Remarks at the SEC Historical Society Annual Meeting

Speech

Remarks at the SEC Historical Society Annual Meeting

 

Commissioner Elisse B. Walter

U.S. Securities and Exchange Commission

Washington, D.C.

June 6, 2013

Good afternoon, it's a pleasure to be with you today.

I want to begin by saying "thank you" to President Bruce Bennett and Carla Rosati for their work helping the SEC Historical Society to continue to grow and flourish. To my mind, it is not only an important repository of American Financial History, it is a tribute to the thousands of men and women who have committed themselves over the years to protecting American investors and ensuring the stability of our financial markets by working at, or with, the Securities and Exchange Commission. Your efforts, and those of all who contribute to the Society and support events like this one, are deeply appreciated.

Today of course, is the anniversary of the Securities Exchange Act of 1934 -- the United States Securities and Exchange Commission has now been in existence for 79 years. And some days I feel as though I have been here for most of them.

I could go on forever about the changes that have come to the agency since I first started in 1977. I'm proud to say that, unlike in the 70s, in this millennium, it is no longer weird for someone to leave the private sector to work as a Commission staff attorney. More seriously, we are finally coming into the age where we have the data and analytic ability to significantly enhance the ways in which we carry out our critical functions.

Unlike the stereotypical (and in my experience apocryphal) civil servant, my colleagues and I welcome change, recognize its importance and have been delighted to help advance change at the SEC, as a staffer, Commissioner and Chairman.

Change keeps us relevant in a rapidly evolving financial world, and it helps us execute traditional functions better.

Today, changes within the SEC are helping us prevent and redress the kinds of frauds that have existed as long as there have been markets. And they're helping us police markets that had barely come into being back when I started here.

Of course, there has always been ongoing change and growth at the agency, but what I think is different now is the quality of the changes underway. It's not so much the incremental improvements in quality and capacity that I find exciting – although, as with compound interest, these incremental changes add up to a substantial transformation after a time.

Rather, we're making changes that fundamentally alter the way we execute our mission.

  • We're embracing new technologies, transforming the way we target, investigate and examine registered entities and suspected wrongdoers through the use of sophisticated custom algorithms.

  • And, in a world of limited resources, we're leveraging our capacity in ways that effectively multiply the reach of our staff and bring oversight into places it wouldn't normally be able to go.

  • We're coming to grips with the fact that, as complicated and as difficult as it is to do, we must function in many ways as an international regulator.

As the size of the financial markets and the scope of our responsibilities within those markets continue to expand, we are multiplying our effectiveness with strategies that would have been difficult to execute or even to imagine barely a decade ago.

Technology

For as long as I've been here, the SEC mission has far exceeded the resources appropriated to carry it out.

So we're coming up with creative, in-house technologies that allow us to dramatically expand our oversight without dramatically expanding our staff.

As you may know, OCIE has been working with the Division of Risk Strategy and Financial Innovation to continue to improve the algorithm that allows them to determine which registrants offer the highest risk to investors, and target resources on these firms. The result has been a significant increase in the percentage of examinations that yield significant findings or referrals to Enforcement.

In addition, last year we rolled out the Aberrational Performance Initiative, which uses public data to find financial advisory firms whose reported results seem literally too good to be true. This too has already resulted in a series of enforcement actions.

We will soon be able to crunch the numbers in filings submitted by registered companies and compare their numbers to those submitted by similar firms to see if there's something unusual that needs to be examined more closely.

And, we're even working on a tool that will allow us to examine the written sections of corporations' filings to discover misdirection in the management's discussion and analysis sections -- anomalies that suggest that something is being hidden.

Leverage

In addition to high-tech targeting, we're also expanding our reach by contacting individuals outside the SEC, finding ways to make them work for our team.

One way is through our rules.

Among our first responses to the Madoff crisis was to adopt regulations requiring that investment advisers with custody of their clients' assets undergo a random audit each year. We subsequently proposed similar rules applying to broker dealers.

We also put in place a cooperation program that gives entities in violation of SEC regulations or securities law incentives to cooperate with our investigations and voluntarily to take steps to root out the causes of our concerns.

Perhaps most significantly, our Whistleblower Program offers significant rewards when high-quality, original information leads to a judgment of at least $1 million. In the first year of the program, the SEC received more than 3,000 tips from whistleblowers.

Last summer, the SEC paid nearly $50,000 to a whistleblower who helped us stop a multi-million dollar fraud – we expect news of this reward to significantly affect participation in the program going forward.

Although there is no substitute for the SEC's professional staff, we now have professionals, insiders and management teams working with the SEC to ensure that laws are followed and malefactors are found.

Cross Border

And we've begun to grow into our role as an international regulator.

Consider a hypothetical, but not unusual swap transaction:

One party is in Chicago, the other is in Frankfurt. They negotiate the transaction through traders and sales personnel in New York, then book the trade in each company's London affiliate.

Which jurisdiction's swap regulations apply?

The SEC recently took on that question, proposing an approach we call "substituted compliance," allowing a foreign entity to satisfy the Commission's requirements in a particular area by complying with requirements in its home jurisdiction – as long as they are comparable to those in place here in the U.S.

It's a pragmatic and flexible approach that recognizes the efforts by other jurisdictions to create their own regulatory regimes, while allowing the Commission to require compliance with U.S. regulations where foreign regulation falls short.

As passionate as I am about our work, I recognize that in a global marketplace, the SEC cannot take a "my way or the highway" approach to regulation. And, as the importance of international finance – and our involvement in it – continues to grow, I think this proposal is helping us create creating a template for future international efforts.

Conclusion

Today, the SEC is a bigger player on a bigger stage than ever before – and yet is still under-resourced and over-tasked.

We are fortunate, however, that the ingenuity of our staff is making it possible to execute against our growing responsibilities by welcoming and harnessing change – deploying technology in unprecedented ways, encouraging outsiders to support our work, and addressing global challenges in practical fashion that makes other jurisdictions our allies in creation of a stable regulatory structure.

The Chinese supposedly considered the phrase: "may you live in interesting times," a curse. But, perhaps because I'm an old-school New Yorker and suspect that phrase may have originated in a fortune cookie rather than with a Jin Dynasty court scribe, I'm thoroughly enjoying these interesting times at the SEC. And I know that the changes that are making these times so interesting are making us a better agency at what we do for markets and investors.

Thank you.