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Speech by SEC Chairman: Remarks at the SIFMA C&L Conference

Chairman Mary L. Schapiro

U.S. Securities and Exchange Commission

Miami, Florida

March 20, 2012

Good morning. It is a pleasure to be here. I always enjoy speaking at the annual C&L conference because I know that we share an understanding – an understanding that markets work best when they offer investors of every variety access to the accurate information that supports informed decisions; when trading venues are fair and honest; when rigorous internal compliance programs protect against abusive practices; and when there is a vigorous examination and enforcement regime to deter, detect, and punish.

When I returned to the SEC as Chairman just over three years ago, the nation, the financial industry and federal regulators were grappling with the fallout from one of the worst financial crises of the past century. Following years of underfunding, the SEC was struggling to effectively pursue its mission. A bright spotlight was focused on us. And we were being challenged to handle not only a growing volume of day-to-day demands, but the need to mount a significant response to the financial crisis and to begin restructuring the agency itself.

It is testament to the talent and dedication of our staff that we were able to move rapidly not just to indentify and repair structural weaknesses in the financial system, but to aggressively identify other areas where the SEC could protect investors and help to stabilize markets – all while in the course of significant organizational change.

That effort – which continues to this day – is more than just a series of discrete restructurings and rulemakings, driven by backward-looking responses to past events. It is, in fact, a comprehensive, forward-looking strategy designed to fundamentally restructure, re-orient, and refocus the SEC in ways that make us a much more effective regulator – regardless of the challenges we might face.

A Re-Energized SEC

Almost immediately upon my return we set about on one of the busiest rulemaking agendas in the past two decades, making tremendous progress in reforming the rules by which Wall Street plays. We passed rules to make money market funds more resilient. We strengthened the custody controls that investment advisers must have in place to protect investor assets; we adopted rules to end “pay-to play” practices by advisers to public pension plans and we required better and more timely disclosure of material events related to municipal securities.

We required investment advisers to disclose more information about their qualifications and conflicts – and made that information easily accessible to the public.

We significantly improved the quality of the information in proxy statements so investors know about the qualifications of board members as well as corporate policies and compensation practices that encourage risk. And we gave shareholders a greater say on executive compensation, with “say on pay” rules.

As we were moving forward with our investor protection agenda, we were also supporting Congressional progress on what became the Dodd-Frank Act. Signed into law in 2010, the Act assigned the SEC a host of significant responsibilities.

We now have in place new rules requiring hedge fund and other private fund advisers to register and report important data to the public and systemic risk information to the regulators. We have required greater disclosure from the issuers of asset backed securities and begun to reduce investor reliance on credit ratings. And in short order, we established a new whistleblower program that is now producing higher quality leads and shortening the length of investigations. All told, we have proposed or adopted more than three-quarters of the more than one hundred rules we are directed by Dodd-Frank to write.

And across the agency, staff is adopting a proactive approach to their duties. We reorganized the Enforcement Division, putting more attorneys on the front lines, giving them greater authority to launch investigations and negotiate penalties, and creating specialized units to build in-house expertise in key areas like structured products or asset management.

Last year, the SEC brought more cases than ever before, won orders for over $2.8 billion in judgments and returned $2.2 billion to wronged investors. We worked with the Justice Department to win civil and criminal convictions of more than 24 individuals involved in the largest insider-trading ring ever broken up. And since 2009, we have brought nearly 100 actions against people and firms whose conduct contributed to the financial crisis.

Over the last two years, our examination unit (OCIE) has put in place a new National Examination Program that has brought changes in the way examination teams are assembled – OCIE now precisely matches examiners’ skills with the unique challenges each examination offers.

Our Division of Corporation Finance established new groups to concentrate closely on systemically critical facets of the financial world, like structured finance and capital markets trends. Corp Fin is also taking a lead in providing companies guidance on how existing disclosure rules apply to emerging and fast-changing market realities – issuing guidance where possible – before inadequate or outdated disclosure practices cause harm. For example, the staff issued guidance regarding the way financial services firms should disclose their exposure to European sovereign debt in time for their annual reports.

Our Office of the Chief Accountant is leading the complex effort to bring U.S. GAAP and International Financial Reporting Standards together into a global system that provides investors everywhere with accurate financial reporting.

And our Division of Investment Management is managing registration and oversight of large hedge funds and other private funds.

In every corner of the agency, we’re smarter; we’re more, agile, aggressive and experienced, and we’re executing at a significantly higher level.

The IT Transformation

The men and women at the SEC are our most valuable resource. But the other pillar of effective regulation and oversight is technology. And so while I speak often about our efforts to bring new and cutting-edge skills to the agency, today I would like to talk about our initiative to bring our systems into the 21st century.

Of course, the SEC has already taken significant steps to improve our information infrastructure.

For example, our recently-created Division of Risk, Strategy and Financial Innovation is working both with OCIE and Enforcement to build data-driven models that help us efficiently target examinations and investigations.

