SEC, financial reporting, securities regulation

1. 1 ResearchconductedbyArthurMboue
How Compliant Are They? SEC Registrants.
As youmay know,the missionof the SECisto protect the investingpublicandmaintainfair,orderlyand
efficientmarketandfacilitate the capital formation. Ithas full legal authoritytosetanyguidelines andenforce
any lawto reach the goal of itsdefinedmission. Fourdivisionsare helpingittoaccomplishthisdefined
missionin‘peace’time includingthe CorporationFinance (CF),InvestmentManagement (IM),Divisionof
economicandriskanalysis(DERA) andTradingand Market ™. Forpurpose of thisfinancial reportingpost,I
will notdefine DERA because ithasa little contactwiththe investingpublic. Thatsaid,CF hastwo primary
definedmissions:tosee thatinvestors are providedwithmaterially completeandaccurate informationandto
deterfraudand misrepresentationinthe publicdisclosure andoffering,trading,votingandtenderingof
securities. IM’sdefinedmissionistominimize the financial riskstoinvestorsfromfraud,mismanagement, self
dealingandmisleadingorincomplete disclosure inthe investmentcompanyandinvestmentadviserfirmsand
segmentsof the financial servicesindustrywithoutimposingunnecessarycostsandburdensonregulatedand
reportingentities. TM’sdefinedmissionistoestablishandmaintainstandardsforfair,orderlyandefficient
marketwhile fosteringinvestorprotectionandconfidence inthe markets. SECwill onlyreachitsgoal by
helpingtheirregistrantsimplementaculture of well managedorganizationswithreturnoninvestment
includinglowlegal costtherefore low costsof doingbusiness,obedience ingood businesspractices,
maintenance of companyandmanagementgoodreputation,goodqualityatlow price products/services,
preservationof goodcustomersservices,attractionof the bestandstar staff andbusinesspartners. All this
requiresstandardsof behaviorbeyonddesigning,watching,tracking andadministeringmetricsingovernance,
riskand compliance (GRC). Havingsaidthatif the company andits managersbreakanylaw,the divisionof
enforcementwill huntthemdownandbringthemfora ride to meetthe grandjury andjudge fora debate.
The divisionof enforcementconductsinvestigationsof registeredandreportingentities(publiccompanies,
mutual funds,brokerdealers,transferagentandinvestmentadvisersfirms) andunregisteredandfraudulent
securitiesfirm’sworkingonline andassistorsandabiders). Also,itisnota surprise foryouthat 2 principal
forcesthat initiallychangedAmericancorpgovernance are takeoverandthe growinguse of equity financing.
But the shadowforce isthe mediaincreasingfascinationwithcorporate reportsscandals includingblockbuster
compensationawards. All theseforcesmade managers more sensitive totheircompany’s marketprices. Itis
whyexecutivesare inclinedtotake greaterriskstoinflate stocksprice. One of the strongest arguments for
mandatorydisclosure underprescribedaccountingrulesisapowerful comparativemethodnotonly tovalue
some assetsof the companiesbutalsoto evaluate how aparticularexecutive isperforminginthe peer
competition. Butthismethoddoesnotshiftthe burdenof proof to the SEC reviewer,thatmeansyouneeda
goodteam itdoesnot matterthat reviewersdidcommitanymistake andneedtoimplementalastingculture
to preventfuture violationof lawandcostsrelatedtolitigation. Atthe same token,the Gov’troutinely
expectsvoluntarydisclosureandcooperationbecauseitwill save the Gov’t moneyandtime while evaluatinga
corporationfullyanddecidingquicklyinsteadof longinvestigationandcourtroomoutcome and‘jeopardy’. It
iswhy the Gov’tdefinescooperationtoinclude ‘if necessary,waiverof attorney-clientprivilege andwork
productprotection’. Thus, the followingelementscan help the companyreceive creditsfromthe USFederal
sentencingguidelinesandUSSEC
1. Governance:the boardof directorsandtop managementshouldprovideadequateresourcesfor
corporate compliance.

2. 2 ResearchconductedbyArthurMboue
2. Culture andvalues:newlyimplementedculture andvaluesof the organizationsshouldpromote
ethical behaviorandaccountability
3. Monitoringandreporting:metricsandresultsof the monitoringprogrammustbe reportedtothe top
management
4. Incentivesandrewards:compensationcommittee mustpenalizemisbehaviorandnon-performance
relatedcompensationpackages
5. RiskManagement:the implementationof goodriskmanagementmustidentify,assess,mitigate and
manage compliance.
