to identify regulated entities with high-risk profiles.
In addition to Enforcement’s Office of the Whistleblower discussed above, the Dodd-Frank Act required the Commission to create four new offices: the Office of Credit Ratings, Office of the Investor Advocate, Office of Minority and Women Inclusion, and Office of Municipal Securities.
As required by Section 932 of the Dodd-Frank Act, the Commission established an Office of Credit Ratings (OCR) in June 2012. OCR is charged with administering the rules of the Commission with respect to the practices of NRSROs in determining credit ratings, promoting accuracy in credit ratings issued by NRSROs, and ensuring that (1) credit ratings are not unduly influenced by conflicts of interest and (2) firms provide greater disclosure to investors. In support of this mission, OCR monitors the activities and conducts examinations of NRSROs to assess and promote compliance with statutory and Commission requirements.
Section 915 of the Dodd-Frank Act required the SEC to establish an Office of the Investor Advocate to assist retail investors in resolving significant problems they may have with the Commission or with SROs. The Investor Advocate also will identify areas in which investors would benefit from changes in Commission regulations or SRO rules; identify problems that investors have with financial service providers and investment products; and analyze the potential impact on investors of proposed Commission regulations and SRO rules. The Investor Advocate also must hire an Ombudsman, whose activities will be included in the Advocate’s reports to Congress. The Commission is in the process of filling the position of Investor Advocate.
SEC Diversity Efforts. Under a broad outreach strategy developed by OMWI, the SEC has sponsored and/or attended more than 40 career fairs, conferences, and business matchmaking events to market the SEC to diverse suppliers and jobseekers. OMWI also continued to partner with leading organizations focused on developing employment opportunities for minorities and women at the SEC and in the financial services industry. As a result of these efforts, the SEC saw an increase in the percentages of new hires in FY 2012 over FY 2011 for the following demographic groups: African-American/Black; Asian-American; and American Indian/Alaskan Native. There remains more that can be done with respect to diversity in our hiring, however, particularly for attorneys, accountants, and examiners.
SEC Programs and Contracts. OMWI continues to move forward with respect to policies relating to contracting and regulated entities. OMWI staff is preparing to incorporate good faith contract language in the SEC’s contracts that seeks to ensure the fair inclusion of women and minorities in the workforce of the contractor. The language will be incorporated in all SEC contracts for services that exceed a certain threshold amount. The OMWI Director also is required to advise the Commission on the impact of the SEC’s policies and regulations on minority-owned and women-owned businesses. Of the total $302.4 million awarded to contractors in FY 2012, $64.1 million (21.2%) was awarded to minority-owned and women-owned businesses.
Practices of Regulated Entities. During FY 2012, the OMWI Director and staff participated in roundtable discussions with regulated entities, representative trade associations, community groups, and other interested parties to obtain information about existing diversity policies and leading practices, and to hear their perspectives and suggestions. In FY 2013, OMWI is working with key agency staff to develop proposed standards to assess the diversity policies and practices of SEC-regulated entities, and to solicit feedback from securities and financial services industry groups on the impact of the proposed standards on the entities regulated by the agency.
Pursuant to Section 979 of the Dodd-Frank Act, the Commission established a separate Office of Municipal Securities (OMS) to administer the Commission’s rules on practices of broker-dealers, advisors, investors, and issuers with respect to municipal securities and to coordinate with the MSRB on rulemaking and enforcement actions. OMS advises the Commission and other SEC offices on policy matters, enforcement, current market issues, and other issues affecting the municipal securities market. OMS also serves as the Commission’s liaison to the MSRB, FINRA, the IRS Office of Tax-Exempt Bonds, and various industry groups and regulators on municipal securities issues.
