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Preparing for the Regulatory Challenges of the 21stCentury

Commissioner Luis A. Aguilar

Georgia Law Review Annual SymposiumFinancial Regulation: Reflections and ProjectionsUniversity of Georgia, Athens, Georgia

March 20, 2015

Thank you, Professor [Carol] Morgan, for that kind introduction. It is a great honor to be hereat the Georgia Law Review’s Annual Symposium. Before I begin my remarks, however, let meissue the standard disclaimer that the views I express today are my own, and do notnecessarily reflect the views of the U.S. Securities and Exchange Commission (“SEC” or“Commission”), my fellow Commissioners, or members of the Commission’s staff.

In the spirit of today’s Symposium, entitled “Financial Regulation: Reflections and Projections,”I plan to reflect back over the events that have taken place during my years as a Commissionerand then make a few projections as to future trends.

During my tenure as an SEC Commissioner, our country’s economy has experienced extremehighs and lows. In fact, the country experienced the worst financial crisis since the GreatDepression, followed by the current period of significant economic growth where the stockmarket has grown by around 165% from the low point of the financial crisis.[1]

I have had a front­row seat to all of this, as I became an SEC Commissioner just weeks beforethe financial crisis hit our nation. As a result, I witnessed first­hand just how fragile our capitalmarkets can be, and the need for a robust and effective SEC to protect them. First, let meprovide a snapshot of what went on. I was sworn­in as an SEC Commissioner on July 31, 2008.Within a few weeks, on September 15, 2008, Lehman Brothers filed for bankruptcy.[2] To giveyou a sense of its rapid decline, within 15 days, its share price went from $17.50 per share[3]to virtually worthless. The demise of Lehman Brothers is often seen as the first in a rapidsuccession of events that led to an unimaginable market and liquidity crisis.[4] These eventsincluded:

Substantial economic damage to a number of storied financial institutions;[5]

A crisis that engulfed the money market industry;[6]

The freezing up of the short­term capital markets;[7] and

The discovery of a long list of Ponzi schemes as cash became in short supply, the mostfamous of which was the Bernie Madoff Ponzi scheme.[8]

Any one of these events would have been a significant market event, but taken together wehad a financial system on the verge of collapse. A discussion of all that went wrong could fillseveral volumes of the Georgia Law Review.

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Needless to say, the ensuing turmoil shook the global economy to its core and exposed theweaknesses of many regulatory regimes—both in the United States and abroad. Eventually, itbecame abundantly clear that years of lax attitudes, deregulation, and complacency about thevirtues of strong regulation contributed significantly to the financial crisis.

The events of the financial crisis substantially affected the Commission, as the primaryregulator of the U.S. capital markets. It is no exaggeration to say that the SEC’s continuedexistence was in doubt. In fact, in early 2009, there were reports that the White House and theU.S. Department of Treasury were considering a plan that would reduce the SEC’s authority toprotect investors, and transfer this authority to a new federal “super cop.”[9]

I was a new Commissioner at the time, and the Commission, as well as our country, faced anavalanche of unprecedented issues. I marveled at the timing of my arrival at the SEC. Lookingback, I thought about my long career as a partner at several nationally recognized law firms, asthe General Counsel, Head of Compliance, and Executive Vice President for one of the world’slargest and most successful asset management firms, and as the President of one of its broker­dealers. And now I found myself at the SEC, faced with the possibility that we would be askedto turn off the lights and close the doors for the very last time.

Fortunately, Congress and the White House realized that the SEC played an essential andnecessary role. In fact, the Dodd­Frank Act[10] expanded the SEC’s authority and jurisdiction.As a result, during my tenure, a refocused SEC has tackled head­on a wide variety of complexissues. Indeed, the years following the financial crisis have been one of the most active periodsin SEC history. Much of this work involved taking an honest assessment of our shortcomings,which resulted in significant internal restructurings, including reorganizing the EnforcementDivision,[11] creating a new division to focus on economic analysis and risk assessment,[12]and revamping our inspection and examination program.[13]

Moreover, during this same time period, the Commission has entered into one of its most activeperiods in promulgating new rules. In fact, the Commission has voted on almost 250rulemaking releases during my tenure. Most of the Commission’s new rules rightly focusedon addressing flaws in our own capital markets. For example, some of these rules sought toremedy the conflicts of interest that led credit rating firms to knowingly give their highestratings to a slew of investments that were extremely risky, and which turned out to beworthless, or close to it.[15] Other rules address the poor disclosures for the asset­backedsecurities markets that were at the epicenter of the 2008 market turmoil.[16] Of course, theCommission has also proposed and/or adopted a wide range of other regulatory requirementsacross the expanse of the capital markets—impacting equity and option exchanges, broker­dealers, investment advisers, and hedge funds—to name just a few.

Many of these rulemakings have been groundbreaking. Still, even with all of this activity,the Commission remains behind on many of its mandates under the Dodd­Frank Act, the morerecent JOBS Act,[19] and other important initiatives.[20] The Commission still has much workto do.

In addition to the focus on the domestic market, the Commission is also working internationallyto address the dangers arising from the growth and interconnectedness of the global financialmarkets, and the reality that risks from less­regulated overseas markets can ultimately cometo our shores.[21]

[14]

[17]

[18]

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The Commission’s efforts continue across a wide range of regulatory initiatives, any of whichare worthy of an in­depth discussion. Today, I plan to project forward and focus on certainfundamental challenges facing the Commission that will cut across several important regulatoryresponsibilities, and demonstrate the need for the Commission to evolve and adapt to changingtimes. In particular, I will focus on:

First, how the SEC should prioritize its use of data and technology to become a moreeffective regulator; and

Second, how the global nature of the crisis illustrates the increasingly interconnectednature of the global economy and underscores that the SEC faces a future of needing towork globally to protect American investors.

The Evolving Capital Markets and the Need For High-Quality Information

First, I want to discuss how the Commission is evolving into a more informed regulator throughvarious data gathering and technology driven initiatives.

Today, our capital markets are more sophisticated, larger, faster, and more technologicallydriven than at any time in history. This rapid change requires that a regulator be able to quicklyspot risks, identify emerging trends, and understand how new financial products and evolvingmarket conditions are impacting investors and the capital markets as a whole, both here andabroad.[22]

For example, within the past few years, high­tech, automated trading has come to dominatethe world’s capital markets. This reliance on technology has resulted in a market structureincreasingly characterized by high­speed trading executed at many different trading venues. Toillustrate this point, in January 2005, the New York Stock Exchange’s (“NYSE”) average speedof execution for small, immediately executable orders was 10.1 seconds.[23] More recently, theaverage speed has accelerated to a half a second or less.[24] This speed can bring benefits asit allows for quicker executions and delivery of market data.[25] However, it can also wipe outbillions of dollars in just a few minutes, such as when the Flash Crash in May 2010 caused $1trillion to evaporate in just 20 minutes, before making a partial recovery;[26] and, when KnightCapital suffered a $460 million trading loss over a 45­minute period in August 2012 thatresulted from a computer malfunction.[27]

The new technology has enabled the growth of a very fragmented trading environment andencouraged the proliferation of so­called “dark pools.”[28] As evidence of this development, in2005, NYSE executed approximately 80% of the consolidated share volume of listed stocks.[29] Today, NYSE’s share of volume is less than 24%.[30] Where we once had just a handful ofbrick­and­mortar securities exchanges, like NYSE, there are now 18 national securitiesexchanges and perhaps as many as 40 to 50 dark pools where trades are executed, mostlythrough automatic, electronic networks.[31] Estimates show that, in 2012, automated tradingaccounted for about 50­75% of the volume traded on all of the exchanges each day.[32]

It is no secret that the Commission is struggling to keep up with these market andtechnological developments while trying to assess whether these evolutionary changes benefitor detract from our capital markets. In fact, just last summer, Chair White announced that theSEC would “comprehensively review and address core market structure policy issues, such asthe overall fairness of trading in high­speed markets [and] changes in the number and nature

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of trading venues….”[33] As a further step, the Commission recently established an advisorycommittee to provide a formal mechanism through which it can receive input on marketstructure issues.[34] In fact, the first meeting of this committee is scheduled for May 13, 2015.

The Need for Timely, Accurate, and Complete Data and Information

No one can doubt that effective oversight of the capital markets requires that the SEC be well­informed. However, one of the most difficult challenges facing the SEC today is the lack ofinformation, particularly at a time when the capital markets’ reliance on the newest and mostadvanced technology to generate and process information keeps increasing exponentially.

The Commission’s lack of access to critical data was laid bare by the Flash Crash.[35] It tookthe staffs of both the SEC and CFTC over four months to get the data and analyze the events ofthose fateful 20 minutes in May 2010, when the prices of many U.S. equities experiencedextraordinarily rapid and extreme swings.[36] The Commission’s need for data is even moreacute, as markets are continuing to grow more complex and fragmented.[37] Moreover, thelack of access to critical data goes beyond market structure and cuts across the Commission’sresponsibilities including enforcement, corporate disclosures, and the asset managementindustry.

The financial crisis, and its aftermath, made clear that the SEC needed far more information toeffectively supervise a number of important market sectors—such as money market funds,hedge funds, derivatives activities (including credit default swaps), municipal advisors, creditrating agencies, and others.

Efforts to Obtain Critical Data and Information

To that end, even though the SEC is not a self­funded agency, like many of its counterparts, theCommission is devoting significant amounts of its limited resources to enhancing the agency’sdata gathering and analytics. These initiatives are important if the Commission is to properlykeep track of, among other things, the activities of over 25,000 regulated entities,[38] theapproximately 9,400 publicly­traded companies that file reports with the SEC,[39] and the15,000­16,000 tips, complaints, and referrals we receive per year.[40]

In particular, the Commission has been working to capture data and automate its analyticalcapabilities to allow our staff to proactively identify areas of risks, emerging trends, andfraudulent activity. These initiatives will allow the staff to spot issues in ways we were not ableto do before the crisis.

One of the most significant data collection rules that the Commission has adopted is therequirement for a Consolidated Audit Trail (“CAT”). CAT, when operational, will be the world’slargest data repository of securities transactions.[41] CAT should improve the oversight of themarkets by allowing the Commission to identify and address potential risks before theymetastasize into larger problems.[42] CAT will also be a game­changer with respect tocombatting securities fraud, which is more difficult to identify due to market fragmentation andthe rise of electronic trading.

