3 November 2010
The US Securities and Exchange Commission (SEC) is bolstering its tip gathering and analysis capabilities in an effort to enhance its investigative and enforcement abilities.
The SEC’s fraud detection capabilities have faced scrutiny in the wake of the Bernard Madoff $65 billion securities fraud, which went undetected by the SEC’s Division of Enforcement notwithstanding the fact that—according to SEC Inspector General H. David Kotz—the SEC received at least six tips that could have led to uncovering the fraud if the tips were handled appropriately. Kotz blamed the agency’s failure on the lack of communication between its own divisions; among other changes, he recommended that the SEC centralize and enhance the ways in which it collects and analyzes tips. The agency is doing just that.
Previously, tips were scattered among various databases throughout the SEC and its regional divisions. Now, all tips will be stored in one central database. The SEC is also retooling its tip intake processes. SEC Chairwoman Mary Schapiro said that agency’s goal is to make “search capabilities more robust so that tips can be better assessed or triaged.” SEC employees will now follow uniform procedures, and will consistently collect certain information from tipsters. Chairwoman Schapiro added that the new system “will add enhanced workflow capabilities so we can track how tips and complaints are being used throughout the agency.” Further changes are planned to add tools that can filter and analyze the data.
The Enforcement Division also has created the Office of Market Intelligence, which is tasked with combining all tips and complaints with other public and confidential information to enable investigators to focus on those that pose the highest risk to investors. The Office of Market Intelligence is also tasked with identifying newly emerging trends in securities fraud, so that the agency can identify fraud or securities violations at an early stage and act to protect investors.
The agency’s tip gathering and analysis changes may be just in time, as the new whistleblower provisions of the Dodd-Frank financial reform legislation could dramatically increase the volume of tips it receives (see Mayer Brown’s Legal Update “SEC Solicits Comments on Effect of Whistleblower Bounty Program on Existing Corporate Compliance Programs”). The new law entices would-be whistleblowers with up to 30 percent of the total amount collected for providing “original information” that leads to a recovery of $1 million or more in any resulting enforcement action. The SEC will be proposing rules to implement the whistleblower program within the next several months, but its new centralized tip database and related procedures will undoubtedly be a major component of the Enforcement Division’s efforts to administer the whistleblower process.
More information on the SEC’s enforcement reform efforts.
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