The highest immediate priority project for OMS is to finalize permanent rules for the registration of municipal advisors with the SEC pursuant to Section 975 of the Dodd-Frank Act. This new registration requirement, which became effective on October 1, 2010, applies broadly to persons that provide advice to municipal entities on municipal financial products or the issuance of municipal securities or that solicit municipal entities. In September 2010, the Commission adopted, and subsequently extended, temporary rules for municipal advisor registration.70 In December 2010, the Commission proposed permanent rules for municipal advisor registration.71 The SEC received over 1,000 comment letters on the proposal. Many expressed concern that the proposed rules were overbroad, including well-publicized concerns about their potential impact on appointed board members of municipal entities, municipal investments unrelated to municipal securities, and traditional banking products and services. The staff is developing a recommendation for final rules that we anticipate will address these concerns.
OMS’s current priorities also include initiatives to assist with the ongoing consideration of disclosure and market structure recommendations in the Commission’s Report on the Municipal Securities Market, issued in July 2012.72 Recently, a Commission roundtable discussed, among other things, potential ways to improve the transparency and efficiency of the municipal securities market.
The Office of International Affairs (OIA) advances international enforcement and regulatory cooperation, promotes high quality regulatory standards worldwide, and formulates technical assistance programs to strengthen investor protection and regulatory infrastructure globally. OIA partners with Enforcement to facilitate the assistance of foreign regulators to obtain evidence for use in Enforcement investigations, as well as to trace, freeze and repatriate proceeds of fraud transferred outside the United States. For example, in the Nexen case filed last year, crucial assistance from the Hong Kong Securities and Futures Commission enabled the SEC to pursue traders who reaped more than $13 million in illegal profits by trading in advance of an acquisition.73 The assistance also allowed the SEC to file insider trading charges and obtain an emergency freeze of assets held by traders in Hong Kong and Singapore. At the time the case was filed by the SEC, it was only four days after the acquisition announcement, and the SEC did not know the identities of most of the traders. Following a request facilitated by OIA, the Hong Kong authorities quickly provided the bank, brokerage, and business records necessary to identify the traders and the details of the trades. To date, we have already obtained more than $17 million in disgorgements and monetary penalties in this case as a direct result of international collaboration.
OIA also assists Commission staff in conducting examinations of foreign-domiciled registrants and addressing cross-border registration issues. OIA further facilitates cooperation between the Commission and its counterparts in the oversight of globally active entities, and negotiates supervisory memoranda of understanding (MOUs) on behalf of the Commission with foreign regulators.
OIA seeks to advance the SEC’s interests by participating in a wide array of international organizations, including the International Organization of Securities Commissions and the Financial Stability Board. OIA assists the SEC efforts to deal with cross-border regulatory issues by, among other things, analyzing the potential impact of SEC rules and actions on foreign market participants active in U.S. markets and on the cross-border activities of U.S. issuers and financial service providers, and the possible effect that foreign regulators’ actions might have on the SEC, the U.S. market and market participants. OIA also monitors foreign regulatory reform efforts to alert the Commission of potential conflicts and opportunities for cross-border coordination.
The federal securities laws authorize the Commission to set accounting standards for public companies, and the Commission has recognized the standards set by the Financial Accounting Standards Board (FASB). The Commission’s Office of the Chief Accountant, which serves as the principal advisor to the Commission on accounting and auditing matters, oversees the FASB’s standard-setting process. The Commission also plays an important role in connection with International Financial Reporting Standards (IFRS), which foreign private issuers can use in their filings with the Commission, including through interaction with the International Accounting Standards Board (IASB) and the Commission’s participation in the IFRS Foundation Monitoring Board.
The FASB and the IASB are working together on several projects to set high-quality converged accounting standards in the areas of revenue recognition, financial instruments, leases, and insurance contracts. During 2013, the FASB and the IASB issued proposals for public comment on financial instruments, expect to issue proposals for public comment on leases and insurance contracts, and expect to issue a final standard on revenue recognition. Commission staff is monitoring progress on the projects and remains committed to assuring that the process operates in a fair and open way and that the results serve the interests of investors.
The Public Company Accounting Oversight Board (PCAOB) oversees the audits of issuers and registered broker-dealers to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports. The PCAOB accomplishes its objectives through registration, standard setting, inspection, and discipline. The Commission has oversight over the PCAOB, which includes appointing board members, approving PCAOB rules, reviewing PCAOB disciplinary actions and disputes regarding inspection reports, and approving the PCAOB’s budget and accounting support fee. The PCAOB has an active standard-setting agenda, including projects to update numerous standards that address important aspects of the performance of audits and a project to consider changes to the content of the auditor’s report on a company’s financial statements.