While we’re waiting for CAT to be implemented, the SEC is developing tools to utilize data innew ways.[43] First, in 2013 the SEC staff rolled out a data collection initiative entitled MarketInformation Data Analytics System, or as we call it, MIDAS.[44] It is designed to collectpublicly available market information, such as commercial feeds of market quotes and data

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from national exchanges. On any given day, MIDAS collects about one billion trading recordsfrom each of the national equity exchanges.[45] The SEC staff is utilizing MIDAS to providemarket structure information to the public and to help the staff develop better insights into thecapital markets.[46] Nonetheless, the system does have some significant constraints. Inparticular, it only collects publicly available information and it does not provide informationregarding the lifecycle of a trade, the various components of a trade, the identities of partiesinvolved in the trade, or any of the off­exchange trade and order flow information. These aregaps that an operational CAT should address in the future.

Beyond better utilizing public data, the SEC is using several data­analytic tools to assist itsenforcement investigations. For example, the Enforcement Division is using a sophisticated,data­driven, proprietary analytical program, called Aberrational Performance Inquiry, to identifyand investigate hedge funds and financial advisory firms with suspicious returns.[47] In FiscalYear 2014, the Enforcement Division brought its eighth case, as a result of this initiative.[48]Similarly, the Division’s Automated Bluesheet Analysis Project, which was started in 2011,continues to be an effective and proactive tool to detect suspicious trading patterns andrelationships among traders who attempt to profit through illegal insider trading.[49] Inaddition, working with the Division of Economic and Risk Analysis, or DERA, the EnforcementDivision is also using a tool called the Accounting Quality Model (“AQM”), which helps the staffdetermine whether an issuer’s financial statements stick out from the pack in a way thatrequires further review.[50]

Furthermore, in response to criticisms about the Commission’s ability to process the tips,complaints and referrals (“TCR”) received, the SEC upgraded its technology to make it easierand more user­friendly for the public to submit tips, as well as to provide the SEC staff with theautomated ability to access and analyze real­time data.[51] The Commission now has anautomated centralized information system for tracking, analyzing, and reporting on thehandling of tips and complaints.[52] This program assures that no tip will be neglected, aproblem the SEC had faced in the past.

The Commission recognizes that data gathering is only the start. It also should be able toeffectively use and analyze the data. To that end, the Commission is improving thetransparency and the overall usefulness of some of the disclosure information it receives, byrequiring data tagging.[53] The idea is simple: data tagging allows investors, regulators, andmarket participants to organize and analyze massive amounts of data and information moreefficiently by associating pieces of information with keyword tags.[54] The ultimate result isthat data tagging improves the retrieval, searchability, and analysis of relevant market data bythe SEC staff and the public alike.

The focus on data tagging began in earnest in 2009, when the Commission adopted its so­called “smart disclosure” rules to require interactive data tagging for the financial statements ofpublic companies;[55] the risk/return information of mutual funds;[56] and certain informationprovided by credit rating agencies.[57] But it’s not just the SEC that benefits from datatagging. To further enhance transparency of this data, the Commission’s public website nowcontains organized data sets of quarterly and annual data from XBRL­tagged financialstatements filed with the Commission.[58] These data sets should help the public and

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interested users more easily consume large amounts of data for comparison and analysis.Moreover, the SEC staff has developed analytical tools to use this tagged data to identify andinvestigate possible enforcement matters.[59]

Finally, another example of the benefits of collecting real­time data information can be foundwith respect to money market funds. The financial crisis made clear that the information beingreceived by the Commission was too stale to be of regulatory use. When a prominent moneymarket fund “broke the buck,” and other funds came under pressure, we simply did not havethe data at hand to determine what other funds could “break the buck.” Accordingly, theCommission promulgated a rule to require money market funds to provide monthly disclosuresof their investment portfolios.[60] This new data has proven invaluable, as it allows theCommission to put its finger on the pulse of these funds, and better monitor their activities.

For example, this new data allowed the SEC staff to monitor closely whether and how moneymarket funds were adjusting their holdings during the Eurozone crisis in 2011.[61] Inparticular, this data allowed the staff to determine that money market funds were not—as hadbeen widely speculated—overexposed to Irish banks and other European securities during theEurozone crisis.[62]

These are all positive steps forward. The Commission is now using data and technology in waysit had not done before the crisis. The demonstrable results are that the SEC staff is able toreview and analyze information more efficiently and effectively.

But, it is not enough and there is much more to be done. As I project into the future, the SECmust push forward with its efforts to embed interactive data in more of its regulatory filingrequirements. As one example, as a result of the Dodd­Frank Act, the SEC is promulgating newrules that require additional corporate governance information to be provided in proxystatements, including matters involving executive compensation.[63] These rules shouldinclude, where appropriate, data tagging requirements that would enable this information to bereviewed and analyzed more efficiently by the Commission staff and investors alike.[64]

Data Collection and Analysis: A Work In Progress

Ultimately, enhanced data gathering and technological developments can help the Commissionfulfill its mission of protecting investors, fostering capital formation, and ensuring the market isfair, orderly, and efficient. However, to accomplish those goals, Congress will need to providethe SEC with sufficient and reliable funding to utilize cutting­edge technologies.[65] In addition,the SEC requires funding to hire staff with specialized skill sets to analyze the data and improvethe agency’s ability to assess risk, conduct examinations, and detect and investigate fraud.

Simply stated, to be an effective regulator, the Commission must have a vast repository of vitaldata from market transactions, public companies and regulated entities, in a format that thestaff can easily use, search, and compare. The Commission requires systems that canefficiently manage this volume of information and allow the information to be reviewed andanalyzed more effectively by the Commission staff and the public.[66] We’re getting there, butwe’re not there yet —not by a long shot.

At the end of the day, whether or not the SEC will be an effective regulator in the years tocome will depend on its ability to obtain and efficiently analyze full, accurate, and timely dataas to market activity and all the companies we oversee.

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The Globalization of Securities Regulation

Let me now turn to another growing challenge—and that is the growing globalization ofsecurities regulation.

Technological advances that have impacted the domestic securities markets have alsosignificantly affected the global securities market and have accelerated the movement of capitalacross international borders.[67] Over the past 20 years, the global securities market hasgrown in both size and sophistication[68]—and as the global markets grow, Americans have agreater ability to invest in securities markets around the world. This increase in investmentopportunities has been facilitated, in part, by advances in technology that provide investors—through their desktops and smart phones—with access to nearly limitless investmentopportunities worldwide.[69]

These developments require that the SEC think more globally and recognize that its registrantswill increasingly be global players, that fraud perpetuated at home can be initiated by thosewho have never set foot in the United States, and that a market meltdown can have globalorigins and ramifications.

Consequently, as I project forward, the protection of American investors will require that theSEC increase its efforts to communicate, coordinate, and cooperate with its internationalcounterparts, something that is easier said than done. The differences between civil andcommon law jurisdictions, the variances in cultures and traditions, and the dissimilarities inlocal laws and how they are enforced pose serious challenges. Oftentimes, the applicable law isa patchwork of separate and localized regulations that, at best, result in a fragmented,uncoordinated, and sometimes conflicting system of regulations, and, at worst, can result in a“race­to­the­bottom.”[70]

Fostering a Global Environment for Combating Fraud

An important aspect of international cooperation, of course, is addressing cross­border fraud.In fiscal year 2013, for example, almost 20% of the SEC’s enforcement cases involved foreignpersons and entities.[71] Moreover, the Commission expects future cases to continue to haveinternational elements.[72] To effectively investigate and prosecute these cases, theCommission will need cooperation from our international partners. To that end, the Commissionhas entered into over 130 information­sharing arrangements with foreign regulators and lawenforcement agencies.[73] In addition, the SEC conducts a wide variety of technical assistanceprograms to train our international regulatory and law enforcement partners on enforcementand examination topics.[74] In Fiscal Year 2014 alone, the SEC trained more than 2,300regulatory and enforcement officials from around the world.[75]

Recent statistics underscore the growing need for mutual cooperation in cross­borderenforcement. A quick look at the SEC’s recent international enforcement cases includenumerous cases in the areas of insider trading, market manipulation, foreign bribery, and othersecurities fraud cases.[76] This growing trend requires a good deal of international cooperationin order to prosecute these cases successfully. In Fiscal Year 2014, for example, the SEC madeabout 735 requests for international assistance, and, in turn, received approximately 460

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requests for assistance from foreign regulators.[77] In addition, the SEC often provides accessto its files to foreign regulators and uses its compulsory powers to assist foreign investigations.[78]

Regrettably, these international efforts are not what they should be. Although someinternational partners have been helpful, there are too many times that when the SEC calls forhelp, we find only silence, or worse, there are regulatory obstacles put in the SEC’s path.[79]These obstacles and challenges included a foreign regulatory authority’s lack of broad powersto investigate, litigate, or sanction violations; lack of regulatory independence from politicaland industry influences; and the lack of resources dedicated to international cooperation.[80]Additionally, several foreign jurisdictions have privacy laws, blocking statutes, and other lawsrestricting or limiting the disclosure of certain information required in enforcementinvestigations and regulatory examinations.

Moreover, even when the SEC succeeds in obtaining remedies in federal district courts oradministrative proceedings for a cross­border fraud, enforcing those judgments and orders stillposes challenges. For instance, one important tool for the SEC to punish wrongdoers is itsability to seek monetary penalties.[81] The power to impose penalties enhances theeffectiveness of the Commission’s enforcement program by more effectively deterring individualand corporate violators.[82] However, the weight of legal authority in foreign jurisdictions tendsto favor the denial of court judgments and administrative orders that impose fines or penalties.[83]

The impact of cross­border fraud on American investors is further exacerbated by the SupremeCourt decision in Morrison v. National Australian Bank, Ltd. that limits the anti­fraud provisionof the Exchange Act, Section 10(b),[84] to claims that relate to frauds on an American stockexchange or that involve security transactions in the United States.[85] The end result is that,as the internet and the growth in foreign capital markets facilitate the ability of Americaninvestors to directly deploy their money around the globe, their ability to seek redress in theUnited States is being limited, while their ability to be harmed is not.

Accordingly, the Commission must consider, first, what it can do to prevent, detect, andmitigate the domestic impact of fraud originating from a foreign jurisdiction; and, second, whatit can do to foster global efforts to combat fraud and enhance market integrity. But, as I saidbefore, this is easier said than done.

