How Compliant Are They? SEC Registrants.As you may know, the mission of the SEC is to protect the investing public and maintain fair, orderly and efficient market and facilitate the capital formation. It has full legal authority to set any guidelines and enforce any law to reach the goal of its defined mission. Four divisions are helping it to accomplish this defined mission in ‘peace’ time including the Corporation Finance (CF), Investment Management (IM), Division of economic and risk analysis (DERA) and Trading and Market ™. For purpose of this financial reporting post, I will not define DERA because it has a little contact with the investing public. That said, CF has two primary defined missions: to see that investors are provided with materially complete and accurate information and to deter fraud and misrepresentation in the public disclosure and offering, trading, voting and tendering of securities. IM’s defined mission is to minimize the financial risks to investors from fraud, mismanagement, self dealing and misleading or incomplete disclosure in the investment company and investment adviser firms and segments of the financial services industry without imposing unnecessary costs and burdens on regulated and reporting entities. TM’s defined mission is to establish and maintain standards for fair, orderly and efficient market while fostering investor protection and confidence in the markets. SEC will only reach its goal by helping their registrants implement a culture of well managed organizations with return on investment including low legal cost therefore low costs of doing business, obedience in good business practices, maintenance of company and management good reputation, good quality at low price products/services, preservation of good customers services, attraction of the best and star staff and business partners. All this requires standards of behavior beyond designing, watching, tracking and administering metrics in governance, risk and compliance (GRC). Having said that if the company and its managers break any law, the division of enforcement will hunt them down and bring them for a ride to meet the grand jury and judge for a debate. The division of enforcement conducts investigations of registered and reporting entities (public companies, mutual funds, broker dealers, transfer agent and investment advisers firms) and unregistered and fraudulent securities firm’s working on line and assistors and abiders). Also, it is not a surprise for you that 2 principal forces that initially changed American corp governance are takeover and the growing use of equity financing. But the shadow force is the media increasing fascination with corporate reports scandals including blockbuster compensation awards. All these forces made managers more sensitive to their company’s market prices. It is why executives are inclined to take greater risks to inflate stocks price. One of the strongest arguments for mandatory disclosure under prescribed accounting rules is a powerful comparative method not only to value some assets of the companies but also to evaluate how a particular executive is performing in the peer competition. But this method does not shift the burden of proof to the SEC reviewer, that means you need a good team it does not matter that reviewers did commit any mistake and need to implement a lasting culture to prevent future violation of law and costs related to litigation. At the same token, the Gov’t routinely expects voluntary disclosure and cooperation because it will save the Gov’t money and time while evaluating a corporation fully and deciding quickly instead of long investigation and court room outcome and ‘jeopardy’. It is why the Gov’t defines cooperation to include ‘if necessary, waiver of attorney-client privilege and work product protection’. Thus, the following elements can help the company receive credits from the US Federal sentencing guidelines and US SEC

1. Governance: the board of directors and top management should provide adequate resources for corporate compliance.

1 Research conducted by Arthur Mboue

2. Culture and values: newly implemented culture and values of the organizations should promote ethical behavior and accountability

3. Monitoring and reporting: metrics and results of the monitoring program must be reported to the top management

4. Incentives and rewards: compensation committee must penalize misbehavior and non-performance related compensation packages

5. Risk Management: the implementation of good risk management must identify, assess, mitigate and manage compliance.

6. Communication and training: staff should be trained to understand their roles and responsibilities including segregation of duties

7. Policies and procedures: adopted policies and procedures should focus on maximizing compliance values

8. Escalation and investigation: it must be a good discipline helping staff and others to confidentially report wrong doings, misconducts and frauds

9. Issues management: A company must adopt to strategy to build root causes of any reported misconducts, frauds and wrong doing.

10. Improvement process: continual improvement and benchmarking of best practices must be put in place in order to focus on the search for excellence.

11. Negotiation: corporate leaders must work hard enough to keep lines of communication between the SEC Staff and the company leaders open

12. NPA/DPA: a. US DOJ- to receive cooperation credits for DPA/NPA, the company must provide all facts

relating to the individualsb. SEC- self reports of misconduct in order to be eligible for the Division of Enforcement to

recommend a DPA or NPA to the commission

After reviews or tips, the SEC begins investigating into possible securities violation by opening a matter under inquiry (MUI). It can initiate the filing of civil complaint in district court or an order instituting proceeding (OIP) before its home court based on its own criteria and use of discretion. At the end of year (Sept), SEC collects information activities for public or congressional briefings. In public or private world, a professor was telling us “who has more reliable data wins’. Without data and good reporting, the organization does not know its own performance, its target, customer segmentation and the like. That means, a good reporting of data will help the organization comes up with target goals. For organizations reporting to Congress, the consequence of a commission failure to meet a performance metric score card can be a reduced budget, not increase, it is why some agency find misreporting as a way to entitle them with workable budget. For instance, knowing the process, after my emails and phone calls were not answered by the SEC, I did dig past congressional reports to find and put together this table below. But, in my view these numbers do not look good, it is just a feeling of someone with 2 decades reviewing data daily in addition FPI,… are not included in these congressional reports. Indeed, let assume that the SEC high ranking officers will not lie to Congress just to keep increasing SEC budget; my most important problem is that if the numbers of enforcement actions are used as a metric to report and evaluate the SEC effort, can they help to measure and monitor SEC achievement of its main goal? You may notice reading this table: the number of registrants, number of SEC securities actions, and SEC actions without follow on. I did collect these numbers of registrants just to show that the percentage of registrants is