The Office of Investor Education and Advocacy (OIEA) seeks to provide individual investors with the information they need to avoid fraud and make sound decisions concerning investments in the securities markets. OIEA administers three primary programs to promote this mission: assisting individual investors with complaints and inquiries; conducting educational outreach; and providing the Commission and staff with input from the perspective of the individual investor.
The Office of the Chief Operating Officer (OCOO) leads and coordinates the activities of the Offices of Financial Management (OFM), Information Technology, Acquisitions, Human Resources (OHR), and Support Operations (OSO).
In FY 2012, OFM continued to focus on strengthening internal controls over financial reporting, with the SEC achieving its best ever result in its FY 2012 Government Accountability Office (GAO) financial controls audit. For the second consecutive year, GAO noted no material weakness and the number of significant deficiencies identified in the SEC’s financial operations was reduced. These results occurred during the complex midyear migration of the SEC’s financial system to a Federal Shared Services Provider hosted by the Department of Transportation.
automating processes that historically have been manual in nature in areas such as filing fees and disgorgements and penalties.
While the agency has made significant progress over the past few years in modernizing our technology systems, it also is important that the SEC continue leveraging technology to streamline operations and increase the effectiveness of the agency’s programs. The SEC’s FY 2014 budget request includes additional funds for technology to support a number of key Information Technology (IT) initiatives, including enhancements to the system for receiving tips, complaints, and referrals, improvements to IT security, data analysis tools, improvements in our e-Discovery systems, and infrastructure upgrades aimed at achieving efficiencies in business operations and reducing long-term costs.
In FY 2014, the SEC also plans to continue using the SEC Reserve Fund, established by statute, to fund large, multi-year, mission-critical technology projects. Among other projects, the agency would continue overhauling the Electronic Data Gathering, Analysis and Retrieval (EDGAR) system to create a new, modernized system that will meet Commission requirements for real-time system updates, reduce filer burden, improve data capture, and reduce the long term costs of operating and maintaining the system. In addition, we plan to continue construction and enhancement of the Enterprise Data Warehouse (EDW). The EDW is a critical step in combining currently disparate sources of data from EDGAR filings, exam reports, investigations, external vendors, and many other sources. An organized central data repository should allow enhanced analytical capabilities, predictive modeling, and strengthened governance of data controls and quality standards.
The securities markets we oversee are continuously evolving, and the technology of today is most certainly not the technology of tomorrow. Fast-paced and constantly changing markets – fueled by financial firms whose annual technology budgets exceed what the SEC spends on its entire operations – require constant monitoring and analysis. When issues are identified, the investing public deserves appropriate and timely regulatory and enforcement responses. The securities industry also has been growing rapidly in size. In the last decade, trading volume in the equity markets has more than doubled, as have assets under management by investment advisers. It is expected that these trends will continue in the foreseeable future. At the same time, the SEC’s jurisdiction has grown to cover significant new aspects of the securities markets.
Although the agency has made significant strides forward to strengthen its oversight over markets that are so critical to the savings of American families and to the growth potential of American businesses, much work remains.
The SEC’s current level of resources presents significant challenges as we seek to keep pace with the growing size and complexity of the securities markets and fulfill our broad mandates and responsibilities. The FY 2014 budget request – all of which would be fully offset by matching collections of fees on securities transactions and will not increase the Federal budget deficit – seeks to address these challenges directly, to better position the agency to provide the kind of market oversight that the public expects and deserves.
enhancing training and development of SEC staff.
1 These participants include about 10,600 investment advisers, 9,700 mutual funds and exchange traded funds, 4,600 broker-dealers, and 460 transfer agents. We also oversee 17 national securities exchanges, eight active clearing agencies, and 10 nationally recognized statistical rating organizations (each, an NRSRO), as well as the Public Company Accounting Oversight Board (PCAOB), Financial Industry Regulatory Authority (FINRA), Municipal Securities Rulemaking Board (MSRB), and the Securities Investor Protection Corporation (SIPC), and the Financial Accounting Standards Board (FASB).