The challenge regulators face in pro­actively preventing fraudulent activity is demonstrated bythe Public Company Accounting Oversight Board’s (“PCAOB”) difficulty in inspecting PCAOB­registered firms that reside abroad. As you may know, in order to audit financial statements ofcompanies publicly­traded in the United States, accounting firms are required to register withthe PCAOB and subject themselves to regular inspections.[86] This is not limited to accountingfirms based in the United States, and, in fact, more than 900 of the approximately 2,300 firmsregistered with the PCAOB are located outside the United States.[87] Thus, for the PCAOB tobe effective, it must be able to inspect all registered firms no matter where they reside—truly aglobal effort.

Unfortunately, the PCAOB has faced significant regulatory obstacles to its inspections in anumber of international jurisdictions. In various European Union (“EU”) member states, therewas a long delay before the PCAOB was even allowed to inspect registered accounting firms,

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oftentimes as a result of state sovereignty claims, privacy or personal data concerns, or otherlocal law considerations in these countries.[88] Fortunately, within the last few years, thePCAOB has made progress in overcoming some of these regulatory obstacles to globalinspections.[89]

Notwithstanding this progress, however, the difficulties continue today, as the PCAOB still isunable to conduct inspections of approximately 175 registered accounting firms in 11 EUmember countries, as well as in China, Hong Kong, and Venezuela.[90] These obstacles persist,despite the important regulatory objective of the PCAOB’s inspections in providing investorswith reliable and accurate financial statements. Ultimately, these regulatory obstacles pose athreat to all investors, whether in the U.S. or abroad, who cannot be assured that companieswith foreign operations in these countries will be subject to audits that meet the requisiteindependence and high­quality professional standards.

The PCAOB’s experience shows how difficult it is to develop cross­border oversight but, on theother hand, the progress that has been made shows it’s possible.

As we look to the future and project forward, it is clear that, as companies increasingly haveforeign operations, the SEC will need to address how best to extend its enforcement reach andsupervisory oversight over global operations and transactions. The success or failure of thoseefforts will determine if the SEC will be an effective regulator in the future.

Conclusion

Clearly, the past few years have been challenging. By many accounts, a large number ofinvestors lost significant amounts of money and simply left the capital markets. Fortunately,since then, there are signs of an economic recovery and that some investors are returning tothe market.[91]

Nonetheless, we must learn from the past to project into the future. It is important to keep inmind that change is a constant in our capital markets, and the exact nature and impact of thatchange will be difficult, if not impossible, to predict. For instance, the dangers and risks ofcyber­attacks and the impact of high­frequency trading are developments no one expected justa few years ago.[92]

As we project forward, it is impossible to predict with certainty the challenges ahead. I dobelieve, however, that the country requires a well­informed and well­funded SEC to protectAmerican investors—from both domestic and international activities. While the world keepschanging, and while the SEC will need to change with it, the one constant I hope will notchange is the commitment of the SEC staff to protecting investors and the markets. As weproject forward, a strong SEC is the only way to be prepared for the future.

Thank you for having me here today.

[1] During the recent financial crisis, the S&P 500 was at 797.87 on January 1, 2009, and roseto 2110.74 by January 1, 2015. See Yahoo! Finance, S&P 500 data from January 1, 2005(1,180.59) to January 1, 2015 (2,110.74), available at http://finance.yahoo.com/echarts?s=%5Egspc+interactive#%7B%22range%22%3A%22max%22%2C%22scale%22%3A%22linear%22%7D.

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[2] FDIC Quarterly, Feature Article: The Orderly Liquidation of Lehman Brothers Holdings Inc.under the Dodd­Frank Act, Vol. 5, No. 2, pp. 1, 12 (Early Release for the Upcoming 2011),available at https://www.fdic.gov/bank/analytical/quarterly/2011_vol5_2/lehman.pdf.

See id.

[4] Senior Supervisors Group, Risk Management Lessons from the Global Banking Crisis of2008, p. 6 & n. 2 (Oct. 21, 2009), available athttps://www.sec.gov/news/press/2009/report102109.pdf.

[5] See, e.g., Nick Mathiason, Three weeks that changed the world, The Guardian (Dec. 27,2008), available at http://www.theguardian.com/business/2008/dec/28/markets­credit­crunch­banking­2008 (“Not since 1929 has the financial community witnessed 12 months like it.Lehman Brothers went bankrupt. Merrill Lynch, AIG, Freddie Mac, Fannie Mae, HBOS, RoyalBank of Scotland, Bradford & Bingley, Fortis, Hypo and Alliance & Leicester all came within awhisker of doing so and had to be rescued.”).

[6] Senior Supervisors Group, Risk Management Lessons from the Global Banking Crisis of2008, p. 7 (Oct. 21, 2009), available athttps://www.sec.gov/news/press/2009/report102109.pdf.

[7] Id.

[8] SEC Website, The Securities and Exchange Commission Post­Madoff Reforms, available athttp://www.sec.gov/spotlight/secpostmadoffreforms.htm#revitalize.

[9] Chair Mary Jo White, The Importance of Independence (Oct. 3, 2013), available athttp://www.sec.gov/News/Speech/Detail/Speech/1370539864016#_ftnref13; Jill E. Fisch, TopCop or Regulatory Flop? The SEC at 75, 95 Va. L. Rev. 785, 786­789 (June 2009), available athttp://www.virginialawreview.org/sites/virginialawreview.org/files/785.pdf; Marcy Gordon,Obama’s financial watchdog plan faces big hurdles, Real Clear Markets (May 20, 2009),available athttp://www.realclearmarkets.com/news/ap/finance_business/2009/May/20/obama_s_financial_watchdog_plan_faces_big_hurdles.html (last visited Mar. 14, 2015).

[10] Dodd­Frank Wall Street Reform and Consumer Protection Act (the “Dodd­Frank Act”), Pub.L. 111­203, § 410 (2010).

[11] SEC Press Release No. 2010­5, SEC Names New Specialized Unit Chiefs and Head of NewOffice of Market Intelligence (Jan. 13, 2010), available athttp://www.sec.gov/news/press/2010/2010­5.htm. In the wake of the financial crisis, theCommission also made a number of internal changes. For example, we substantiallyrestructured the Division of Enforcement and created specialized teams of lawyers and marketexperts to focus in the areas of Asset Management, Market Abuse, Complex FinancialInstruments, Foreign Corrupt Practices, and Municipal Securities and Public Pensions. See id. Inaddition, the Office of Market Intelligence was created to better manage and assess tips,complaints, and referrals. See id.

[12] Moreover, we created the Division of Economic and Risk Analysis, or “DERA,” to provideeconomic and statistical analysis to support the SEC’s rulemakings, and to assist with ourexamination and enforcement programs. See SEC Press Release No. 2009­199, SEC Announces

3

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New Division of Risk, Strategy, and Financial Innovation (Sept. 16, 2009), available athttp://www.sec.gov/news/press/2009/2009­199.htm.; SEC Press Release No. 2013­104, SECRenames Division Focusing On Economic and Risk Analysis (June 6, 2013), available athttp://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171575272.

[13] SEC Website, The Securities and Exchange Commission Post­Madoff Reforms, available athttp://www.sec.gov/spotlight/secpostmadoffreforms.htm#revitalize.

[14] These numbers are based on information received from the Commission’s Office of theSecretary through February 10, 2015, and included both proposing and adopting releases.

[15] See Nationally Recognized Statistical Rating Organizations, SEC Rel. No. 34­72936 (Aug.27, 2014), available at http://www.sec.gov/rules/final/2014/34­72936.pdf; Commissioner LuisA. Aguilar, Restoring Integrity to the Credit Rating Process (Aug. 27, 2014), available athttp://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370542769492.

[16] See Credit Risk Retention, SEC Release No. 34­73407 (Oct. 22, 2014), available athttp://www.sec.gov/rules/final/2014/34­73407.pdf; Asset­Backed Securities Disclosure andRegistration, SEC Release No. 33­9638 (Sept. 4, 2014), available athttp://www.sec.gov/rules/final/2014/33­9638.pdf; Commissioner Luis A. Aguilar, Skin in theGame: Aligning the Interests of Sponsors and Investors (Oct. 22, 2014), available athttp://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370543250034; and CommissionerLuis A. Aguilar, Correcting Some of the Flaws in the ABS Market (Aug. 27, 2014), available athttp://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370542768870. With respect to theadopted rules covering asset­level disclosures of asset­backed securities, the Commission’s2014 adopted rules only covered certain asset classes, but did not cover all asset classes, suchas equipment loans and leases, student loans, and inventory financings. See Asset­BackedSecurities Disclosure and Registration, SEC Release No. 33­9638 (Sept. 4, 2014).

[17] For example, during that time, the Commission adopted or substantially amended anumber of significant regulatory and disclosure rules—including, to name just a few examples,final rules regarding the application of Title VII definitions of security­based swap dealer andmajor security­based swap participants in the cross­border context (Application of “Security­Based Swap Dealer” and “Major Security­Based Swap Participant” Definitions to Cross­BorderSecurity­Based Swap Activities, SEC Release No. 34­72472 (June 25, 2014), available athttp://www.sec.gov/rules/final/2014/34­72472.pdf); final rules implementing a statutorymandate that prohibits any banking entity from engaging in proprietary trading or fromacquiring or retaining an ownership interest in, sponsoring, or having certain relationships witha hedge fund or private equity fund, subject to certain exemptions (Prohibitions andRestrictions on Proprietary Trading and Certain Interests In, and Relationships With, HedgeFunds and Private Equity Funds, SEC Release No. BHCA­1 (Dec. 10, 2013), available athttp://www.sec.gov/rules/final/2013/bhca­1.pdf); rules enhancing the custody practices ofinvestment advisers (Custody of Funds or Securities of Clients by Investment Advisers, SECRelease No. IA­2968 (Dec. 30, 2009), available at http://www.sec.gov/rules/final/2009/ia­2968.pdf); and significant amendments to the rules governing nationally recognized statisticalrating organizations (Amendments to Rules for Nationally Recognized Statistical RatingOrganizations, SEC Release No. 34­59342 (Feb. 2, 2009), available athttp://www.sec.gov/rules/final/2009/34­59342.pdf; and Amendments to Rules for NationallyRecognized Statistical Rating Organizations, SEC Release No. 34­61050 (Nov. 23, 2009),

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available at http://www.sec.gov/rules/final/2009/34­61050.pdf). The SEC has also passedamendments to the rules governing money market mutual funds (Money Market Fund Reform:Amendments to Form PF, SEC Release No. 33­9616 (July 23, 2014), available athttp://www.sec.gov/rules/final/2014/33­9616.pdf); rule amendments to strengthen thecustody practices of broker­dealers (Broker­Dealer Reports, SEC Release No. 34­70073 (July30, 2013), available at http://www.sec.gov/rules/final/2013/34­70073.pdf); rules to prohibitpay­to­play activity in the investment advisory industry (Political Contributions by CertainInvestment Advisers, SEC Release No. IA­3043 (July 1, 2010), available athttp://www.sec.gov/rules/final/2010/ia­3043.pdf); improvements to the short­selling rules(Amendments to Regulation SHO, SEC Release No. 34­60388 (July 27, 2009), available athttp://www.sec.gov/rules/final/2009/34­60388.pdf; and Amendments to Regulation SHO, SECRelease No. 34­61595 (Feb. 26, 2010), available at http://www.sec.gov/rules/final/2010/34­61595.pdf); and rules to enhance municipal securities disclosure (Amendment to MunicipalSecurities Disclosure, SEC Release No. 34­62184A (May 27, 2010), available athttp://www.sec.gov/rules/final/2010/34­62184a.pdf).

