What’s Inside?

• Report Shows SEC’s Whistleblower Program is Wildly Successful, Should Not Be Weakened
• SEC’s Quantity Over Quality Enforcement Program
• Supreme Court Case Threatens One of the SEC’s Most Powerful Weapons to Fight Fraud
• Better Markets Opposes the CFTC’s Continued Deregulation Endangering the Financial System

Report Shows SEC’s Whistleblower Program Is Wildly Successful, Should Not Be Weakened

The SEC just submitted its 2019 Annual Report on its Whistleblower Program to Congress, which proves – again – that whistleblowers perform a vital public service by revealing fraudulent and illegal conduct.  The SEC’s Whistleblower Program was created in the Dodd-Frank Act and designed to reward and protect whistleblowers.

As a result of the Program, the SEC has received tens of thousands of high-quality tips, market intelligence and information that has resulted in sanctions of more than $2 billion on fraudsters and crooks.  Of that $2 billion, more than $500 million has been or will be returned to victimized and defrauded investors – money they most likely would have never gotten back, and even worse, the fraud would have likely gone on longer causing more harm.  Simply put, the Program has been a game-changer in terms of investor protection and fraud detection and prevention. 

Yet, despite this success, the SEC is proposing significant changes to the Program that risk snatching defeat from the jaws of victory and that would violate the Dodd-Frank Act.  These proposed changes put investors needlessly at risk and increases the likelihood of fraud going unreported and therefore undetected, as Better Markets detailed in a comment letter submitted to the SEC. The SEC’s own 2019 Annual Report proves that the Program should not be changed.  Better Markets will continue to fight attempts to weaken the Whistleblower Program and investor protections. 

SEC’s Quantity Over Quality Enforcement Program

The SEC also recently released its FY2019 Enforcement Program statistics, and while the total number of completed enforcement cases remains high, it is concerning to note how the SEC has achieved these numbers.  As in past years, the SEC seems more interested in quantity more than quality.  For example, according to the report, of the 526 standalone enforcement actions, 95 were against mutual funds that self-reported violations of disclosure rules under SEC’s recent Mutual Fund Share Class Selection Disclosure Initiative. Over 36% of the standalone cases were against investment companies, and only 51 cases against broker-dealers and 30 cases for insider trading, which are 40% less than SEC’s similar actions in the prior year. 

America’s investors depend on the SEC to detect, investigate, punish, and deter investment professionals’ or corporations’ misconduct and illegal activities.  Bragging about numbers that make the SEC look good may make them feel good, but only actual tough actions against even powerful financial interests will punish and deter wrongdoing and protect investors.  The SEC is supposed to be the cop on the Wall Street beat, not an organization more interested in its own PR, which may fool the public, but it won’t fool the securities crooks who will see it as a green light to prey on investors.

Better Markets has long advocated for an effective SEC enforcement program.  For example, Better Markets aggressively opposed the SEC’s weak, flawed sweetheart settlements with Wall Street’s largest banks, including, for example, Citigroup where we intervened in the District Court and filed briefs in the U.S. Court of Appeals for the Second Circuit.  We are also actively engaging FINRA, which is the front-line regulator of the broker-dealer profession, on investor protection to significantly revamp its approach towards recidivist brokers and firms that specialize in hiring recidivist brokers.  We will continue fighting for well-resourced and investor-oriented enforcement programs that hold unscrupulous financial professionals and executives accountable for cheating and harming investors.

Supreme Court Case Threatens One of the SEC’s Most Powerful Weapons to Fight Fraud

Making crooks and lawbreakers give up their ill-gotten gains is critical to making sure “crime does not pay,” which is key to deterring future crimes.  After all, if you get to keep what you illegally took, that wasn’t yours, then you are incentivized to do it again.

This is called “disgorgement” and should always be required along with additional fines, penalties or other sanctions.  Unfortunately, the Supreme Court, in a very bad 2017 decision, ruled that the SEC can only obtain disgorgement from crooks going back five years. 

Now the crooks are back before the Court asking for it to rule that the SEC cannot obtain disgorgement at all!  The defendants in this new case insist that the SEC has no statutory authority to seek any amount of disgorgement since, although the law allows the SEC to ask a court for “equitable relief,” disgorgement, they claim, must be viewed exclusively as a punitive measure, not “equitable relief,” which is what the court said in the earlier case.  This would overturn 50 years of court rulings that disgorgement is an appropriate equitable remedy in SEC enforcement actions and allow countless fraudsters to retain vast amounts of money they have taken from their investor victims. 

This case once again illustrates the enormous impact that Supreme Court cases involving financial regulation can have on the lives of all Americans, as we detailed in our recent report on how the Supreme Court impacts the economic security and prosperity of the American people. Briefing on the merits will soon get underway, and Better Markets plans to support the SEC with an amicus brief highlighting the damage that would be done by a decision stripping the SEC of its long-standing authority to seek court-ordered disgorgement to recover funds stolen from investors.

Better Markets Opposes the CFTC’s Continued Deregulation Endangering the Financial System

On Monday, Better Markets filed a comment letter on the Commodity Futures Trading Commission’s (CFTC) proposed exemption from certain U.S. regulations for certain derivatives clearinghouses organized outside of the United States.  Despite the CFTC’s naming convention—”alternative compliance”—the proposal is not a means to comply with U.S. law at all, but rather, an explicit and unlawful exemption from most U.S. regulatory requirements applicable to clearinghouses combined with a de facto and unlawful exemption from most U.S. statutory requirements as well.  For this reason, the CFTC’s proposal rightly should have been called, “Alternative Non-Compliance.”  Better Markets comment letter can be found here.   

The Dodd-Frank Act made central clearing of swaps a cornerstone financial reform for the over-the-counter derivatives markets in the aftermath of the 2008 financial crisis.  It sought to reform Wall Street’s reckless practices in the dealer-dominated derivatives markets by mandating and encouraging migration of significant derivatives risks to clearinghouses, making robust, comprehensive supervision and regulation of such clearinghouses, clearing practices, and interconnected clearing members all the more critical to U.S. financial stability.  The CFTC should be focused on statutory mandates to ensure the safety and soundness of clearinghouses, to protect U.S. customers and access to the markets, and to maintain the financial stability of the U.S. financial system as whole.  Instead, the CFTC seeks an unnecessary exemption that conflicts with agency practice for at least two decades and would dramatically reduce U.S. oversight of five out of the six foreign clearinghouses currently regulated by the CFTC.     

Moreover, the CFTC’s proposed “alternative compliance” framework is, unfortunately, only one of three proposals seeking to exempt clearinghouses and other financial institutions from U.S. oversight.  Stay tuned for Better Markets’ upcoming comment letter discussing an even more dangerous and equally unlawful CFTC exemption for foreign clearinghouses.