2 In accordance with past practice, the SEC’s FY 2014 Congressional Budget Justification was submitted by the Chair and was not voted on by the full Commission. The budget request can be found at http://sec.gov/about/reports/secfy14congbudgjust.shtml.
3 Release No. 34-67857, In the Matter of New York Stock Exchange LLC, et al. (September 14, 2012), http://www.sec.gov/litigation/admin/2012/34-67857.pdf.
4 Release No. 34-67969, In the Matter of eBX, LLC (October 3, 2012), http://www.sec.gov/litigation/admin/2012/34-67969.pdf.
5 Release No. 34-67924, In the Matter of Hold Brothers On-Line Investment Services, LLC, et al. (September 25, 2012), http://www.sec.gov/litigation/admin/2012/34-67924.pdf.
6 Release No. 34-65609, In the Matter of Pipeline Trading Systems LLC, et al. (October 24, 2011), http://www.sec.gov/litigation/admin/2011/33-9271.pdf.
7 Litigation Release No. 22670, SEC v. Scott London, et al. (April 11, 2013), http://www.sec.gov/litigation/litreleases/2013/lr22670.htm.
8 SEC v. Michael Steinberg (March 29, 2013), http://www.sec.gov/litigation/complaints/2013/comp-pr2013-49.pdf.
9 Litigation Release No. 22539, SEC v. CR Intrinsic Investors, LLC, et al. (November 20, 2012), http://www.sec.gov/litigation/litreleases/2012/lr22539.htm.
10 Release No. IA-3324, In the Matter of Asset Advisors, LLC (November 28, 2011), http://www.sec.gov/litigation/admin/2011/ia-3324.pdf; Release No. 34-65838, In the Matter of Feltl & Company, Inc. (November 28, 2011), http://www.sec.gov/litigation/admin/2011/34-65838.pdf; Release No. 34-65837, In the Matter of OMNI Investment Advisors Inc., et al. (November 28, 2011), http://www.sec.gov/litigation/admin/2011/34-65837.pdf.
11 Litigation Release No. 22176, SEC v. Michael R. Balboa, et al. (December 2, 2011), http://www.sec.gov/litigation/litreleases/2011/lr22176.htm; Litigation Release No. 22151, SEC v. Chetan Kapur, et al. (November 10, 2011), http://www.sec.gov/litigation/litreleases/2011/lr22151.htm; Litigation Release No. 22167, SEC v. Patrick G. Rooney, et al.(November 22, 2011), http://www.sec.gov/litigation/litreleases/2011/lr22167.htm; Release No. 34-65750, In the Matter of LeadDog Capital Markets, LLC, et al. (November 15, 2011), http://www.sec.gov/litigation/admin/2011/33-9277.pdf.
12 The Cross Border Working Group is an intra-agency group with representatives from each of the SEC’s major divisions and offices.
13 Litigation Release No. 22627, SEC v. Keyuan Petrochemicals, Inc., et al. (February 28, 2013), http://www.sec.gov/litigation/litreleases/2013/lr22627.htm.
14 SEC and Justice Department Release FCPA Guide (November 14, 2012), http://www.sec.gov/news/press/2012/2012-225.htm.
15 Release No. 34-69279, Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings (April 2, 2013), http://www.sec.gov/litigation/investreport/34-69279.htm.
17 SEC Announces Non-Prosecution Agreement with Ralph Lauren Corporation Involving FCPA Misconduct (April 22, 2013), http://www.sec.gov/news/press/2013/2013-65.htm.
18 The 2012 report is available at http://www.sec.gov/about/offices/owb/annual-report-2012.pdf.
19 Release No. 34-67698, In the Matter of the Claim for Award in connection with [Non-Public] (August 21, 2012), http://www.sec.gov/rules/other/2012/34-67698.pdf.
20 The letter sent to registrants describing the presence exam initiative is available at http://www.sec.gov/about/offices/ocie/letter-presence-exams.pdf.