[18] See id.

[19] See Jumpstart Our Business Startups Act, Pub. L. No. 112­106, 126 Stat. 306 (Apr. 5,2012).

[20] For example, the SEC needs to improve disclosures related to target­date funds andmunicipal securities. See Commissioner Luis A. Aguilar, Advocating for Investors Saving forRetirement (Feb. 5, 2015), available at http://www.sec.gov/news/speech/advocating­for­investors­saving­for­retirement.html. The Commission also needs to address a number ofissues with respect to the structure of our equity markets, extend the protections of RegulationSCI to broker­dealers and other entities, pass final rules to enhance the safety of systemicallyimportant clearing agencies, improve secondary market liquidity for small businesses, andupdate the rules governing transfer agents. See Chair Mary Jo White, Enhancing Our EquityMarket Structure (June 5, 2014), available athttp://www.sec.gov/News/Speech/Detail/Speech/1370542004312; Commissioner Luis A.Aguilar, Statement at Open Meeting on Regulation SCI (Nov. 19, 2014), available athttp://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370543491121; Commissioner LuisA. Aguilar, Enhancing the Stability and Safety of Clearing Agencies (Mar. 12, 2014), available athttp://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370542555999; Commissioner LuisA. Aguilar, The Need for Greater Secondary Market Liquidity for Small Businesses (Mar. 4,2015), available at http://www.sec.gov/news/statement/need­for­greater­secondary­market­liquidity­for­small­businesses.html; Commissioner Luis A. Aguilar, The Importance to theCapital Markets of Updating the Rules Regarding Transfer Agents (Dec. 17, 2014), available athttp://www.sec.gov/news/statement/spch121714­2laa.html.

[21] For example, in 2010, Congress directed the SEC and the U.S. Commodity Futures TradingCommission (“CFTC”) to create a regulatory framework to oversee the derivatives market,which is significantly international in scope. See Davis Polk & Wardwell LLP, Dodd­FrankProgress Report, p. 6 (Dec. 1, 2014), available at http://www.davispolk.com/Dodd­Frank­Rulemaking­Progress­Report (According to this report, as of December 1, 2014, the CFTC hasfinalized 36 out of 43 required Title VII rulemakings, or 84%, while the SEC has only finalizedten out of 29 required Title VII rulemakings, or 35%.); SEC Press Release No. 2014­123, SEC

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Adopts Cross­Border Security­Based Swap Rules (June 25, 2014), available athttp://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542163722 (According todata analyzed by the staff of the SEC, a majority of transactions in single­name credit defaultswaps on U.S. reference entities involved one or more counterparties located overseas, withapproximately 48% entered into between one U.S­domiciled counterparty and one foreign­domiciled counterparty.). To do this, the SEC has been consulting and coordinating with foreignregulatory authorities on the establishment of a robust and consistent international approach toderivatives regulation. See Sec. 752 of the Dodd­Frank Act (International Harmonization): “Inorder to promote effective and consistent global regulation of swaps and security­based swaps,the Commodity Futures Trading Commission, the Securities and Exchange Commission, and theprudential regulators (as that term is defined in section 1a(39) of the Commodity ExchangeAct), as appropriate, shall consult and coordinate with foreign regulatory authorities on theestablishment of consistent international standards with respect to the regulation (includingfees) of swaps, security­based swaps, swap entities, and security­based swap entities and mayagree to such information­sharing arrangements as may be deemed to be necessary orappropriate in the public interest or for the protection of investors, swap counterparties, andsecurity­based swap counterparties.”

See also Cross­Border Security­Based Swap Activities; Re­Proposal of Regulation SBSR andCertain Rules and Forms Relating to the Registration of Security­Based Swap Dealers and MajorSecurity­Based Swap Participants, SEC Release No. 34­69490, (May 1, 2013), available athttp://www.sec.gov/rules/proposed/2013/34­69490.pdf; Comment letter from Better Marketsto the Securities and Exchange Commission, Cross­Border Regulation, at pp. 2­3 (Apr. 19,2013) (“Weak cross­border regulatory standards not only raise the specter of global systemicrisk and failure, they pose a special threat to U.S. interests…Distinctions like ‘branch’ versus‘guaranteed subsidiary’ create the illusion of varying degrees of immunity from contagionwhere in reality none exist. Moreover, it elevates form over substance and invites regulatoryarbitrage.”); Comment letter from American for Financial Reform to the Commodity FuturesTrading Commission (June 14, 2012), available athttp://comments.cftc.gov/PublicComments/ViewComment.aspx?id=58309&SearchText(“Failure to apply Dodd­Frank protections to the foreign subsidiaries of U.S. banks would permitWall Street to easily evade U.S. financial regulation by moving their swaps businessoverseas.”); Commissioner Luis A. Aguilar, Working to Increase Transparency and ReduceSystemic Risks Caused by the Global Derivatives Market (May 1, 2013), available athttp://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370542573918.

[22] Jill E. Fisch, Top Cop or Regulatory Flop? The SEC at 75, 95 Va. L. Rev. 785, 820 (June2009), available at http://www.virginialawreview.org/sites/virginialawreview.org/files/785.pdf.

[23] See, e.g., Concept Release on Equity Market Structure, SEC Release No. 34­61358, p. 7(Jan. 14, 2010), available at http://www.sec.gov/rules/concept/2010/34­61358.pdf.

[24] See, Michael A. Goldstein, et al., Computerized and High­Frequency Trading, The FinancialReview 49, pp. 187 and n. 22, 188 and n. 23 (2014), available athttp://www.babson.edu/Academics/centers/cutler­center/Documents/computerized­and­high­frequency­trading.pdf.

[25] See, e.g., Concept Release on Equity Market Structure, SEC Release No. 34­61358, p. 58(Jan. 14, 2010), available at http://www.sec.gov/rules/concept/2010/34­61358.pdf.

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[26] The Flash Crash of May 6, 2010, during which, in just a matter of minutes, certain equitiesexperienced severe price movements—both up and down—with more than 20,000 trades inover 300 securities executed at prices more than 60% away from their market values. In just afew minutes, nearly $1 trillion in market value evaporated, before making a partial recovery.See Findings Regarding the Market Events of May 6, 2010, Report of the Staffs of the CFTC andSEC to Joint Advisory Committee on Emerging Regulatory Issues (Sept. 30, 2010), available athttp://www.sec.gov/news/studies/2010/marketevents­report.pdf.

[27] In just 45 minutes, Knight Capital’s computers rapidly bought and sold millions of shares.Those trades pushed the value of many stocks up, and the company’s losses appear to haveoccurred when it had to sell the overvalued shares back into the market at a lower price. As aresult, Knight Capital lost approximately $10 million per minute, almost had to go intobankruptcy, and subsequently agreed to be purchased. See In the Matter of Knight CapitalAmericas LLC, AP File No. 3­15570, Securities Exchange Act Release No. 34­70694 (October16, 2013), available at http://www.sec.gov/litigation/admin/2013/34­70694.pdf; PR Newswire,Knight Capital Group Provides Update Regarding August 1st Disruption To Routing In NYSE­listed Securities (Aug. 2, 2012), available at http://www.prnewswire.com/news­releases/knight­capital­group­provides­update­regarding­august­1st­disruption­to­routing­in­nyse­listed­securities­164724626.html. Some of the better­known examples of such incidents include:

The systems issues associated with the initial public offerings of BATS Global Markets, Inc.,and Facebook, Inc., in March and May 2012, respectively. The losses sustained as a resultof the Facebook IPO may be as much as hundreds of millions of dollars. See, Sarah N.Lynch, Nasdaq says FINRA caps Facebook IPO claims at $41.6 million, Reuters (Oct. 25,2013), available at http://www.reuters.com/article/2013/10/25/us­nasdaq­facebook­claims­idUSBRE99O0TK20131025 (estimating major market makers lost up to $500million in the IPO).

On August 22, 2013, the trading of more than 2,000 NASDAQ­listed stocks, with a totalestimated market capitalization of $5.7 trillion, was halted for three hours because of atechnology failure related to NASDAQ’s market data feed. See, NASDAQ, Update ­­ NASDAQOMX Issues Statement on the Securities Information Processor (Aug. 22, 2013), availableat http://ir.nasdaqomx.com/releasedetail.cfm?ReleaseID=786871; Tom Bemis, $5.7trillion locked up by Nasdaq trading halt, MarketWatch (Aug. 22, 2013), available athttp://blogs.marketwatch.com/thetell/2013/08/22/5­7­trillion­locked­up­by­nasdaq­trading­halt/. Following this market disruption, SEC Chair Mary Jo White held a meetingwith leaders of the equities and options exchanges, FINRA, the Depository Trust ClearingCorporation, and the Options Clearing Corporation, during which she requested action planson five critical areas in an effort to strengthen critical market infrastructure. Theexchanges submitted action plans relating to the following five work streams: (1) enhancethe resilience, performance, disaster recovery capability and governance of securitiesinformation processors, or SIPs; (2) assess the robustness and resilience of other criticalinfrastructure systems; (3) evaluate current rules, procedures, and expectations that stemfrom a system event or outage at one of the SIPs; (4) address rules regarding trade breaksin both the equities and options markets; and (5) coordinate common “kill switch”functionality to prevent risk and disruption to the equity markets.