6. Communicationandtraining:staff shouldbe trainedtounderstandtheirrolesandresponsibilities
includingsegregationof duties
7. Policiesandprocedures:adoptedpoliciesandproceduresshouldfocusonmaximizingcompliance
values
8. Escalationandinvestigation:itmustbe a gooddiscipline helpingstaff andotherstoconfidentially
reportwrongdoings,misconductsandfrauds
9. Issuesmanagement:A companymustadoptto strategytobuildrootcausesof any reported
misconducts,fraudsandwrongdoing.
10. Improvementprocess:continual improvement andbenchmarkingof bestpracticesmustbe putin
place inorder to focuson the searchfor excellence.
11. Negotiation:corporate leadersmustworkhardenoughtokeeplinesof communicationbetweenthe
SEC Staff and the companyleadersopen
12. NPA/DPA:
a. US DOJ- to receive cooperationcreditsforDPA/NPA,the companymustprovideall facts
relatingtothe individuals
b. SEC- self reportsof misconductinordertobe eligible forthe Divisionof Enforcementto
recommendaDPA or NPA to the commission
Afterreviews ortips,the SECbeginsinvestigatingintopossiblesecuritiesviolationbyopeningamatterunder
inquiry (MUI). It can initiate the filingof civil complaintindistrictcourtoran order institutingproceeding (OIP)
before itshome courtbasedon itsowncriteriaand use of discretion. Atthe endof year (Sept),SECcollects
informationactivitiesforpublicorcongressional briefings. In publicorprivate world,aprofessorwastelling
us “whohas more reliable datawins’. Withoutdataandgoodreporting,the organizationdoesnotknowits
ownperformance,itstarget,customersegmentationandthe like. Thatmeans,a goodreportingof data will
helpthe organizationcomesupwithtargetgoals. FororganizationsreportingtoCongress,the consequenceof
a commissionfailuretomeetaperformance metricscore card can be a reducedbudget,notincrease,itiswhy
some agencyfind misreportingasa way to entitle themwithworkable budget. Forinstance,knowingthe
process,aftermyemailsandphone callswere notansweredbythe SEC,I diddigpast congressional reportsto
findandput togetherthistable below. But,inmy view these numbersdonotlookgood,itis justa feelingof
someone with2decadesreviewingdatadailyinadditionFPI,…are notincludedinthese congressionalreports.
Indeed,letassume thatthe SEChighrankingofficerswill notlie toCongressjusttokeepincreasingSEC
budget;mymost importantproblemisthatif the numbersof enforcementactions are usedasa metricto
reportand evaluate the SECeffort,can they helptomeasure andmonitorSEC achievementof itsmaingoal?
You may notice readingthistable:the numberof registrants,numberof SECsecuritiesactions,and SECactions
withoutfollow on. Ididcollectthese numbersof registrantsjusttoshow thatthe percentage of registrantsis

3. 3 ResearchconductedbyArthurMboue
too large compare to the SEC enforcementactions. Inaddition,Iwill addthatno enforcementactionsfor
muni securitiesviolationsare includedinthese metricsbecause since 2005, the muni securitiesviolationhas
beenreportedseparately. Also,since 2013, forreasonI didnot findout,the SEC has not reportedcontempt
proceedingsactionstoenforce compliance withanearlierenforcementactioninanaggregate tallyof
enforcementactionsfiled. Goingforward,the bigquestioniswhatisa follow oncase? Follow onactionsare
derivative actionsusedtoimpose additional sanctionsagainstindividualsworkingonthe case. Followoncases
seektoimpose partial orfull associational baragainstanoffenderto eithersuspendorrevoke registrationas
brokerdealerorinvestmentadviserortosuspendthe rightof an auditoror attorneyto practice before the
commission. Alsowhenthe defendant isconvictedof acase filedby the SECand US DoJ,the SEC’s original
primaryenforcementactionisconvertedintoafollow onproceedinginwhichthe defendantisdisbarredor
suspendedbutnototherwisesanctioned. The processfollowsbythe follow oncasesistoocostlybecause the
commissionmustinitiate anadministrativeproceeding. Butif the commissionhad a rule toseekprofessional
or associational baragainsta defendant/respondentincourtwhenthe primaryenforcementactionisbrought
incourt insteadof actual practices, the follow onproceedingwouldhave consumedlessresourcesfromthe
SEC budget. There isno doubtinmindthat the enforcementof follow onbarsandthe like hascontributedto
the actual improvedqualityof ourfinancial reportingand 21st
century marketdiscipline andlow numberof
