Speech by SEC Staff:
Remarks Before the Panamanian Securities Regulatory Community and Industry
Director, Office Of International Affairs
U.S. Securities and Exchange Commission
April 15, 2004
It is truly a pleasure. I would like to thank Chairman Barsallo, Commissioner Pabon and Commissioner de Leon for their kind invitation to speak to here today on securities enforcement issues. I am particularly pleased because this audience represents not only Panama's regulators and government, but also its industry.
That is because I firmly believe that market participants can and should play an important role in the development of strong capital markets and in strengthening investor confidence. Without industry's commitment to fostering transparent, fair and honest markets, financial regulators, like the SEC and the Comision Nacional de Valores (CNV), face an uphill battle to say the least. If local investors cannot trust businesses, they will not come to the market.
Investors also must have confidence that should wrongdoing in the financial markets occur, it will be quickly detected, investigated and prosecuted by the relevant authority and that every effort will be made to return ill-gotten gains to defrauded investors. After all, securities laws - no matter how comprehensive and well crafted - are meaningless unless supported by a robust enforcement regime, a concept well accepted by the international regulatory community.
I applaud the Panamanian government's efforts, and particularly those of the CNV, to seek enhancements to its securities laws and enforcement capabilities. In today's world, I think these efforts are a necessary step to fostering investor confidence, to increasing cross-border business, and to becoming a full partner in the international regulatory community.
In my remarks, I would like to begin with an overview of the SEC's enforcement framework. I will then move on to the importance of international cooperation in combating cross-border fraud and the role that industry can play.
Before going any further, I must deliver the standard statement that the Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views that I express are mine and do not necessarily reflect those of the Commission, the Commissioners or other members of the SEC's staff.
SEC's Enforcement Program
In discussing the SEC's enforcement program, let me begin with the fundamentals - our agency's mission. The SEC is charged with administering and enforcing the US federal securities laws, which are designed to:
- protect investors;
- maintain fair, honest and efficient markets; and
- facilitate capital formation.
A strong enforcement regime is critical to giving effect to our laws and regulations. After all, regulations without teeth are merely words. This is why the SEC's enforcement program is a integral component of the agency's mandate. Investors must have confidence that regulators will quickly detect and prosecute wrongdoing should it occur. This is truer now than ever before as we have recently faced, and continue to face, a myriad of financial frauds including Enron, WorldCom, Tyco and HeatlhSouth. Indeed, in the 2003 fiscal year, the SEC filed a record 679 actions, up from 484 two years ago, a 40% increase.
I will not spend a great deal of time going into the details of the SEC's investigative processes, but I would like to provide a glimpse of our enforcement framework and the remedies available to us.
The SEC's enforcement responsibilities are principally carried out by its Division of Enforcement, with support on cross-border issues from my office, the Office of International Policy Affairs. The Enforcement Division: (i) investigates possible violations of securities laws; (ii) recommends Commission action when appropriate, either in a federal court or before an administrative law judge; (iii) and negotiates settlements on behalf of the Commission. While the SEC has civil enforcement authority only, it works closely with various criminal law enforcement agencies throughout the country to develop and bring criminal cases when the misconduct warrants more severe action, such as imprisonment.
The Division of Enforcement obtains evidence of possible violations of the federal securities laws from many sources, including its own surveillance activities, other Divisions of the SEC, the self-regulatory organizations, the securities industry itself, press reports, and investor complaints.
Facts are developed to the fullest extent possible through informal inquiry, interviewing witnesses, examining brokerage records, reviewing trading data, and other methods. However, once the Commission issues a formal order of investigation, the Division's staff may compel witnesses by subpoena to testify and produce books, records, and other relevant documents. This broad ability to compel testimony and documents extends to both regulated and non-regulated persons and entities, and is critical to fully and quickly investigating securities violations.
Under the US federal securities laws, the Commission can bring enforcement actions either in the federal courts or internally before an administrative law judge. The factors considered by the Commission in deciding how to proceed include: the seriousness of the wrongdoing, the technical nature of the matter, tactical considerations, and the type of sanction or relief to obtain. For example, the Commission may bar someone from the brokerage industry in an administrative proceeding, but an order barring someone from acting as a corporate officer or director must be obtained in federal court. Often, when the misconduct warrants it, the Commission will bring both proceedings.
Remedies that the SEC may seek include, among others, cease and desist orders, monetary penalties, disgorgement of ill-gotten gains, and suspension or revocation of the registration of market participants, such as broker-dealers, investment advisers and their associated persons.
Common violations that may lead to SEC investigations include: insider trading; misrepresentation or omission of important information about securities; manipulating the market prices of securities; stealing customers' funds or securities; violating broker-dealers' responsibility to treat customers fairly; and the sale of securities without proper registration.
The SEC's enforcement program traditionally has centered on investigating unlawful conduct that has already occurred and preventing it from continuing. But, in the last couple of years, with the deluge of fraud and malfeasance, it is no longer considered sufficient to simply prosecute violations of the securities laws after the fact and dole out appropriate sanctions. Today, the concept of effective enforcement necessarily involves - as Chairman Donaldson puts it -- "seeing around corners." In others words, the SEC is working to expand its enforcement program to include not only detecting, investigating and prosecuting securities fraud, but also identifying trends, practices and risks within our capital markets that could be exploited to the detriment of investors. The ultimate goal being preventing such activities from evolving into full fledge, large-scale fraud that erodes the confidence of our investors and the integrity of our marketplace.