An alarming number of technology­related market disruptions occurred in the latter part of

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2013. On August 20, 2013, Goldman Sachs executed a large number of erroneous optionstrades when one of its automated trading systems malfunctioned. See, Arash Masoudi,Goldman faces losses on erroneous trades, Financial Times, (Aug. 21, 2013), available athttp://www.ft.com/intl/cms/s/0/f95200d6­09ad­11e3­ad07­00144feabdc0.html#axzz3UIUGETQ7; on September 16, 2013, options trading was haltedfor more than a half­hour due to a failure of the data feed that supplied options prices tothe market. See, Jacob Bunge, Stock­Options Trading Halted After Data Feed Problem, WallStreet Journal (Sept. 16, 2013), available athttp://www.wsj.com/articles/SB10001424127887323527004579079301165239372; onOctober 29, 2013, a data feed interruption prevented prices for NASDAQ’s benchmark U.S.stock indexes from being disseminated for almost an hour. See, Sam Mamudi and NikolajGammeltoft, Nasdaq Says Human Error Caused Hourlong Halt in Data Feed, Bloomberg(Oct. 29, 2013), available athttp://www.bloomberg.com/news/articles/2013­10­29/nasdaq­says­human­error­caused­hour­long­halt­in­data­feed­1­; on November 1,2013, NASDAQ halted trading on one of its three options markets for most of the daywhen its systems encountered problems processing an increase of orders and could notdisseminate quotes for a subset of securities. See, Dina ElBoghdady, Another Nasdaqmalfunction shuts down options market, Washington Post (Nov. 1, 2013), available athttp://www.washingtonpost.com/business/economy/2013/11/01/1719a886­4323­11e3­a624­41d661b0bb78_story.html; on November 7, 2013, a network failure at OTC MarketsGroup Inc. prevented trading in thousands of unlisted shares for more than five hours. SeeJacob Bunge, et al., Glitch at OTC Markets Halts Trading of Unlisted Shares, Wall StreetJournal (Nov. 7, 2013), available athttp://www.wsj.com/articles/SB10001424052702303309504579183831541669864.

[28] See, e.g., Leslie Boni, et al., Dark Pool Exclusivity Matters, (Dec. 19, 2013), available athttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2055808 (among the consequences ofRegulation NMS is the proliferation of dark pool alternative trading systems); Roberta Karmel,IOSCO’s Response to the Financial Crisis, 37 Iowa J. Corp. L. 849 (Summer 2012) (“Whilederegulation and demutualization opened the door for dark pools, one of the chief reasons fortheir rapid proliferation in the last decade is the SEC’s promulgation of Regulation NMS”);Aubrey Gallo, Developments in Banking and Financial Law 2009­2010: The Shadow FinancialSystem: XI. Dark Pool Liquidity, 29 Rev. Banking & Fin. L. 88 (Fall 2009) (Regulation NMSmandates that public traders publish the “national best bid or offer” for each security, but doesnot mandate dark pool traders to publish quotes. As a result, the number of ATSs like darkpools, fearful of adverse selection because of Regulation NMS's disclosure requirements,increased after Regulation NMS passed in 2005 ... Regulation NMS, by requiring disclosure ofthe lowest­priced seller on exchanges, forced large­block public traders underground to avoiddisclosure, increasing transactions in dark pool liquidity.”); Kirsten Zaza, A Fiduciary Standardas a Tool for Dark Pool Subscribers, 18 Stan. J.L. Bus. & Fin. 319 (Spring 2013) (dark poolshave flourished in the wake of Regulation NMS as institutional investors fled exchanges for darkpools that allow greater secrecy and liquidity); Marshall Blume, Competition and Fragmentationin the Equity Markets: The Effects of Regulation NMS (University of Pennsylvania FinanceDepartment Working Paper Series) (Jan. 2007).

[29] See, e.g., Concept Release on Equity Market Structure (Jan. 14, 2010), SEC Release No.34­61358, available at http://www.sec.gov/rules/concept/2010/34­61358.pdf.

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[30] See, Market Volume Summary, available athttp://www.batstrading.com/market_summary/ (last visited Mar. 14, 2015).

[31] See, e.g., SEC Website, Exchanges, available athttp://www.sec.gov/divisions/marketreg/mrexchanges.shtml (last visited Mar. 14, 2015)(showing a list of exchanges registered with the SEC under Section 6(a) of the SecuritiesExchange Act of 1934 (“Exchange Act”) as national securities exchanges); Sam Mamudi, DarkPools: Private Stock Trading vs. Public Exchanges, Bloomberg QuickTake, (Jan. 21, 2015),available at http://www.bloombergview.com/quicktake/dark­pools (last visited Mar. 14, 2015)(“The U.S. stock market has fragmented into 11 public exchanges and roughly 45 alternativetrading systems, most of them dark pools.”); Matthew Phillips, European Investors are DivingInto Dark Pools, Bloomberg (Nov. 14, 2013) (noting that there are roughly 40 dark pools in theU.S.); John McCrank, U.S. stock exchanges call for new rules on “dark pools,” Reuters (Apr. 16,2013), available at http://www.reuters.com/article/2013/04/16/us­regulation­exchanges­darkpools­idUSBRE93F0VI20130416 (noting that there are around 50 dark pools and 13 publicexchanges in the U.S.).

[32] See, e.g., Testimony of David Lauer, Better Markets, Inc., before the U.S. SenateCommittee on Banking, Housing, and Urban Affairs, Subcommittee on Securities, Insuranceand Investment (Sept. 20, 2012), available athttp://www.banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=56ef1df0­6c9a­4c53­99e8­2ad7a614afe2 (“[High­frequency trading] has been so successful that it has taken over the stock market, nowaccounting for between 50%­70% of equity market volume on any given day”); Sal Arnuk andJoseph Saluzzi, Broken Markets: How High Frequency Trading and Predatory Practices on WallStreet Are Destroying Investor Confidence and Your Portfolio, p. 2 (2012) (“high­frequencytraders account for 50­75% of the volume traded on the exchanges each day and a substantialportion of the stock exchanges’ profits”).

[33] Chair Mary Jo White, Intermediation in the Modern Securities Markets: Putting Technologyand Competition to Work for Investors (June 20, 2014), available athttp://www.sec.gov/News/Speech/Detail/Speech/1370542122012.

[34] The Commission established an Equity Market Structure Advisory Committee, or MSAC, tofocus on the structure and operations of the U.S. equities markets, and provide a formalmechanism though which the Commission can receive public input on market structure issues.SEC Press Release, SEC Announces Members of New Equity Market Structure AdvisoryCommittee: Committee Comprised of Experts with Diverse Backgrounds and Viewpoints (Jan.13, 2015), available at http://www.sec.gov/news/pressrelease/2015­5.html (last visited Mar.14, 2015).

[35] Findings Regarding the Market Events of May 6, 2010, Report of the Staffs of the CFTCand SEC to Joint Advisory Committee on Emerging Regulatory Issues (Sept. 30, 2010),available at http://www.sec.gov/news/studies/2010/marketevents­report.pdf (“Of final note,the events of May 6 clearly demonstrate the importance of data in today’s world of fully­automated trading strategies and systems.”)

[36] See id.

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[37] See, e.g., Leslie Boni, et al., Dark Pool Exclusivity Matters (Dec. 19, 2013), available athttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2055808 (discussing the proliferation ofdark pool alternative trading systems); Roberta Karmel, IOSCO’s Response to the FinancialCrisis, 37 Iowa J. Corp. L. 849 (Summer 2012) (discussing how deregulation anddemutualization opened the door for dark pools); Aubrey Gallo, Developments in Banking andFinancial Law 2009­2010: The Shadow Financial System: XI. Dark Pool Liquidity, 29 Rev.Banking & Fin. L. 88 (Fall 2009) (discussing the increasing number of alternative tradingsystems like dark pools; Kirsten Zaza, A Fiduciary Standard as a Tool for Dark Pool Subscribers,18 Stan. J.L. Bus. & Fin. 319 (Spring 2013) (dark pools have flourished as institutionalinvestors fled exchanges for dark pools that allow greater secrecy and liquidity); MarshallBlume, Competition and Fragmentation in the Equity Markets: The Effects of Regulation NMS,The Wharton School, University of Pennsylvania (Jan. 22, 2007), available athttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=959429&download=yes.

[38] See U.S. Securities and Exchange Commission, FY 2015 Budget Request By Program, p.55­56, available at https://www.sec.gov/about/reports/sec­fy2015­budget­request­by­program.pdf (“Given current trends in the markets, OCIE anticipates that at the beginning of FY2015 it will oversee more than 25,000 market participants, including nearly 11,500 investmentadvisers with more than $55 trillion in assets under management, more than 800 investmentcompany complexes managing over 10,000 mutual funds and Exchange Traded Funds (ETFs),approximately 4,400 broker­dealers with more than 160,000 branch offices, 18 nationalsecurities exchanges, and approximately 450 transfer agents.”).

[39] This data is maintained by the Division of Economic and Risk Analysis.

[40] In Fiscal Year 2013, the SEC received and processed almost 16,000 tips, complaints, andreferrals. U.S. Securities and Exchange Commission, FY 2015 Budget Request By Program, p.52, available at https://www.sec.gov/about/reports/sec­fy2015­budget­request­by­program.pdf.

[41] SEC Rule 613: Consolidated Audit Trail (CAT) Website, Summary of Consolidated AuditTrail Initiative, p. 2 (Aug. 6, 2014), available athttp://catnmsplan.com/web/groups/catnms/@catnms/documents/appsupportdocs/p571933.pdf. It will also handle 58 billion records of orders, executions, and quote life­cycles for equitiesand options on a daily basis, and estimated to grow to an estimated 21 petabyte of datafootprint within five years of operation. Id. The CAT, if implemented, will allow the Commissionto track efficiently and accurately all trading activities throughout the U.S. securities markets.SEC Website, Rule 613 (Consolidated Audit Trail), available athttp://www.sec.gov/divisions/marketreg/rule613­info.htm. But the CAT remains a work inprogress. Since the CAT final rule was adopted on July 18, 2012, the Commission has grantedtwo extensions. See Order Granting a Temporary Exemption Pursuant to Section 36(a)(1) ofthe Securities Exchange Act of 1934 from the Filing Deadline Specified in Rule 613(a)(1) of theExchange Act, SEC Release No. 34­69060 (March 6, 2013), available athttps://www.sec.gov/rules/exorders/2013/34­69060.pdf; Order Granting a TemporaryExemption Pursuant to Section 36(a)(1) of the Securities Exchange Act of 1934 from the FilingDeadline Specified in Rule 613(a)(1) of the Exchange Act, SEC Release No. 34­71018 (Dec. 6,2013), available at https://www.sec.gov/rules/exorders/2013/34­71018.pdf; see generally,SEC Website, Rule 613 (Consolidated Audit Trail), available at

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http://www.sec.gov/divisions/marketreg/rule613­info.htm (last visited Mar. 14, 2015). TheConsolidated Audit Trail is a necessary tool for the Commission to be effective in the 21stcentury because it needs to have ready access to timely, detailed, and accurate marketinformation to oversee the capital markets.

