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Episode 139: When student athletes play hard, who gets paid?

Nov 12, 2019

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Why the SEC is all about ‘broken windows’

Tracey Samuelson Sep 11, 2014
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The Securities and Exchange Commission announced Wednesday that it had charged 34 people and companies for failing to file timely disclosures about their dealings in company stock.

Nearly all the cases settled for fines of up to $150,000.

While the SEC says these charges represent important violations on their own, they’re also part of a larger “broken windows” strategy of enforcement, modeled after a policing theory first coined in the 1980s. The idea is that if you clamp down on little infractions, you’re more likely to deter big-time crime.

“Focusing on these violations does keep people on notice that we are going to bring action in connection with violations big and small,” says Andrew Ceresney, the director of enforcement at the SEC. “It does create heightened focus and attention to compliance more generally.”

He says the SEC has developed digital tools to allow it to go after these smaller cases without distracting it from bigger ones.  

“It’s an interesting experiment,” says John Coffee, a professor and director of the Center on Corporate Governance at Columbia University Law School.

By enforcing filing deadlines Coffee believes the SEC might head off larger problems, where company officials trade on stock before releasing good or bad company news.

“By forcing stricter disclosure, I think, in turn, you’re going to reduce the prospect of insiders exploiting material nonpublic information,” he explains.

The strategy is part of a wider effort to rehabilitate the SEC’s reputation. Tom Gorman, a partner with the law firm Dorsey & Whitney, says the agency was once highly respected for its enforcement abilities. But its image has suffered due to its failure to prevent the Madoff and Stanford Ponzi schemes, and because of the public’s perception that the agency hasn’t netted a big fish in the wake of the financial crisis.

“It’s started to come back, but it still has a long way to go to get back to the days when it was really the most respected enforcement program in town,” says Gorman. “They haven’t really brought, recently, a huge financial fraud case, but they’ve brought some. It’s those kind of cases that are going to build their reputation to what they want it to be.”

Wednesday’s settlements might cause some companies to look at their compliance policies, says Michael Rivera, the chair of the Securities Enforcement and Compliance Practice at Venable LLP. But he doubts they will deter bigger criminals.

“The individuals that are going to engage in massive frauds, I don’t think, are too worried about these smaller cases,” he says. “The real way for the SEC to deter major frauds like that is to go after those major frauds.”

He also notes that these small wins will help the agency report higher numbers of successful actions.

However, the SEC stresses it’s important for the agency to feel omnipresent. Announcing the broken windows approach last October, SEC Chair Mary Jo White said, “Investors in our markets want to know that there is a strong cop on the beat — not just someone sitting in the station house waiting for a call, but patrolling the streets and checking on things.”

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