SEC Director of Enforcement Speaks About SEC’s Enforcement Priorities

On November 2, 2015, Andrew Ceresney, Director of the U.S. Securities and Exchange Commission’s (“SEC”) Division of Enforcement, delivered a speech at the Securities Industry and Financial Markets Association’s Compliance and Legal Society New York Regional Seminar regarding the SEC’s enforcement strategies related to equity market structure.  In his opening remarks, Ceresney notes that the SEC’s increased focus on market structure issues is relatively new, reflecting a fundamental shift in trading practices in the market over the last decade.

In an effort to respond to the “rapid innovations in the areas of trading and equity market structure” such as increased automation and the use of algorithms in trading, Ceresney notes that the SEC has investigated “a growing number” of market structure enforcement cases due to the new threats such changes pose to the market and to investors.  Namely, Ceresney lists four focus areas of the SEC: (1) fair operation of trading venues, (2) the protection of customer order information, (3) curbing out-of-control automation, and (4) reducing high volume manipulation.

Fair Operations of Trading Venues:  According to Ceresney, an “overriding goal” of the SEC now is to ferret out instances of rule violation by the national stock exchanges.  This emphasis is driven by the rise in actions against national stock exchanges that resulted in civil penalties for their misconduct.  To date, there have been seven such actions; whereas, prior to 2012, a national stock exchange had never incurred such a penalty.  The SEC is also focused on ensuring that trading venues operate fairly.  Such measures hope to curb exchanges illegally sharing information with customers or members before the general public.  An example he provided was the SEC’s action against Direct Edge, where the exchange used “price-sliding” orders and only disclosed how such an order type work to some of its members.  Not only was the order type itself unapproved by the SEC, the selective disclosure rendered the practice a further violation of SEC regulations.  Ceresney explained that off-exchange venues harbor similar risks for customers, citing the example of USB allowing only some of its subscribers to place sub-penny orders, a practice that was unfair both because it was not available to all subscribers and because it violated SEC regulations, as in the case above.

The Protection of Customer Order Information:  Of particular importance to the Commission, according to Ceresney, is protecting customer order information within the context of dark pools and other alternative trading systems (“ATSs”).  To do so, the Commission has recently brought several cases enforcing Regulation ATS, which mandates that ATSs adequately protected customers’ confidentiality.  Particularly of note is the SEC’s recent case against ITG, which resulted in ITS agreeing to pay an $18M penalty for abusing customer trust.

Curbing Out-of-Control Automation:  Ceresney stressed the SEC’s interest in enforcing the market access rule (Rule 15c3-5), a requirement for brokers and dealers to “have, implement, and maintain a system of risk management controls” that guard against certain risks created by automated trading.  The market access rule minimizes financial risk caused by erroneous orders and help ensure that pre-trade requirements are met.  As markets have become increasingly automated in the past decade, such risk management controls are crucial to ensuring market and investor protection from errors and system failures.

Reducing High Volume Manipulation:  Ceresney cited multiple cases in which the SEC focused on curbing issues related to the increasingly high-volume nature of modern trading, such as the case against the Biremis Corporation which exposed thousands of investors to wrongdoing and market manipulation because the company failed to supervise overseas day traders.  Other manipulations, such as the placement of orders a trader does not intend to ultimately fulfill, known as “layering and spoofing,” are also a recent focus of the SEC.  Most recently, the SEC pursued a case against Briargate Trading and its co-founder, resulting in a $500,000 civil penalty imposed on the firms.  Ceresney specifically stated: “Detecting, investigating, and bringing cases against those responsible for market manipulation or abusive trading schemes is a core responsibility and priority of the SEC.”

Ceresney’s portrayal of the SEC’s priorities reflects the Commission’s commitment to dealing with the challenges of modern trading practices, with a particular focus on market structure enforcement.  As Ceresney notes, the market has changed dramatically over the past decade, and the SEC must adapt, lest it expose the market and investors to substantial and unique threats.  Given Ceresney’s statements, individuals with information regarding the unfair operation of trading venues, the failure to adequately protect customer order information in the market context, out-of-control automation, and high volume market manipulation may have particularly viable “tips” under the SEC Whistleblower Rewards Program.  The SEC Whistleblower Office provides awards of 10 to 30 percent of the amount of sanctions and penalties the SEC imposes on wrongdoers as a result of whistleblower’s information.  At Katz, Marshall & Banks, we specialize in representing individuals in the submission of “tips” to whistleblower reward programs such as those administered by the SEC.