[42] Shagun Bali, The Consolidated Audit Trail: Stitching Together the US Securities Markets,Tabb Forum (Mar. 4, 2015), available at http://tabbforum.com/opinions/the­consolidated­audit­trail­stitching­together­the­us­securities­markets.

[43] For example, the Commission’s Office of Compliance Inspections and Examinations, orOCIE, established a Quantitative Analytics Unit to expand the scope of its data collection andanalysis program. U.S. Securities and Exchange Commission, Agency Financial Report, p. 13(Fiscal Year 2014), available at http://www.sec.gov/about/secpar/secafr2014.pdf. In addition,the National Exam Analytics Tool system, or NEAT, allows the Commission’s examination staff toreview trading data and transactions within minutes. Id. at p. 14. OCIE’s Risk Assessment andSurveillance Group also aggregate and analyze data from SEC filings to identify activity thatmay warrant examination, and the Risk Analysis Examination Group use technology to examineclearing firms and large broker­dealers and identify problematic behaviors. Id. at p. 29.

In 2013, the Commission’s Division of Economic and Risk Analysis, or DERA, established itsQuantitative Research Analytical Data Support program, or QRADS. Id. at p. 36. This program,among other things, generated standardized quantitative reports of financial markets andregistrant activities to help the Commission better understand the capital markets and identifyrisk areas. Id. at p. 36. The Commission tasked DERA’s recently created Office of RiskAssessment with deploying data­driven analytics to assist in identifying financial market risk.Id. at p. 41.

[44] The Commission’s Office of Analytics and Research with the Division of Trading andMarkets developed several tools to help it better use data to oversee the market and inform itsexamination program. See U.S. Securities and Exchange Commission, Agency Financial Report,p. 18 (Fiscal Year 2014), available at http://www.sec.gov/about/secpar/secafr2014.pdf. One ofthese tools, MIDAS, collects and analyzes market data obtained from exchanges to provide theCommission and the public an overview of the market structure, including trading speed, quotelifetimes, trade­to­order volume rations, hidden volume ratios, and odd lot rates. See id. at p.14, 18.

[45] SEC Website, Market Structure: MIDAS (Market Information Data Analytics System),available at http://www.sec.gov/marketstructure/midas.html (last visited Mar. 14, 2015).

[46] Id.

[47] See U.S. Securities and Exchange Commission, Agency Financial Report, p. 153 (FiscalYear 2014), available at http://www.sec.gov/about/secpar/secafr2014.pdf. The AberrationalPerformance Inquiry is a joint effort among the staff in the Enforcement Division, OCIE, andDERA. See id.

[48] In re GLG Partners, Inc. et al. (Dec. 12, 2013), available athttp://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540491613. The other caseswere SEC v. Yorkville Advisors, LLC et al. (S.D.N.Y. filed Oct. 17, 2012), available athttp://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171485332; SEC v. Balboa et

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al. (S.D.N.Y. filed Dec. 1, 2011), available at http://www.sec.gov/news/press/2011/2011­252.htm; SEC v. Rooney et al. (N.D. Ill. filed Nov. 18, 2011), available athttp://www.sec.gov/news/press/2011/2011­252.htm; In re LeadDog Capital Markets, LLC etal. (Nov. 18, 2011) , available at http://www.sec.gov/news/press/2011/2011­252.htm; SEC v.Kapur et al. (S.D.N.Y. filed Nov. 18, 2011), available athttp://www.sec.gov/news/press/2011/2011­252.htm; SEC v. Reid et al. (S.D. Ga. filed Feb. 1,2011), available at http://www.sec.gov/litigation/litreleases/2011/lr21840.htm; and SEC v.Neufeld et al. (N.D. Ill. filed Apr. 19, 2010), available athttp://www.sec.gov/litigation/litreleases/2010/lr21497.htm.

[49] U.S. Securities and Exchange Commission, FY 2015 Budget Request By Program, p. 50,available at https://www.sec.gov/about/reports/sec­fy2015­budget­request­by­program.pdf;Testimony of Robert Khuzami, Director, Division of Enforcement, Before the United StatesSenate Committee on Homeland Security and Governmental Affairs, Statement on theApplication of Insider Trading Law to Trading by Members of Congress and Their Staffs (Dec. 1,2011), available at http://www.sec.gov/news/testimony/2011/ts120111rsk.htm.

[50] See Craig M. Lewis, Chief Economist, U.S. Securities and Exchange Commission, RiskModeling at the SEC: The Accounting Quality Model (Dec. 13, 2012), available athttps://www.sec.gov/News/Speech/Detail/Speech/1365171491988.

[51] U.S. Securities and Exchange Commission, Agency Financial Report, p. 38 (Fiscal Year2014), available at http://www.sec.gov/about/secpar/secafr2014.pdf.

[52] SEC Website, The Securities and Exchange Commission Post­Madoff Reforms, available athttp://www.sec.gov/spotlight/secpostmadoffreforms.htm#revitalize; See U.S. Securities andExchange Commission, 2014 Annual Report to Congress on the Dodd­Frank WhistleblowerProgram, p. 9 (Nov. 17, 2014), available at http://www.sec.gov/about/offices/owb/annual­report­2014.pdf. In addition, since 2011, the SEC’s Office of the Whistleblower has receivedmore than 10,000 whistleblower tips, and, in Fiscal Year 2014 alone, received 3,620whistleblower TCRs—the highest in the whistleblower program’s short history—and made itslargest award of more than $30 million to a single whistleblower who provided originalinformation that led to a successful SEC enforcement action. See id. at pp. 3, 9­10, and 20.

[53] For example, as far back as 2003, the Commission required officers, directors, andprincipal owners to provide beneficial ownership information under Section 16(a) of theExchange Act to the Commission in XML format or through the Commission’s online forms Website that tags the information in XML. For these purposes, XML refers to eXtensible MarkingLanguage format. Mandated Electronic Filing and Web Site Posting for Forms 3, 4 and 5, SECRelease No. 33­8230 (May 7, 2003), available at http://www.sec.gov/rules/final/33­8230.htm.See also Electronic Filing and Revision of Form D, SEC Release No. 8891 (Feb. 6, 2008),available at http://www.sec.gov/rules/final/2008/33­8891.pdf ; Interactive Data to ImproveFinancial Reporting, SEC Release No. 33­9002 (Jan. 30, 2009), available athttp://www.sec.gov/rules/final/2009/33­9002.pdf, as corrected by Interactive Data to ImproveFinancial Reporting, SEC Release No. 33­9002A (Apr. 1, 2009), available athttp://www.sec.gov/rules/final/2009/33­9002a.pdf; Interactive Data for Mutual FundRisk/Return Summary, SEC Release No. 33­9006 (Feb. 11, 2009), available athttp://www.sec.gov/rules/final/2009/33­9006.pdf, as corrected by Interactive Data for MutualFund Risk/Return Summary; Correction, Release No. 33­9006A (May 1, 2009), available at

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http://www.sec.gov/rules/final/2009/33­9006a.pdf; Amendments to Rules for NationallyRecognized Statistical Rating Organizations, SEC Release No. 34­61050 (Nov. 23, 2009),available at http://www.sec.gov/rules/final/2009/34­61050.pdf, and Amendments to Rules forNationally Recognized Statistical Rating Organizations, Release No. 34­59342 (Feb. 2, 2009),available at http://www.sec.gov/rules/final/2009/34­59342.pdf; and Money Market FundReform, SEC Release No. IC­ 29132 (Feb. 23, 2010), available athttp://www.sec.gov/rules/final/2010/ic­29132.pdf.

[54] See SEC Investor Advisory Committee, Recommendations of the Investor AdvisoryCommittee Regarding the SEC and the Need for the Cost Effective Retrieval of Information byInvestors (Adopted July 25, 2013), available at http://www.sec.gov/spotlight/investor­advisory­committee­2012/data­tagging­resolution­72513.pdf.

[55] Interactive Data to Improve Financial Reporting, SEC Release No. 33­9002 (Jan. 30,2009), available at http://www.sec.gov/rules/final/2009/33­9002.pdf, as corrected byInteractive Data to Improve Financial Reporting, SEC Release No. 33­9002A (Apr. 1, 2009),available at http://www.sec.gov/rules/final/2009/33­9002a.pdf.

[56] Interactive Data for Mutual Fund Risk/Return Summary, SEC Release No. 33­9006 (Feb.11, 2009), available at http://www.sec.gov/rules/final/2009/33­9006.pdf, as corrected byInteractive Data for Mutual Fund Risk/Return Summary; Correction, SEC Release No. 33­9006A(May 1, 2009), available at http://www.sec.gov/rules/final/2009/33­9006a.pdf.

[57] Amendments to Rules for Nationally Recognized Statistical Rating Organizations, ReleaseNo. 34­61050 (Nov. 23, 2009), available at http://www.sec.gov/rules/final/2009/34­61050.pdf,and Amendments to Rules for Nationally Recognized Statistical Rating Organizations, SECRelease No. 34­59342 (Feb. 2, 2009), available at http://www.sec.gov/rules/final/2009/34­59342.pdf.

[58] See SEC Website, Division of Economic and Risk Analysis, Financial Statement Data Sets,available at http://www.sec.gov/dera/data/financial­statement­data­sets.html (last checked onMarch 11, 2015). See also SEC Press Release No. 2014­295, SEC Announces Program toFacilitate Analysis of Corporate Financial Data, (Dec. 30, 2014), available athttp://www.sec.gov/news/pressrelease/2014­295.html.

