Enforcement officials from the U.S. SEC’s Chicago Regional Office and the U.S. Attorney’s Office for the Northern District of Illinois gathered to discuss their enforcement initiatives at the “SEC & DOJ Hot Topics 2014” program on February 11, 2014.  Local regulators reinforced the theme that in 2014, the SEC will continue to adopt enforcement tools that historically have been used by their counterparts in criminal law enforcement.

The program was among the first public speaking engagements by David Glockner in his new role as director of the SEC’s Chicago Regional Office.  Mr. Glockner was appointed as the Chicago Regional director in November 2013, following an impressive, decades-long career in the Chicago U.S. Attorney’s Office, including 11 years as the criminal division chief.  Joining Mr. Glockner on the panel were regulators Thomas Dunn, a Financial Economist in the SEC’s Division of Economic and Risk Analysis, and Julie Porter, Chief of the Financial Crimes Division at the Chicago U.S. Attorney’s Office.

In discussing the SEC’s 2014 enforcement priorities, Mr. Glockner noted that the economy seems to be “between major financial crises” at the moment, which presents an opportunity for the SEC to set its own agenda – rather than reacting to various market failures.  In setting this agenda, Mr. Glockner warned that companies should expect the SEC to be present in as many of its different areas of regulatory responsibility as possible.  He noted that even activities that have not garnered much attention from the SEC in the recent past may now fall under scrutiny, especially if there is a high potential for misconduct in a previously overlooked area.  He specified that current areas of interest include: (1) accuracy of books and records, earnings reports and investor communications; (2) municipal securities / public pensions; and (3) utilizing staff exams to conduct targeted reviews of risk-based areas.

A More Pervasive Presence for the SEC in 2014

To balance the SEC’s desire for a more pervasive presence with its current limited resources, the Commission is making use of the sophisticated financial analysis tools in its arsenal to actively ferret out fraud and other market irregularities.

SEC Economist Thomas Dunn explained that 2014 will usher in the testing phase of the SEC’s “Accounting Quality Model” (AQM), which is a data analytics program designed to cull data from financial reports and allow regulators to compare a company’s filings against those of its peers.  The AQM reports are then provided to SEC exam teams, who will use the reports to determine exam priorities, potentially including which companies are chosen for exams, exam order, and testing areas.  Mr. Dunn mentioned that the SEC is also working on an a text analytics model, which will enable Commission staff to analyze text included in the management discussion section of filings, as well as press releases and other investor communications, to uncover potential irregularities in comparison to a company’s industry peers.  Additional tools under development include aberrational performance models to analyze hedge funds, broker-dealers and investment advisors.

Assistant U.S. Attorney Julie Porter predicted an increase in coordination with the SEC, citing the recent insider trading case involving parallel actions by the U.S. Attorney’s Office and SEC against a former accountant at Chicago-based Allscripts Healthcare Solutions.  Ms. Porter added that the Chicago U.S. Attorney’s Office is also increasing its cooperation with DOJ strike forces to bring cases in the areas of financial crime, healthcare fraud and potentially more FCPA cases.

Ms. Porter expressed that companies and individuals can expect a steady flow of sweep activity, whereby enforcement officials package a number of small cases in order to deliver a message to market participants or an industry.  Mr. Glockner noted that sweep activity has been conducted by DOJ for a long time, and will increasingly be used by the SEC.  Thus, it appears that this is just one page from the prosecutor’s playbook that Mr. Glockner will bring with him as he embarks on his new role of director of the SEC’s Chicago Regional Office.