At the National Association of Corporate Directors-New England breakfast on Tuesday, one guest had the temerity to suggest to the Director of SEC’s Boston Office, and to Secretary of the Commonwealth Bill Galvin (who controls the State’s Securities Division), that the government was over-reaching in its regulation of financial institutions. Much of the corporate crowd mumbled in agreement; not surprisingly, the regulators did not.

Paul Levenson has been head of the SEC Boston office since October. His list of hot regulatory topics: large-scale pyramid schemes (something not normally within the SEC bailiwick); constant pressure on public issuers to hit earning targets, resulting in liberal accounting; migration of broker/dealers into registered investment advisory functions, giving people trained in sales a fiduciary obligation which they may not be attuned to filling.

The latter point is interesting; much litigation by regulators against broker/dealers is aimed at pointing out that they already are fulfilling a fiduciary agency role with respect to customers.

Secretary Galvin focused on consumer protection; most of his cases bubble up from citizen complaints. His key areas are pyramid schemes, insider trading, and an anticipated rush of claims based upon recent SEC liberalization of the rules for private placements (new SEC Rule 506(c) permits public advertising of formerly “private” security sales to sophisticated purchasers).

There were a couple of takeaways for boards of directors:

• Cyber security is not a matter of “whether” your company will be hacked, but what your response mechanisms are. The importance of a board making sure that cyber security systems are in place varies with the company; if you are selling bumpers for automobiles you are less sensitive than if you possess consumer charge card data.
• Are banks too big and complex to actually regulate (a question from the audience based upon the billons of dollars banks already have paid in settling SEC claims)? Levenson was unremitting in this regard. For directors, you must understand that security law breaches derive from actions of your employees. Take a look at your corporate organizational chart. Can you obtain a confident feeling that high ethical standards can be policed through the organization as currently structured? Is your organizational chart so complex and over-lapping that there is no way you can conceive of a workable compliance program?

Finally the SEC, since the 2010 Dodd-Frank Act, has been relying more heavily on adjudicating securities law violations through administrative law judges appointed by the SEC itself. This avoids the troublesome task of actually going to court and having a trial where you have to convince the jury of someone else’s guilt. Levenson’s explanation: going to a jury is a waste of time and money, these are sophisticated issues which sophisticated administrative law judges can resolve more efficaciously. This trend is therefore liable to continue. Trial by jury does not seem to be high on the SEC hit parade.