[59] The SEC used data tagging to enhance its data analytics for enforcement purposes. Forexample, in 2012, the Director of the SEC’s Division of Economic and Risk Analysis (“DERA”)(then known as the Division of Risk, Strategy and Financial Innovation) described a programcalled the Accounting Quality Model (“AQM”) that allowed the staff of the Division ofCorporation Finance and the Division of Enforcement to determine whether an issuer’s financialstatements “stick out from the pack” in a way that would require a deeper review by the staff.See Craig M. Lewis, Chief Economist, U.S. Securities and Exchange Commission, Risk Modelingat the SEC: The Accounting Quality Model (Dec. 13, 2012), available athttps://www.sec.gov/News/Speech/Detail/Speech/1365171491988. Specifically, DERA’s projectundertook to identify possible indicia of possibly fraudulent “earnings management,” such asoutlier discretionary accruals that could signify earnings manipulation. See id. See also, thediscussion above and associated text describing the SEC’s Aberrational Performance Inquiry,which uses data analytics to comb information from, among other things, tagged data in FormsPF filed by investment advisers to private funds. See U.S. Securities and Exchange

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Commission, Annual Staff Report Relating to the Use of Data Collected from Private FundSystemic Risk Reports (Aug. 15, 2014), available at http://www.sec.gov/reportspubs/special­studies/im­private­fund­annual­report­081514.pdf.

[60] Money market funds are required to submit this information monthly via Form N­MFP. SeeMoney Market Fund Reform, SEC Release No. IC­29132 (Feb. 23, 2010), available athttp://www.sec.gov/rules/final/2010/ic­29132.pdf.

[61] Comments by Sharon Pichler, Senior Financial Analyst, Division of InvestmentManagement, Risk and Examinations Office, at 2015 SEC Speaks (Feb. 21, 2015). TheEurozone included the following countries: Austria, Belgium, Finland, France, Germany, Ireland,Italy, Luxembourg, the Netherlands, Portugal, Spain, Greece, Cyprus, Malta, Slovenia, Slovakia,and Estonia. See Ashoka Mody and Damiano Sandri, The Eurozone Crisis: How Banks andSovereigns Came to be Joined at the Hip, IMF Working Paper, p. 3 n. 3 (Nov. 2011), availableat https://www.imf.org/external/pubs/ft/wp/2011/wp11269.pdf.

[62] See U.S. Securities and Exchange Commission, Division of Risk, Strategy, and FinancialInnovation, Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher,pp. 31­35, (Nov. 30, 2012), available at https://www.sec.gov/news/studies/2012/money­market­funds­memo­2012.pdf; Comments by Sharon Pichler, Senior Financial Analyst, Divisionof Investment Management, Risk and Examinations Office, at 2015 SEC Speaks (Feb. 21,2015);. Similarly, the Division of Investment Management’s Risk and Examinations Office (REO)was able to conclude that money market funds were not holding excessive amounts ofmunicipal bonds issued by Detroit and Puerto Rico, as had been feared. Id.

[63] See Sections 951­957 of the Dodd­Frank Act.

[64] In its 2010 Concept Release on the U.S. Proxy System, the Commission stated that ifissuers provided reportable items in interactive data format, “shareholders may be able tomore easily obtain specific information about issuers, compare information across differentissuers, and observe how issuer­specific information changes over time as the same issuercontinues to file in an interactive data format.” See Concept Release on the U.S. Proxy System,SEC Release No. 34­62495 (July 14, 2010) at p. 99, available athttps://www.sec.gov/rules/concept/2010/34­62495.pdf. In addition, see the discussion abovein footnote 65 regarding the Investor Advisory Committee’s recommendations on data tagging.

[65] U.S. Securities and Exchange Commission, FY 2015 Budget Request By Program, availableat https://www.sec.gov/about/reports/sec­fy2015­budget­request­by­program.pdf. Funding theSEC appropriately will also support the Commission’s commitment to a multi­year technologytransformation plan called “Working Smarter,” under which the agency will work to standardizeenterprise­wide platforms, modernize the SEC’s website and EDGAR filer system, developadvanced search and discovery capabilities, and build complex, predictive analyticalcapabilities. See U.S. Securities and Exchange Commission, Agency Financial Report, p. 43(Fiscal Year 2014), available at http://www.sec.gov/about/secpar/secafr2014.pdf.

[66] This suggestion is supported by the Commission’s Investor Advisory Committee (“IAC”),which in 2013 recommended that the Commission immediately prioritize tagging importantinformation with respect to various corporate governance issues, including portions of theproxy statement that relate to executive compensation and matters voted upon byshareholders. The IAC added that tagging the voting data and results contained in certain

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forms could result in more informed voting and investment decisions, and would facilitatecomparisons among public companies. See SEC Investor Advisory Committee,Recommendations of the Investor as Owner Subcommittee Regarding the SEC and the Need forthe Cost Effective Retrieval of Information by Investors (July 25, 2013), available athttp://www.sec.gov/spotlight/investor­advisory­committee­2012/iac­recommendation­data­tagging.pdf (describing recommendations to include tagging revisions in the proxy statementon Schedule 14A, in Form N­PX filed by mutual funds (where such forms include theregistrant’s proxy voting record for the most recent 12 month period), and voting results filedwith the Form 8­K.).

[67] SEC Office of International Affairs, International Enforcement Assistance, available athttp://www.sec.gov/about/offices/oia/oia_crossborder.shtml#secintlcases (last visited Mar. 14,2015).

[68] See Robert G. DeLaMater, Recent Trends in SEC Regulation of Foreign Issuers: How theU.S. Regulatory Regime Is Affecting the United States’ Historic Position as the World's PrincipalCapital Market, 39 Cornell Int’l L.J. 109, 117 (2006) (“The securities markets outside theUnited States have grown in breadth and depth of their own over the past twenty years andnow afford issuers in their home countries significant opportunities for financing that did notpreviously exist.”), available athttps://www.law.umich.edu/workshopsandsymposia/intlworkshopseries/Documents/R.%20DeLaMater%20­%20Cornell%20Intl%20Law%20Journal%20W06%20Speech.pdf.

[69] See Eric C. Chafee, The Internationalization of Securities Regulation: The United StatesGovernment’s Role in Regulating the Global Capital Markets, 5 J. Bus. & Tech. L. 187, 190(Spring 2010), available at http://digitalcommons.law.umaryland.edu/cgi/viewcontent.cgi?article=1144&context=jbtl.

[70] Many observers are concerned that automatically adopting international standards on awholesale basis may result in weakening an otherwise strong SEC regulatory framework in theinterest of global harmonization. As one commentator stated, the United States shouldestablish regulatory standards for the global securities markets from which nations could“upwardly depart.” Eric C. Chafee, The Internationalization of Securities Regulation: The UnitedStates Government’s Role in Regulating the Global Capital Markets, 5 J. Bus. & Tech. L. 187,205 (Spring 2010). Given today’s interconnected global securities markets, however, jointinternational efforts are needed to lessen regulatory fragmentation and to adopt effective androbust standards that protect investors and the markets. To this end, the SEC has worked witha long list of international organizations, including the International Organization of SecuritiesCommissions (“IOSCO”). Established in 1983, IOSCO counts among its membership more than95% of the world’s securities markets in more than 115 jurisdictions. See InternationalOrganization of Securities Commissions, About IOSCO, available athttp://www.iosco.org/about/?subsection=about_iosco (last visited Mar. 14, 2015). It works tocoordinate, and, where possible, set appropriate global standards for securities regulation andpromote adherence to those standards, covering all aspects of the capital markets. See id.;International Organization of Securities Commissions, Fact Sheet, p. 4 (Nov. 2014), available athttp://www.iosco.org/about/pdf/IOSCO­Fact­Sheet.pdf (last visited Mar. 14, 2015) (coveringbroad areas such as accounting, secondary markets, market intermediaries, enforcement,investment management, credit rating agencies, derivatives, and retail investor issues). The

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SEC also engages with other international organizations, including the Council of SecuritiesRegulators of the Americas (“COSRA”), the Financial Action Task Force (“FATF”), the JointForum, the Monitoring Group, the IFRS Foundation Monitoring Board, and the Organization forEconomic Cooperation and Development (“OECD”). See SEC Office of International Affairs,Advancing the SEC’s Mission through International Organizations, available athttp://www.sec.gov/about/offices/oia/oia_intlorg.shtml#jointforum (last visited Mar. 14, 2015).Moreover, the SEC also works closely with the Financial Stability Board (“FSB”). The FSB worksto promote international financial stability by coordinating between financial regulators andinternational standard­setting bodies to develop regulatory, supervisory, and other financialsector policies. See Financial Stability Board, About the FSB: What We Do, available athttp://www.financialstabilityboard.org/what­we­do/ (last visited Mar. 14, 2015).

[71] This estimated percentage was based on information received from the Commission’sOffice of International Affairs, and data was only analyzed for FY 2013. The percentage ofenforcement cases with an international component is significantly higher because the SECroutinely seeks assistance from foreign regulators in obtaining information in their jurisdictions,including documents and testimony from foreign witnesses.

[72] U.S. Securities and Exchange Commission, FY 2015 Budget Request By Program, pp. 95­96, available at https://www.sec.gov/about/reports/sec­fy2015­budget­request­by­program.pdf.

[73] U.S. Securities and Exchange Commission, Office of International Affairs: InternationalEnforcement Assistance, available at http://www.sec.gov/oia (last visited Mar. 14, 2015). In2002, the SEC was among the first signatories to IOSCO’s Multilateral Memorandum ofUnderstanding (“MMOU”), which enables securities regulators around the world to help eachother conduct securities fraud investigations. As of February 2014, there were 103 signatoriesto the MMOU. OICU­IOSCO, Current Signatories and Members Listed on Appendix B, availableat http://www.iosco.org/about/?subSection=mmou&subSection1=signatories (last visited Mar.14, 2015). An additional 19 regulators, including Russia, are seeking legal authority in theirhome countries to enable them to become signatories to the MMOU. See id.

[74] See FY 2015 Budget Request By Program, p. 98, available athttps://www.sec.gov/about/reports/sec­fy2015­budget­request­by­program.pdf.

[75] U.S. Securities and Exchange Commission, FY 2016 Congressional Budget Justification, FY2016 Annual Performance Plan, FY 2014 Annual Performance Report, p. 30, available athttp://www.sec.gov/about/reports/secfy16congbudgjust.pdf.

[76] U.S. Securities and Exchange Commission, Office of International Affairs: InternationalEnforcement Assistance, available at http://www.sec.gov/oia (last visited Mar. 14, 2015) (list ofcases in the area of insider trading, securities fraud, market manipulation, and Foreign CorruptPractices Act). For example, in the SEC’s $200 million settled case against JPMorgan Chase forfailing to detect and prevent its traders from fraudulently overvaluing investments to concealmillions in trading losses—often referred to as the London Whale trades—the SEC receivedsubstantial assistance from the United Kingdom’s Financial Conduct Authority. SEC PressRelease No. 2013­187, JPMorgan Chase Agrees to Pay $200 million and Admits Wrongdoing to

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Settle SEC Charges: Firm Must Pay $920 Million in Total Penalties in Global Settlement (Sept.19, 2013), available athttp://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539819965.

