Is a major shift in US regulatory deterrence and punishment for financial crime underway behind the scenes?

New SEC Individual Enforcement Policy Signaling Big Regulatory Shift?

SEC sets its sights on individuals

With little fanfare, a new Securities and Exchange Commission (SEC) policy sets its enforcement sights on a new target: individuals. The Wall Street Journal is reporting that the agency is increasingly looking to hold individual compliance officers at hedge funds personally liable for the activities of the fund, according to Marc Elovitz, a partner at the law firm of Schulte Roth & Zabel LLP..

Holding individuals accountable for criminal activity in financial firms has been a hot topic.  When HSBC agreed to pay $1.9 billion to regulators for laundering money for Iran and Mexican drug cartels, the bank admitted guilt but no individuals were held accountable. In like fashion, JPMorgan Chase & Co. (NYSE:JPM) was fined $2.6 billion for its role in the Bernie Madoff ponzi scheme when it failed to report the ponzi scheme to regulators despite observing suspicious behavior and even reducing the bank’s exposure to Madoff. Again, there was no individual punishment of bank executives involved.

While the new apparent SEC policy is targeting lower level compliance officials, it does set the regulatory agency on the path of engaging in individual responsibility when criminal activity occurs within a financial institution.  The SEC declined to comment on the WSJ article.  However, it is known that SEC chairman Mary Jo White has embraced a deterrence approach that seeks to send a message through enforcement.

White outlines aggressive enforcement policy

In what was considered a landmark speech Ms. White addressed the Council of Institutional Investors on September 23, 2013 where she outlined what sounded like an aggressive enforcement policy. “We must be aggressive and creative in the way we use the enforcement tools at our disposal,” she said.  “That means we should neither shrink from bringing the tough cases, nor fail to bring smaller ones.  When we detect wrongdoing, we should consider all the legal avenues to pursue it.  If we do not have the evidence to bring a case charging intentional wrongdoing, then bring the negligence case that does not require intent.  When we resolve cases, we need to be certain our settlements have teeth, and send a strong message of deterrence.  That is why in each case, I have encouraged our enforcement teams to think hard about whether the remedies they are seeking would sufficiently redress the wrongdoing and cause would-be future offenders to think twice.”

In a nod to today’s announcement that individual enforcement for compliance executives, Ms. White was clear in her 2013 speech.  “Another core principle of any strong enforcement program is to pursue responsible individuals wherever possible,” she said.  “That is something our enforcement division has always done and will continue to do. Companies, after all, act through their people.  And when we can identify those people, settling only with the company may not be sufficient. Redress for wrongdoing must never be seen as ‘a cost of doing business’ made good by cutting a corporate check.”

Deterrence has always been the primary key regulators use to prevent financial malfeasance, which can just as easily occur among top corporate executives as it can among mid-level compliance officers.  Partially acknowledging this, Ms. White said “Individuals tempted to commit wrongdoing must understand that they risk it all if they do not play by the rules.  When people fear for their own reputations, careers or pocketbooks, they tend to stay in line.”

It remains to be seen if Ms. White’s tough talk will extend past mid-level compliance executives and into the top levels of corporate power where fear of prosecution appears to be lacking most.