OCIE is using quantitative models along with qualitative approaches to identify firms most worthy of further review, and to more efficiently target areas of interest within examinations. In conjunction with a new project-based staffing strategy and the adoption of national best practices, this is helping focus examination resources on areas likely to result in a deficiency notice or an Enforcement referral.

Enforcement’s Aberrational Performance Inquiry – in collaboration with Risk Fin and OCIE – is using quantitative analytics and a process of qualitative review to identify hedge funds with performance characteristics worthy of further review. As a result, in December we brought actions against four hedge fund advisers identified through the aberrational performance inquiry for inflating returns, overvaluing assets and other actions that materially misled and harmed investors.

But this is just a beginning. We are in the midst of executing a Technology Transformation Plan that is designed to streamline, integrate, and upgrade the SEC’s business processes. And we expect the result to be:

  • Better outcomes in our core investor protection mission.
  • Reduced costs and increased efficiencies in our operations.
  • Better services for both employees and the public.


The unprecedented improvements to our electronic infrastructure are long overdue.

When I returned to the SEC in 2009, demands on the agency had been outpacing its resources for several years. Between 2003 and 2009, the dollar value of trading volume had grown 163 percent. The number of investment advisers had risen 43 percent and the number of broker-dealer branch offices had shot up 86 percent. Yet, between 2005 and 2009, the agency’s IT budget actually dropped, and with maintenance costs for aging existing technology rising, investment in new IT fell to less than half of earlier levels.

Recent budget increases have allowed us to launch initiatives designed to pull the SEC technology infrastructure into the 21st Century. Under the guidance of the SEC’s Chief Information Officer, divisions and offices are learning to use new tools, spending more time on our mission and less time on tasks that can be easily accomplished with technology. And we’ve deployed Division Information Officers in key units, putting in place individuals who combine a detailed understanding of their Division’s day-to-day needs with an understanding of available IT.

The SEC Transformation

The effort consists of several separate initiatives, each with a different primary purpose but which will come together in a seamless IT infrastructure supporting all facets of the SEC. I won’t talk about all of them, but let me discuss a few key systems and how updating them leaves the SEC a fundamentally better agency.

Better Execution of our Investor Protection Mission

Investigation Process

The first goal of this effort is to allow us to execute our investor protection mission more effectively, by enhancing the ability of staff to access relevant data throughout the SEC. Among other things, that means being able to research large volumes of data to locate the proverbial “needle in the haystack” – that is, evidence of wrongdoing.

It’s hard to find that needle today. The age of Enforcement’s infrastructure manifests itself in its e-discovery system – the system which must help an attorney locate, use and correlate individual bits of data from sometimes millions of options: public filings, scanned documents, voice recording, e-mail chains, servers, computer hard drives, smart phones, tablets and the like.

The current system, in addition to being painfully slow, relies on cumbersome input models. It only provides basic Boolean search capability and does not provide more advanced searching such as conceptual searching or the ability to find “more like this,” a feature that you would normally see when searching online with Google or when buying something from an e-commerce website.

Beginning this year, however, a new system is being put in place that will allow much faster access to information and more intuitive searching of data produced to the agency. The system will help our staff identify links between documents and disparate information, and reduce the information overload by allowing us to conduct more focused searches.

The search feature is particularly important, as the volume of documents produced in an SEC investigation makes it impossible for staff to closely inspect every scrap of evidence. The new search engine will make connections between search terms and terms that may be related, allowing the attorney to explore new paths towards an effective case, or revealing evidence and relationships – needles that might have been missed or overlooked.

Going forward, this system will be integrated with other tools such as audio-searching technology that allows phonetic searches of voice recordings. Audio-searching technology can help SEC attorneys find potentially relevant evidence from conversations between brokers and their customers without having to listen to hundreds or thousands of hours of talk.

The Automated Bluesheet Analysis Project is adding yet another dimension to our investigative capabilities. At the beginning of any investigation concerning possible market abuse, new data is loaded into a database, containing approximately four billion electronic equities and options trading records dating back roughly 15 years. Enforcement staff use newly-developed analytics to identify suspicious trading patterns and relationships among multiple traders and across multiple securities, thereby generating significant enforcement leads and investigative entry points.

This project is still in its early stages. But it has already generated significant insider trading enforcement actions, including a notable case recently filed against Matthew Kluger and Garrett Bauer, who ran a lucrative insider trading scheme spanning two decades. Kluger and Bauer successfully hid their scheme for years by communicating through a middleman using public telephones and prepaid disposable mobile phones.

The SEC was initially unaware either of Bauer or the middleman’s relationship with Kluger until parallel analysis of the Bluesheet trading data led us to identify the middleman and uncovered Bauer’s relationship with him. The parallel trading gave away the nature of their relationship despite their efforts, and informed our theory of the case.

And one technology that is already being used on a preliminary basis can translate tens of thousands of phone records or lines of trading data into a visual representation that graphically maps out previously undiscovered relationships between participants in complex conspiracies – something simply beyond the capacity of an individual investigator to do. In a case recently filed, the SEC used the technology to identify and connect the traders involved in the insider trading ring among thousands of other traders in the stock.