violatorsbut,Ihave to recognize thatpeople withlow ornosecuritieslaw processhave beenconfusedbythe
followonnumbers. Ireadthat theyletthemselves believe thatfollowoncasesare additiontothe numberof
new casesfiledannuallytodefendant/respondentbythe SEC. For congressional budgetinglobbyand
oversight,preventionanddeterrence of securitiesfraudsandmisconducts,we shouldkeepdisclosingfollow
on numberonthat separate column. The commission shouldnotbe punishedbyCongresswithbudgetcuts
for bringingfewerenforcementactionsorreportinglowerperformance rate thanitstarget. Whenthe SEC
draftsits congressional report,itincludesalotof goodand reliable data(performance dataincludingnumber
of investortestingresearchprojects,timetocomplete SECreviewof SROrules,percentage of transactions
dollarssettledontime,lengthof time torespondtowrittenrequest,timelinesstorespondtorequest,
supervisorycooperationrequestsfromforeignauthoritiesforSECassistance,numberof nonUS regulator
trained,percentage of firmsreceivingdeficiencyletters,percentageof compliance exams,percentage of public
companiesandinvestmentfirmswithdisclosure reviewedeachyearanda lotmore) butenforcementactions
data istoo star that it invadesandcommandsall the mediaticattentionandreportsleavingnoa leasta
footnote reporttoothersdata. To reduce thisshiftinmediaticreport,itwill make sensethatless
congressional oversightwouldyieldbetterresultsanduse of all reliable metrics since the congressfixesonly
whatis inthe media(TV 1st
,newspaper2nd
). At the same time,securitieslaw expertsandacademicfaculties
are arguingfora comparisonof the SEC enforcementactionsdatatootherlaw enforcement agenciesdatajust
to manage the marketplace andthe academizationof the SECmetrics. Professors,unfortunately,Ihave to
disagree withyoubecause you didfail tonotice thatthe SEC is not an enforcementagency. SECwascreated
on June 6, 1934, byPresident forlife FranklinRoosevelt(4termsbutnot the Clinton) withJosephKennedy(JFK
father) aschairman,as a Federal agencytoprovide protectionforthe investingpublicandregulate the
securities industry. Itsenforcementdutiesare itslastoptionsaftertryingeverythingto‘advise’the registrant
includingSECstaff comment,NALandothercommunicationtools. Thatsaid,itwill notprotectthe investing
publicbypublishingaggressive (boosted) SECenforcementactionswhile loweringconfidence andriskinthe
market. Also,wouldacademicmake thisdatamore reliable anduseful if theyare collectedbythem?Idon’t
thinkthisoutsourcingstrategywithuniversityasagentisa good cure to this reportingillness. Havingsaidall
of this,the argumentisthat itwill be unfairtojudge the commissionbasedonthe numberof SECenforcement

4. 4 ResearchconductedbyArthurMboue
actionswhenthe marketisdoingwell. Whencompaniesare investingmulti Billionsof dollarsincompliance,it
isto keepthem outof trouble (outof defendantlist) andimprove the qualityof the financialreporting and
marketdiscipline. Whenthe SECisimprovingthe presentationof the financial reportanddeal withregistrants
as theirconsumers,itis notto arrest themor file acase againstthemlateron,it isjust to protectthe investing
publicandmaintaina fairand efficientmarket. Qualityreportingmetricscanhelptoidentifyareasthatneed
improvementaswell asindicate whatthingswork well forthe organization. Itwill require more resource ina
newwaysof reportingandmanagingreportingorganizations. Congressshoulduse anew waytoassessthe
SEC and to recognize the efforts producedbythe marketparticipantsand financial regulators. Itistime to
award themwiththisrecognitioninsteadof abusesandgive themmore tools tomarket(fromthe bottom
because of thislongpolitical unrecognition) andreachthisexcellence.
In sum,withor withoutnumberof enforcementcases performance indicators,marketparticipantsagree on
one thing,thismethodof reportingandmanagementisnotreliable,meaningful orstandardizedtothe level of
perfection andsophistication the USmarketbuiltbythe SEC effortandMulti Billionsof dollars of corporate
compliance allocationhasreached. Itis time to quitour addictionwithmeasuringSECperformance indicators
of numbersof filedcasesandgive achance to an advancedmethodof qualityperformance indicators. Let
agree on one thing,the majorityof marketparticipantsare compliantnow thankstothe SEC hard worksand
effort. Bothpartiesdeserve tohear thisrecognitioninordertoexcel.