2 Research conducted by Arthur Mboue

too large compare to the SEC enforcement actions. In addition, I will add that no enforcement actions for muni securities violations are included in these metrics because since 2005, the muni securities violation has been reported separately. Also, since 2013, for reason I did not find out, the SEC has not reported contempt proceedings actions to enforce compliance with an earlier enforcement action in an aggregate tally of enforcement actions filed. Going forward, the big question is what is a follow on case? Follow on actions are derivative actions used to impose additional sanctions against individuals working on the case. Follow on cases seek to impose partial or full associational bar against an offender to either suspend or revoke registration as broker dealer or investment adviser or to suspend the right of an auditor or attorney to practice before the commission. Also when the defendant is convicted of a case filed by the SEC and US DoJ, the SEC’s original primary enforcement action is converted into a follow on proceeding in which the defendant is disbarred or suspended but not otherwise sanctioned. The process follows by the follow on cases is too costly because the commission must initiate an administrative proceeding. But if the commission had a rule to seek professional or associational bar against a defendant/respondent in court when the primary enforcement action is brought in court instead of actual practices, the follow on proceeding would have consumed less resources from the SEC budget. There is no doubt in mind that the enforcement of follow on bars and the like has contributed to the actual improved quality of our financial reporting and 21st century market discipline and low number of violators but, I have to recognize that people with low or no securities law process have been confused by the follow on numbers. I read that they let themselves believe that follow on cases are addition to the number of new cases filed annually to defendant/respondent by the SEC. For congressional budgeting lobby and oversight, prevention and deterrence of securities frauds and misconducts, we should keep disclosing follow on number on that separate column. The commission should not be punished by Congress with budget cuts for bringing fewer enforcement actions or reporting lower performance rate than its target. When the SEC drafts its congressional report, it includes a lot of good and reliable data (performance data including number of investor testing research projects, time to complete SEC review of SRO rules, percentage of transactions dollars settled on time, length of time to respond to written request, timeliness to respond to request, supervisory cooperation requests from foreign authorities for SEC assistance, number of non US regulator trained, percentage of firms receiving deficiency letters, percentage of compliance exams, percentage of public companies and investment firms with disclosure reviewed each year and a lot more) but enforcement actions data is too star that it invades and commands all the mediatic attention and reports leaving no a least a footnote report to others data. To reduce this shift in mediatic report, it will make sense that less congressional oversight would yield better results and use of all reliable metrics since the congress fixes only what is in the media (TV 1st, newspaper 2nd). At the same time, securities law experts and academic faculties are arguing for a comparison of the SEC enforcement actions data to other law enforcement agencies data just to manage the marketplace and the academization of the SEC metrics. Professors, unfortunately, I have to disagree with you because you did fail to notice that the SEC is not an enforcement agency. SEC was created on June 6, 1934, by President for life Franklin Roosevelt (4 terms but not the Clinton) with Joseph Kennedy (JFK father) as chairman, as a Federal agency to provide protection for the investing public and regulate the securities industry. Its enforcement duties are its last options after trying everything to ‘advise’ the registrant including SEC staff comment, NAL and other communication tools. That said, it will not protect the investing public by publishing aggressive (boosted) SEC enforcement actions while lowering confidence and risk in the market. Also, would academic make this data more reliable and useful if they are collected by them? I don’t think this outsourcing strategy with university as agent is a good cure to this reporting illness. Having said all of this, the argument is that it will be unfair to judge the commission based on the number of SEC enforcement

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actions when the market is doing well. When companies are investing multi Billions of dollars in compliance, it is to keep them out of trouble (out of defendant list) and improve the quality of the financial reporting and market discipline. When the SEC is improving the presentation of the financial report and deal with registrants as their consumers, it is not to arrest them or file a case against them later on, it is just to protect the investing public and maintain a fair and efficient market. Quality reporting metrics can help to identify areas that need improvement as well as indicate what things work well for the organization. It will require more resource in a new ways of reporting and managing reporting organizations. Congress should use a new way to assess the SEC and to recognize the efforts produced by the market participants and financial regulators. It is time to award them with this recognition instead of abuses and give them more tools to market (from the bottom because of this long political unrecognition) and reach this excellence.

In sum, with or without number of enforcement cases performance indicators, market participants agree on one thing, this method of reporting and management is not reliable, meaningful or standardized to the level of perfection and sophistication the US market built by the SEC effort and Multi Billions of dollars of corporate compliance allocation has reached. It is time to quit our addiction with measuring SEC performance indicators of numbers of filed cases and give a chance to an advanced method of quality performance indicators. Let agree on one thing, the majority of market participants are compliant now thanks to the SEC hard works and effort. Both parties deserve to hear this recognition in order to excel.

4 Research conducted by Arthur Mboue