21 Significant Deficiencies Involving Adviser Custody and Safety of Client Assets (March 4, 2013), http://www.sec.gov/about/offices/ocie/custody-risk-alert.pdf.
22 Examination Priorities for 2013 (February 21, 2013), http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2013.pdf.
23 See Section 413(a) of the Dodd-Frank Act and Release No. 33-9287, Net Worth Standard for Accredited Investors (December 21, 2011), http://www.sec.gov/rules/final/2011/33-9287.pdf.
24 See Section 951 of the Dodd-Frank Act and Release No. 33-9178, Shareholder Approval of Executive Compensation and Golden Parachute Compensation (January 25, 2011), http://www.sec.gov/rules/final/2011/33-9178.pdf.
25 See Section 942(a) of the Dodd-Frank Act and Release No. 34-65148, Suspension of the Duty to File Reports for Classes of Asset-Backed Securities under Section 15(d) of the Securities Exchange Act of 1934 (August 17, 2011), http://www.sec.gov/rules/final/2011/34-65148.pdf; Section 943 of the Dodd-Frank Act and Release No. 33-9175, Disclosure for Asset-Backed Securities Required by Section 943 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (January 20, 2011), http://www.sec.gov/rules/final/2011/33-9175.pdf; Section 945 of the Dodd-Frank Act and Release No. 33-9176, Issuer Review of Assets in Offerings of Asset-Backed Securities (January 20, 2011), http://www.sec.gov/rules/final/2011/33-9176.pdf.
26 See Section 952 of the Dodd-Frank Act and Release No. 33-9330, Listing Standards for Compensation Committees (June 20, 2012), http://www.sec.gov/rules/final/2012/33-9330.pdf.
27 See Section 1502 of the Dodd-Frank Act and Release No. 34-67716, Conflict Minerals (August 22, 2012), http://www.sec.gov/rules/final/2012/34-67716.pdf.
28 See Section 1504 of the Dodd-Frank Act and Release No. 34-67717, Disclosure of Payments by Resource Extraction Issuers (August 22, 2012), http://www.sec.gov/rules/final/2012/34-67717.pdf.
29 See Release No. 34-64148, Credit Risk Retention (March 30, 2011), http://www.sec.gov/rules/proposed/2011/34-64148.pdf and Release No. 34-65355, Prohibition against Conflicts of Interest in Certain Securitizations (September 19, 2011), http://www.sec.gov/rules/proposed/2011/34-65355.pdf.
30 See Section 926 of the Dodd-Frank Act and Release No. 33-9211, Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings (May 25, 2011), http://www.sec.gov/rules/proposed/2011/33-9211.pdf.
31 See Sections 953(a), 953(b), 954 and 955 of the Dodd-Frank Act.
32 See Section 941 of the Dodd-Frank Act. This was a joint rulemaking with other federal agencies.
33 See Titles II, III, IV, V and VI of the JOBS Act, respectively.
34 See Section 201(a) of the JOBS Act and Release No. 33-9354, Eliminating the Prohibition against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings (August 29, 2012), http://www.sec.gov/rules/proposed/2012/33-9354.pdf.
35 See Section 504 of the JOBS Act.
36 See Report on Authority to Enforce Exchange Act Rule 12g5-1 and Subsection (b)(3) (October 15, 2012), http://www.sec.gov/news/studies/2012/authority-to-enforce-rule-12g5-1.pdf. The staff concluded that the current enforcement tools available to the Commission are adequate to enforce the anti-evasion provision of Rule 12g5-1 and determined not to make any legislative recommendations regarding enforcement tools relating to Rule 12g5-1(b)(3).