These technological advances make the agency smarter. It’s not just that a veteran investigator can better confirm an accurate hunch or a litigation team can build a better case. It’s also that it frees attorneys to do their jobs and contributes significantly to the job satisfaction of men and women who did not join the SEC to spend their days wrestling with low-tech tools. It means they’ll stay longer, get better and use the tools even more effectively.


Another key technology initiative called TRENDS is anchoring the operations of our examinations unit. TRENDS is helping the National Exam Program become more uniform in the way it does its exams – and it’s helping to create a repository for all the documents that examiners collect. When fully in place, the system will record in an electronic web-based form everything from the exam’s purpose and scope to the exam’s findings to the data acquired from the exam.

Additionally, TRENDS will be a single database in which all significant exam statistical and reporting needs will be captured. And TRENDS has the potential to serve as a Commission-wide repository for information about Commission registrants.

Individuals in your firms who deal directly with exams and examiners should notice a difference. During the preparation phase, TRENDS walks examiners through every step, ensuring thorough preparation. It will help examiners locate relevant filings and identify key compliance policies. And it supports preparation of the “scope memo,” that defines the focus of the examination.

With this technology, you should find our examiners better prepared and more knowledgeable about your operations, and find the exam itself more focused. Examinations will become more consistent, allowing you to prepare more effectively and minimizing the challenge of responding to unexpected questions or requests. And eventually an increased ability to access the system on-site will – in addition to helping examiners do their own work – make them more rapidly responsive to questions or concerns you may have.


In addition to TRENDS, the SEC continues to upgrade the Tips, Complaints and Referrals (TCR) system that we deployed last year. With TCR’s launch, the agency was for the first time able to centralize collection of tips from the outside the agency, and to integrate the information with enforcement, examination and other activities. The system also allowed for robust and comprehensive searching, and can improve staff’s ability to identify risk patterns and help focus limited resources more efficiently. In addition, it has greatly enhanced our ability to communicate important information across the agency. An examiner in L.A. now knows when a tip regarding the subject of an examination was phoned into the Miami office.

The next step is to build in a triage capability that will allow the system to automatically determine the characteristics and risks of new tips and assess them against previously-processed tips as well as information from other databases – using that assessment to determine the most effective follow-up strategy.

More Efficient Operations and Management

A second goal of our information technology effort is to use technology to improve internal efficiencies – improving management while freeing people and resources to focus on core regulatory tasks.

One key aspect of our strategy – even as we move forward on many fronts – is to migrate all of these internal systems to a single platform, resulting in significant cost savings. For example, if a single search engine can be leveraged across the enterprise, the SEC will avoid paying multiple vendors. And standardizing on a single database platform will lower hardware costs, and data center space requirements, and reduce support staff. Those savings can be redeployed to better use.

Improved Functionality for Registrants

A third goal is to improve your ability – and the public’s ability – to interface electronically with the SEC. The Commission’s website,, provides the public with information about the SEC’s mission, activities, and effectiveness, and disseminates decisions and rule interpretations. With more than 148,000 static web pages and 21 million company filings, the website provides a comprehensive repository of SEC-related information. The site is used by millions of users every month, making it one the most visited government sites.

But the core technology for EDGAR – our corporate filing system – is 15 years old. The resulting difficulty of efficiently accessing information frustrates investors. Late-1990s filing procedures frustrate you. And the cost of maintaining the aging infrastructure frustrates us.

Over the next several years, we will improve with several goals in mind. We will improve the user experience with a cleaner look and feel, improved navigation and an ability to incorporate social media.

For EDGAR, we aim to simplify the interchange between filers and the SEC, and to reduce filer burdens by providing a professional path and a novice path based on filers’ knowledge. We will resolve long-standing system issues and redundancies. And we will improve the ability to meet Commission requirements in real time versus the current quarterly release approach.


Since my arrival at the SEC we’ve been working to improve performance on two fronts. First, dealing with immediate investor protection and market stability needs and meeting Dodd-Frank deadlines. And second, strengthening the agency’s long-term performance – adding institutional capacity to carry out whatever mission becomes necessary as circumstances arise and the markets evolve.

We’ve pursued this second task through new hiring strategies and the restructuring of key divisions and offices. We’ve increased investments in staff training, nurtured a more collaborative culture, and encouraged an entrepreneurial attitude among our staff.

And now we’ve begun to migrate our technology infrastructure into the current decade. It’s a long-term process, and the final results won’t be fully appreciated for some time. But with people who understand both cutting-edge technology and the SEC’s functional needs in place full time, a long-term comprehensive agency performance strategy, and sufficient available resources, we can make real progress.

In some sense, only a few people will ever be aware of how comprehensive the improvements are. Staff may notice only how much easier it is to do their job, and how much more effective their efforts are. Meanwhile, investors will enjoy the ease with which they access up-to-date information. Malefactors will find themselves trapped by more comprehensive investigations. And you will, I hope, benefit for more focused and effective exams, and simpler filings.

Added together, however, each of these individual aspects will cohere into a larger, more important whole: the more effective SEC that investors, our markets, and a growing economy need and deserve.

Thank you.

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