SEC Announces New Enforcement Initiatives For High Risk Market Areas

SEC to focus on financial reporting, microcap companies and new analytical tools to detect fraud.

The SEC recently announced new initiatives that will “build on the Division’s unmatched record of achievement and signal our increasingly proactive approach to identifying fraud.”(1)

First up is the Financial Reporting and Audit Task Force, which will concentrate on efforts to identify securities-law violations relating to financial statements, which we thought was a large part of what the SEC did before this release.

Next up is the Microcap Fraud Task Force, which will “investigate fraud in the issuance, marketing, and trading of microcap securities.”  Considering the types of operators who often work in this area, this is probably a good use of SEC resources as long as they recognize that people can operate in this space with integrity.  Being small is not an indication of being dishonest.  However, the hallmarks of microcap fraud should give a good indication of which players to target.

Finally, we have the Center for Risk and Quantitative Analytics.  The CRQA, as the SEC calls it, “will support and coordinate the Division’s risk identification, risk assessment and data analytic activities by identifying risks and threats that could harm investors, and assist staff nationwide in conducting risk-based investigations and developing methods of monitoring for signs of possible wrongdoing.”

Much like the Dodd-Frank provisions for identifying systemic risk, there is little to suggest that the government has the capabilities to address these issues in this manner.  If the SEC could not recognize the wisdom for investigating Bernie Madoff after being handed the quantitative analysis demonstrating that Madoff’s claims were impossible, what is there to suggest they can do it on a market-wide scale?

Expect fishing expeditions on innocent firms and excuses relating to “concealment” and “lack of cooperation” for guilty ones.  However, we applaud the SEC for focusing on areas where attention is needed.

(1)Umm, none of Enron, Worldcom, Madoff, Fannie/Freddie or the rest of the mortgage-related misconduct were in the plus column of “the Division’s unmatched record of achievement.” But, we digress . . .