37 See Section 106(b) of the JOBS Act.
38 See Report to Congress on Decimalization (July 2012), http://www.sec.gov/news/studies/2012/decimalization-072012.pdf.
39 See Section 108 of the JOBS Act.
40 See Release No. 67091, Order Approving, on a Pilot Basis, the National Market System Plan to Address Extraordinary Market Volatility by BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Board Options Exchange, Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The Nasdaq Stock Market LLC, National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc. (May 31, 2012), http://www.sec.gov/rules/sro/nms/2012/34-67091.pdf; Release No. 34-68953, Notice of Filing and Immediate Effectiveness of the Second Amendment to the Limit Up-Limit Down Plan (February 20, 2013), http://www.sec.gov/rules/sro/nms/2013/34-68953.pdf; Release No. 34-69287, Order Approving the Third Amendment to the Limit Up-Limit Down Plan (April 3, 2013), http://www.sec.gov/rules/sro/nms/2013/34-69287.pdf.
41 See Release No. 34–67090, Notice of Filing of Amendments No. 1 and Order Granting Accelerated Approval of Proposed Rule Changes as Modified by Amendments No. 1, Relating to Trading Halts Due to Extraordinary Market Volatility (May 31, 2012), http://www.sec.gov/rules/sro/bats/2012/34-67090.pdf. The operative date of the revised circuit breakers was delayed from February 4, 2013 to April 8, 2013. See, e.g., Release No. 34–68784, Notice of Filing and Immediate Effectiveness of Proposed Rule Change Delaying the Operative Date of A Rule Change to NYSE Rule 80B, Which Provides for Methodology for Determining When to Halt Trading in All Stocks Due to Extraordinary Market Volatility, From the Date of February 4, 2013, Until April 8, 2013 (January 31, 2013), http://www.sec.gov/rules/sro/nyse/2013/34-68784.pdf.
42 Phase I applies the limit up-limit-down mechanism to stocks in the S&P 500, the Russell 1000, and to select exchange-traded products. Phase II, currently scheduled for implementation in November 2013, will apply to all remaining exchange-traded equity securities, and will be implemented six months following the implementation of Phase I.
43 See Release No. 34-67457, Consolidated Audit Trail (July 18, 2011), http://www.sec.gov/rules/final/2012/34-67457.pdf.
44 See Release No. 34-64976, Large Trader Reporting (July 27, 2011), http://www.sec.gov/rules/final/2011/34-64976.pdf.
45 See Release No. 34-69077, Regulation Systems Compliance and Integrity (March 8, 2013), http://www.sec.gov/rules/proposed/2013/34-69077.pdf.
46 See Release No. 34-69490, Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants (May 1, 2013), http://www.sec.gov/rules/proposed/2013/34-69490.pdf.
47 See Release No. 34-68071, Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers (October 18, 2012), http://www.sec.gov/rules/proposed/2012/34-68071.pdf.
48 See Release No. 33-9338, Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping (July 18, 2012), http://www.sec.gov/rules/final/2012/33-9338.pdf.
49 See Release No. 34-66868, Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant (April 27, 2012), http://www.sec.gov/rules/final/2012/34-66868.pdf.
50 See Release No. 34-68080, Clearing Agency Standards (October 22, 2012), http://www.sec.gov/rules/final/2012/34-68080.pdf.
51 See Release No. 34-67286, Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies; Technical Amendments to Rule 19b-4 and Form 19b-4 Applicable to All Self-Regulatory Organizations (June 28, 2012), http://www.sec.gov/rules/final/2012/34-67286.pdf.
52 Clearing of credit default swaps commenced in 2009. The Commission issued a series of temporary conditional exemptions to help provide legal certainty to facilitate those clearing activities, in light of issues regarding the potential that cleared credit default swaps would be “securities” subject to the Commission’s authority under the Exchange Act. See, e.g., Release No. 34-63387, Order Extending and Modifying Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection with Request of ICE Trust U.S. LLC Related to Central Clearing of Credit Default Swaps and Request for Comment (November 29, 2010) (temporary exemption in connection with clearing by ICE Trust, now ICE Clear Credit), http://www.sec.gov/rules/exorders/2010/34-63387.pdf; Release No. 34-63389, Order Extending Temporary Conditional Exemptions Under the Securities Exchange Act of 1934 in Connection with Request on Behalf of ICE Clear Europe, Limited Related to Central Clearing of Credit Default Swaps and Request for Comment (November 29, 2010) (temporary exemption in connection with clearing by ICE Clear Europe), http://www.sec.gov/rules/exorders/2010/34-63389.pdf.
