Views on the integrity of global capital markets
10 July 2013

From U.S. SEC to Japan’s FSA, Rule Enforcement Progress Benefits Investors

Posted In: US SEC

Insider trading, Ponzi schemes, fraudulent security offerings, and manipulation of stock — these all-too-common concepts were not invented in the 21st century. Rather, individuals and firms intent on getting a leg up by fraudulent means have been carrying out these misdeeds — and pursued by regulators — for decades. Unfortunately, the regulatory response has proven little deterrent for other offenders who believe they can get away with similar behavior. However, regulators in several jurisdictions are casting a stronger net to more aggressively identify and charge violators.

In June, the Japanese Parliament passed new laws that toughen penalties for insider trading violations. The new rules not only will significantly increase financial penalties but carry the potential for criminal penalties and public disclosure of the parties involved. According a recent Wall Street Journal Article, “A Financial Services Agency official said the new insider-trading rules will bring Japan in line with its international peers.” As we’ve discussed previously in this space, insider trading is clearly an international concern.

Meanwhile, the U.S. Securities and Exchange Commission recently announced three new programs for the Division of Enforcement. These new initiatives are intended to focus available resources “on high-risk areas of the market and bring cutting-edge technology and analytical capacity to bear in its investigations.” These initiatives will build upon the success the SEC displayed recently in finding and punishing violators of securities regulations.

According to the SEC’s press release, the initiatives are:

  • The Financial Reporting and Audit Task Force dedicated to detecting fraudulent or improper financial reporting, whose work will enhance the Division’s ongoing enforcement efforts related to accounting and disclosure fraud.
  • The Microcap Fraud Task Force targeting abusive trading and fraudulent conduct in securities issued by microcap companies, especially those that do not regularly publicly report their financial results.
  • The Center for Risk and Quantitative Analytics employing quantitative data and analysis to profile high-risk behaviors and transactions and support initiatives to detect misconduct, increasing the Division’s ability to investigate and prevent conduct that harms investors.

These new efforts come on the heels of a statement by SEC Chairman Mary Jo White that the SEC will limit the ability of defendants in civil cases to settle without admitting or denying their guilt. “Public accountability in particular kinds of cases can be quite important, and if you don’t get them, you litigate them,” White said at a recent conference, according to the Washington Post. According to the article, co-directors of the SEC’s enforcement division, responding to an email from the Post, said that “cases in which the defendant engaged in  ‘egregious intentional misconduct’ may justify requiring an admission, as would the obstruction of an SEC investigation or misconduct that harmed large numbers of investors.”

A subsequent article by professors Michael A. Santoro and Ronald J. Strauss in the Huffington Post, highlights the positives of this change: The current policy has allowed firms to pay larger and larger fines without admitting to wrongdoing; these fines essentially became a cost of doing business in the investment industry.

To regain some of the trust lost during the financial crisis, investors want regulators to hold firms and individuals accountable for their actions. “Moral values and sound business ethics are the lynchpins of healthy financial markets,” as Santoro and Strauss state, adding “The SEC should use its legal powers to motivate Wall Street firms to re-examine and reinvent their values and business ethics in order to bring the financial industry into greater alignment with the public interest.”

An industry based on trust requires a strong enforcement program to keep everyone adhering to the same fundamental ethical principles. CFA Institute and its members have continuously promoted high professional and ethical principles for investment professionals. The combination of a strong sense of personable responsibility and effectively enforced rules and regulations will positively convey to investors that investment professionals represent clients’ interests. The future of finance depends on it.

Learn more about our long-term global effort to shape a trustworthy, forward-thinking financial industry that better serves society.


Photo credit: ©

About the Author(s)
Glenn Doggett, CFA

Glenn Doggett, CFA, is a director of professional standards at CFA Institute. His responsibilities include providing member guidance in applying the ethical and professional conduct standards of CFA Institute. In addition, Doggett is a specialist in XBRL.

1 thought on “From U.S. SEC to Japan’s FSA, Rule Enforcement Progress Benefits Investors”

  1. Glenn Doggett, CFA says:

    Subsequent to publishing this blog post, I learned of a March 2013 consultation paper from the U.K. Financial Services Authority (FSA). The organization was seeking input on changes to how it publishes information related to warning notices. The comment period ended in June, and policy updates will be added to the Financial Conduct Authority (FCA) Enforcement Guide before the changes are implemented.

    Do you have examples of enforcement practice changes in your market?

Leave a Reply

Your email address will not be published. Required fields are marked *

By continuing to use the site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.