An increasingly important component of domestic enforcement regimes is the ability of securities regulators to provide, as well as receive, international assistance. Indeed, the internationalization of the world's securities markets and the increased frequency of cross-border trading activity has made reliance on domestic powers alone insufficient. Strong international cooperation is vital to the quick, thorough and accurate resolution of international enforcement investigations.
These statements are almost axiomatic today. But this wasn't always the case. Until the 1990s, regulators in the world's major markets often lacked the legal and practical ability to share with their foreign counterparts information vital to the resolution of cross-border investigations. The result was that, when the investigative trail crossed its jurisdiction's borders, it quickly became cold.
Today, all IOSCO jurisdictions recognize that their securities regulators should have comprehensive inspection, investigative, surveillance and enforcement powers. Every IOSCO member also recognizes that all securities regulators should have the authority to obtain and share public and non-public information with their foreign counterparts.
Indeed, through the IOSCO Multilateral Memorandum of Understanding (MOU), the world's securities regulators have reached broad consensus on what is required of regulators to be considered responsible members of the international regulatory community.
The Multilateral MOU, adopted in May of 2002, is the first global information-sharing arrangement among securities regulators, and it sets a new international benchmark for cooperation critical to combating securities and derivatives violations. It expresses a commitment by IOSCO members to putting in place efficient and effective arrangements for information-sharing to address illegal use of the securities and derivatives markets, including market abuse and fraud.
The Multilateral MOU specifies the particular types of information a signatory is expected to provide to counterparts upon request. This information consists of:
- client identifying records from bank and brokerage accounts;
- bank and brokerage transaction records; and
- beneficial ownership information of non-natural persons organized in the jurisdiction of the requested authority.
The MOU contains express provisions requiring the confidentiality of the information to be shared. Specifically, the MOU provides that, except for uses specified in the MOU or in response to legally enforceable demands, information provided under the MOU will be kept confidential.
The MOU thus permits the use of the information to:
- further an investigation;
- ensure compliance with the securities laws; conduct civil or administrative enforcement proceedings;
- assist in surveillance or enforcement activities of self-regulatory organizations; and
- assist in criminal prosecutions.
The IOSCO Multilateral MOU now has 25 signatories, with more added every few months. Several of the most recent signatories only just received the legal authority required by the MOU. Their legislatures granted such legal authority precisely because the Multilateral MOU is such a powerful statement of what the international community believes is needed of securities regulators in today's global environment.
We understand that the Panama CNV is taking important steps toward becoming a signatory to the Multilateral MOU. Indeed, the CNV is in the process of formally expressing their intent to obtain the necessary domestic authority to ascribe to the key provisions of the IOSCO Multilateral MOU. I hope you will join me in applauding and supporting their efforts.
Role of Industry
I would now like to turn to the important role that banks, brokers and other financial intermediaries can play in fostering investor confidence by doing their part to promote fair, honest and transparent markets.
The fact is that barriers to enforcement cooperation come not just from ineffective laws. Sometimes they also stem from a lack of willingness to cooperate on the part of market participants. And, I believe that the proceeds of crime travel to where enforcement cooperation is lacking, threatening the integrity of our markets. This erodes not only investor confidence but also the opportunity for real and legitimate growth in both local and cross-border business.
So, you may be asking what can financial intermediaries in Panama do to support vibrant capital markets and the growth of cross-border business. I think there are many positive steps that can be taken -- steps that we have asked US industry to take.
First, you can lend your support towards real and meaningful corporate and enforcement reforms in Panama.
Second, you can serve as models for good corporate behavior and fulfill your fiduciary duties to the highest level.
Third, as you conduct the transactions that are your everyday business, you can be a force for reform - insisting on high standards among your business partners, and acting to root out unethical behavior where you find it. By helping to raise the ethical bar, and not lower it, you can help to create an environment where the interests of investors are paramount. Let me illustrate this last point by way of example.
Take the case of a fraudster who commits securities fraud in one jurisdiction, and then transfers the illicit proceeds of that fraud to a bank in another jurisdiction. A regulator's goal in this situation is simple - to get the money out of the hands of those who committed the fraud and back into the hands of the fraud victims. However, when money crosses borders, this becomes considerably more difficult.
Securities regulators worldwide must work to develop effective means to freeze and repatriate assets. But there are also things industry can do to prevent their institutions from unwittingly being used to harbor the proceeds of crime.
For example, if the SEC's Division of Enforcement can trace the proceeds of fraud to a foreign bank, staff may send the bank what we term "a bank warning letter." This letter puts a foreign bank on notice that an account at its institution may contain illegal proceeds and that the bank could be liable to defrauded investors as a constructive trustee. While such a letter does not compel the bank to take any action, I believe it puts the bank on notice of its legal and ethical responsibility to take whatever steps necessary to temporarily block any activity related to the account. Such time preserving measures allow regulators and other government officials to work together to prevent dissipation of investor funds.
As Commissioner Campos touched on earlier today, the United States has recently undergone extensive corporate governance and other reforms in an effort to restore investor confidence, which was shaken by a rash of corporate governance and mutual fund scandals. At the onset of these reforms - no matter how comprehensive and well-designed - we realized that industry would play a key role in achieving meaningful changes.
After all, industry has the power to change their ethical makeup and ensure that regulations are not merely complied with in the sense of checking the box, but that the true underlying spirit of reform is embraced. While US public companies and financial intermediaries still have a long road of reform ahead, we are seeing signs of real corporate change in the United States.
I believe that industry in Panama also can make a vital contribution towards establishing an environment of trust that fosters investor confidence. I wish you much success in this journey. I believe the end result will be beneficial to both investors and cross-border business, and will establish Panama as one of the leading lights in the region.