53 See Release No. 34-65545, Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds (October 12, 2011), http://www.sec.gov/rules/proposed/2011/34-65545.pdf.
54 Release No. IA-3221, Rules Implementing Amendments to the Investment Advisers Act of 1940 (June 22, 2011), http://www.sec.gov/rules/final/2011/ia-3221.pdf.
55 Release No. IA-3222, Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers with Less Than $150 Million in Assets under Management, and Foreign Private Advisers (June 22, 2011), http://www.sec.gov/rules/final/2011/ia-3222.pdf.
56 Release No. IA-3221, Rules Implementing Amendments to the Investment Advisers Act of 1940 (June 22, 2011), http://www.sec.gov/rules/final/2011/ia-3221.pdf.
57 Release No. IA-3372, Investment Adviser Performance Compensation (February 15, 2012), http://www.sec.gov/rules/final/2012/ia-3372.pdf.
58 Release No. IA-3308, Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF (October 31, 2011), http://www.sec.gov/rules/final/2011/ia-3308.pdf.
59 Release No. IA-3582, Identity Theft Red Flag Rules (April 10, 2013), http://sec.gov/rules/final/2013/34-69359.pdf.
60 Release No. IC-6295, Accounting for Investment Securities by Registered Investment Companies (Dec. 23, 1970), http://www.sec.gov/rules/interp/1970/ic-6295.pdf; Release No. IC-5847, Statement Regarding “Restricted Securities” (Oct. 21, 1969), http://www.sec.gov/rules/interp/1969/ic-5847.pdf.
61 RSFI’s memorandum, laying out its analysis, was then included in the comment file to ensure its availability for public comment. See Memorandum from the Division of Risk, Strategy, and Financial Innovation, Information regarding activities and positions of participants in the single-name credit default swap market (March 15, 2012), http://sec.gov/comments/s7-39-10/s73910-154.pdf.
62 Release No. 34-66868, Further Definition of “Swap Dealer, “ “Security-based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant,” and “Eligible Contract Participant” (April 27, 2012), http://sec.gov/rules/final/2012/34-66868.pdf.
63 See Memorandum from the Division of Risk, Strategy, and Financial Innovation, Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher (November 30, 2012), http://www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf.
64 See Credit Rating Standardization Study (September 2012), http://www.sec.gov/news/studies/2012/939h_credit_rating_standardization.pdf; Report to Congress on Assigned Credit Ratings (December 2012), http://www.sec.gov/news/studies/2012/assigned-credit-ratings-study.pdf. For the latter topic, the Commission will be holding a roundtable scheduled for May 14, 2013.
65 See Dodd-Frank Act § 939C.
66 Report on Review of Reliance on Credit Ratings (July 2011), http://www.sec.gov/news/studies/2011/939astudy.pdf.
67 See Release No. 34-67448, Commission Guidance Regarding Definitions of Mortgage Related Security and Small Business Related Security (July 17, 2012), http://www.sec.gov/rules/interp/2012/34-67448.pdf.
68 See Dodd-Frank Act, § 342(b)(2).
69 Office of Minority and Women Inclusion Annual Report (April 24, 2013), http://www.sec.gov/news/studies/2013/omwi-annualreport-2013.pdf.
70 See Release No. 34-62824, Temporary Registration of Municipal Advisors (September 1, 2010), http://www.sec.gov/rules/interim/2010/34-62824.pdf.
71 See Release No. 34-63576, Registration of Municipal Advisors (December 20, 2010), http://sec.gov/rules/proposed/2010/34-63576.pdf.
72 See Report on the Municipal Securities Market (July 31, 2012), http://www.sec.gov/news/studies/2012/munireport073112.pdf.
73 Litigation Release No. 22428, SEC v. Well Advantage Ltd. et al., (July 30, 2012), http://www.sec.gov/litigation/litreleases/2012/lr22428.htm.
74 Study Regarding Financial Literacy Among Investors (August 2012), http://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf.

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