Wildcats: SEC Compliance Officers Are Getting More Aggressive

The SEC isn’t just turning over rocks to find regulatory breaches at investment firms: they’ve brought in a bulldozer. In a February 2004 speech to District of Columbia Bar Association, SEC enforcement division chief Stephen M. Cutler confirmed what industry insiders had only suspected: SEC officials are using precedent of abuses set at one firm to justify extensive investigations into other firms engaged in similar businesses, even in the absence of specific evidence of wrongdoing-a practice known as ‘wildcatting.’

The term ‘wildcatting’ originates in the oil speculation business-referring to the practice of speculative drilling in unproven areas. Or, as Cutler put it, “[fostering] a subtle cultural change within the enforcement program to encourage more risk-takingâÂ?¦ [when pursuing] investigations where, at the outset, it is not clear that a securities violation has occurred [emphasis added].

The SEC, tiring of being upstaged by the New York Attorney General’s office, embraced the wildcatting practice as a way of ‘seeing around the corner’ in its enforcement operations, as Cutler himself put it. Simply put, the underlying assumption is that if, say, market-timing abuses are occurring at one firm, chances are good that similar violations are occurring elsewhere. The idea is to uncover trends before they can become scandals.

Standards of proof

Of course, one man’s ‘wildcatting’ is another man’s ‘fishing expedition.’ “The SEC has never been required to make a threshold showing of reasonable suspicion, probable cause, or other level of proof to justify the commencement of an investigation,” writes David Brodsky, a New York-based attorney with the law firm Latham & Watkins.

What does this mean for brokers? Watch the headlines. If a firm across town or across the country gets busted, you can expect more ‘voluntary’ depositions from SEC officials, and more ‘voluntary’ requests for documents. This is over and above the long established baseline routine examinations from the Office of Compliance and Examinations which have been going on for years.

Any written responses to such requests should be vetted carefully, and examined for consistency with previous statements and registration filings, counsels Brodsky.

Moreover, when another firm in your business runs into trouble, look carefully at your own policies and procedures to make sure they are in compliance. You are on notice-your door may well be the next one on the SEC’s list. – JVS