Clayton Reveals SEC’s 2018 Agenda in One Word
In a speech at the Practicing Law Institute’s 49th Annual Institute on Securities Regulation in New York last week, SEC Chairman Jay Clayton used one word to describe his agency’s plan to deter, mitigate and eliminate fraud in the near and long-term future – “transparency.”
“Looking back at enforcement actions, a common theme emerges – where opacity exists, bad behavior tends to follow. A thoughtful approach to transparency can enhance both governance and investor protection,” said Clayton.
BAD BROKER DATABASE
During his Wednesday comments, Clayton cited several areas in which the SEC is on the lookout to fight the type of opacity that can create an environment conductive to misconduct. One interesting note, was mention that the SEC is creating a website that will contain a “searchable database of individuals” who have been barred or suspended as a result of federal securities violations. This resource is intended to make the prior actions of repeat offenders and fraudsters more visible to investors.
“Clearly, there are fraudsters in our marketplace who are seemingly unafraid of, or undeterred by, the risk of being caught. The SEC can target the underlying conduct of those fraudsters – and we do – but we also can and should arm investors with information that makes it more difficult for them to be defrauded,” said Clayton.
COMPLEX, HIDDEN FEES
In a similar narrative, transparency among fee disclosures is another area of particular concern for the Commission’s inspection and enforcement department. The SEC will continue to be active in pursuing cases where hidden or inappropriate fees are at issue and explore whether more can be done to clarify fee disclosures made to retail investors.
The SEC’s enforcement record also shows that many penny stocks have a conspicuous lack of transparency with respect to their financial condition and other key business information. Investors are often unable to find current, reliable information about penny stock issuers, making it difficult for investors to evaluate the potential risks and rewards of such investments.
“In addition to informational deficiencies, many penny stocks may be subject to insufficient custody arrangements. The resulting heightened risk of poor recordkeeping and lack of transparency can open the door to fraud and exploitation,” added Clayton.
Another scenario discussed where obscurity exists is when a retail investor purchases a “restricted security.” For example, the retail investor may not understand that an “insider” is reducing his investment in the company while those known to him are promoting an investment.
“This opacity can be attractive to would-be bad actors. The Commission has noted, “[t]he need to prevent unregistered securities distributions is particularly acute in the microcap market, where OTC issuers may not be subject to certain of the Commission’s disclosure requirements and there is an increased potential for fraud and abuse.””
There is also a distinct lack of information about many online platforms that list and trade virtual coins or tokens offered and sold in Initial Coin Offerings, or ICOs. The Commission cautions that any person or entity engaging in the activities of an exchange must register as a national securities exchange or operate pursuant to an exemption from such registration.
Each of these areas of concern has created a need for additional supervision by the SEC. As a result, firms and compliance departments everywhere can expect to see movement on these matters as they continue to examine ways to bring more light into the opaque aspects of today’s market.
To read the complete speech, click here.