[77] See FY 2015 Budget Request By Program, p. 98, available athttps://www.sec.gov/about/reports/sec­fy2015­budget­request­by­program.pdf.

[78] U.S. Securities and Exchange Commission, Office of International Affairs: InternationalEnforcement Assistance, available at http://www.sec.gov/oia (last visited Mar. 14, 2015).

[79] For example, in 2012, the Commission instituted administrative proceedings againstseveral foreign auditors in China for failure to produce audit work papers in contravention oftheir legal obligations. In the Matter of BDO China Dahua CPA Co., Ltd., et al., Exchange ActRelease No. 68335 (Dec. 3, 2012), available at http://www.sec.gov/litigation/admin/2012/34­68335.pdf. However, it was not until January 2014, when the SEC prevailed at anadministrative hearing, before the SEC started receiving productions of work papers from theaudit firms through assistance provided by the regulators in China. SEC Press Release No.2015­25, SEC Imposes Sanctions Against China­Based Members of Big Four AccountingNetworks for Refusing to Produce Documents (Feb. 6, 2015), available athttp://www.sec.gov/news/pressrelease/2015­25.html.

[80] Ana Carvajal and Jennifer Elliott, The Challenges of Enforcement in Securities Markets:Mission Impossible?, IMF Working Paper, pp. 5 fn. 2, 34 (Aug. 2009), available athttps://www.imf.org/external/pubs/ft/wp/2009/wp09168.pdf.

[81] See, S. Rep. No. 337, 101st Cong., 2d Sess. 1990 at 1.

[82] Commissioner Luis A. Aguilar, Taking a No­Nonsense Approach to Enforcing the FederalSecurities Laws (Oct. 18, 2012), available athttp://www.sec.gov/News/Speech/Detail/Speech/1365171491510#_ednref32.

[83] Edward L. Carmody, Section IV.D: Administrative Law: Recognition of ForeignAdministrative Acts, 62 Am. J. Comp. L. 589, 609 (2014).

[84] Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b­5.

[85] In Morrison v. National Australia Bank, Ltd., 130 S. Ct. 2869 (2010), the U.S. SupremeCourt severely restricted the extraterritorial scope of the federal securities laws’ primaryenforcement tool—the antifraud provision of Section 10(b) of the Securities Exchange Act of1934. After Morrison, investors are limited to bringing Section 10(b) claims only if those claimsrelate to frauds on an American stock exchange or involved security transactions in the UnitedStates. Id. at 2888; see also, id. at 2884 (“[I[t is in our view only transactions in securitieslisted on domestic exchanges, and domestic transactions in other securities, to which §10(b)applies.”). As a result, investors have been hampered in their ability to seek redress againstthose who harmed them through cross­border securities fraud. Because of Morrison, and giventhe global nature of our capital markets, the SEC faces challenges in pursuing transnationalsecurities fraud on its own, especially when fraudsters and critical evidence are located withinforeign jurisdictions. In these situations, the SEC will need to work with its fellow regulatorsaround the world to see what can be done to prevent fraud from flowing into the United Statesto rip­off American investors.

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[86] See, Section 101(a), Sarbanes­Oxley Act of 2002, as amended, 15 U.S.C.A. §§ 7201­7266(the “Sarbanes­Oxley Act”).

[87] See PCAOB website, International subsection, available athttp://pcaobus.org/International/Pages/default.aspx. Since 2005, the PCAOB has conductedinspections of registered accounting firms in 44 foreign jurisdictions. See PCAOB 2013 AnnualReport, at p. 8, available athttp://pcaobus.org/About/Ops/Documents/Annual%20Reports/2013.pdf.

[88] See PCAOB 2013 Annual Report, at pp. 8­9, available athttp://pcaobus.org/About/Ops/Documents/Annual%20Reports/2013.pdf. In fact, the EuropeanCommission had to issue a decision recognizing the PCAOB as “adequate” to exchange auditworking papers with EU member state audit regulators; and only then could these regulatorsenter into a cooperative agreement with the PCAOB as a condition for carrying out inspectionsof PCAOB­registered auditors in those states. See id. See, also PCAOB Enters Into CooperativeAgreement with German Audit Regulator (Apr. 13, 2012), available athttp://pcaobus.org/News/Releases/Pages/04132012_GermanyAgreement.aspx; PCAOB EntersInto Cooperative Agreement with the Netherlands (Dec. 5, 2011), available athttp://pcaobus.org/News/Releases/Pages/12052011_Netherlands.aspx#.

[89] In 2011, for example, the PCAOB was able to resume inspections in the UK under acooperative arrangement with the UK regulatory authorities. See PCAOB Enters intoCooperative Agreement with United Kingdom Audit Regulator (Jan. 10, 2011), available athttp://pcaobus.org/News/Releases/Pages/01102011_UK.aspx. Moreover, since April 2011, thePCAOB has entered into similar arrangements that allow for joint inspections of registeredaccounting firms in 13 additional countries, including nine European countries and Japan,Taiwan, Israel, and Dubai. See PCAOB website, International subsection, RegulatoryCooperation, available at http://pcaobus.org/International/Pages/RegulatoryCooperation.aspx(last visited on Mar. 14, 2015).

[90] As of June 30, 2014, the PCAOB was unable to conduct inspections of firms located in 14jurisdictions (Austria, Belgium, China, Cyprus, the Czech Republic, Greece, Hong Kong,Hungary, Ireland, Italy, Luxembourg, Poland, Portugal, and Venezuela). See PCAOB Website,Registered Firms Not Yet Inspected Even Though Four or More Years Have Passed SinceIssuance of an Audit Report While Registered (as of June 30, 2014), available athttp://pcaobus.org/International/Inspections/Pages/NotYetInspected.aspx (updated to excludeDenmark, as the PCAOB entered into a cooperative framework with the Danish audit regulatoron July 18, 2014). See PCAOB Enters Into Cooperative Agreement with Denmark AuditRegulator (July 18, 2014), available athttp://pcaobus.org/News/Releases/Pages/07182014_Denmark.aspx. The number of registeredaccounting firms in these jurisdictions comes from the PCAOB’s website. See PCAOB Website,International subsection, International Registration subsection, Non­U.S. Registered Firms,available athttp://pcaobus.org/International/Registration/Pages/InternationalRegisteredFirms.aspx.

In the countries in which the PCAOB is unable to conduct inspections, at best, the PCAOB hasto rely on local regulators to inspect the PCAOB­registered accounting firms and then to shareits findings and audit materials. In China, for example, the best the PCAOB has been able toachieve thus far is entering into a cooperative arrangement with the Chinese regulators for the

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production and exchange of audit documents relevant to investigations in both countries’respective jurisdictions. See PCAOB Enters into Enforcement Cooperation Agreement withChinese Regulators (May 24, 2013), available athttp://pcaobus.org/News/Releases/Pages/05202013_ChinaMOU.aspx. In this regard, thebreakthrough settlement that the SEC achieved in February 2015 with four registeredaccounting firms in China—Deloitte Touche Tohmatsu Certified Public Accountants Ltd.(“DTTC”), Ernst & Young Hua Ming LLP (“EYHM”); KPMG Huazhen (Special General Partnership)(“KPMG Huazhen”); and PricewaterhouseCoopers Zhong Tian CPAs Limited Company (“PwCShanghai”)—to produce audit workpapers in response to Commission Division of Enforcementsubpoenas is consistent with the PCAOB’s cooperative arrangement with Chinese regulators toshare audit documents relevant to investigations. See In the Matter of BDO China Dahua CPACo., Ltd., et al. Exchange Act Release No. 74217 (Feb. 6, 2015), available athttp://www.sec.gov/litigation/admin/2015/34­74217.pdf. While the Commission’s settlementwith these accounting firms provides for production of audit workpapers in response toinvestigations, it does not resolve that the PCAOB is still not able to conduct in­personinspections of such firms in China.

[91] For example, the S&P 500 index has almost tripled from its low point during the financialcrisis—the S&P 500 index on January 1, 2009 was at around 790, which had risen to more than2,100 as of January 1, 2015. See Yahoo! Finance, S&P 500 data from January 1, 2005(1,180.59) to January 1, 2015 (2,110.74), available at http://finance.yahoo.com/echarts?s=%5Egspc+interactive#%7B%22range%22%3A%22max%22%2C%22scale%22%3A%22linear%22%7D (During the recent financial crisis, the S&P 500 was at 797.87 on January 1, 2009).Recent reports indicate that investor confidence is rising. See Center for Audit Quality, TheCAQ’s Eight Annual Main Street Investor Survey: Focus on Weathering Risk, p. 8, (Oct. 2014),available at http://www.thecaq.org/docs/reports­and­publications/caq2014mainstreetinvestorsurvey.pdf?sfvrsn=2/the­caq's­8th­annual­main­street­investor­survey­focus­on­weathering­the­risk (In late 2014, an all­time high of 80% ofinvestors said that they are now confident in investing in U.S. public companies.). For example,in 2014, almost 73% of investors said that they have confidence in the U.S. capital markets, anincrease from 70% in 2008 and a significant jump from a low of 61% in 2011. See id. at p. 3.According to the same report, one of the main reasons for investors’ confidence is trust in theU.S. government. See id. at p. 4. Inversely, many of those who lack confidence in the U.S.capital markets blamed a lack of leadership in government. See id. at p. 5.

[92] Over just a relatively short period, cybersecurity has become a top concern for operatingcompanies, financial institutions, law enforcement, and a host of global regulators. Forexample, the Director of the Federal Bureau of Investigation (FBI), James Comey, said lastNovember that “resources devoted to cyber­based threats will equal or even eclipse theresources devoted to non­cyber based terrorist threats.” See, Testimony of James B. Comey,Jr., Director, FBI, U.S. Department of Justice, before the Senate Committee on HomelandSecurity and Governmental Affairs (Nov. 14, 2013), available athttp://www.hsgac.senate.gov/hearings/threats­to­the­homeland. See also, Testimony of Jeh C.Johnson, Secretary, U.S. Department of Homeland Security, before the House Committee onHomeland Security (Feb. 26, 2014) (“DHS must continue efforts to address the growing cyberthreat to the private sector and the ‘.gov’ networks, illustrated by the real, pervasive, andongoing series of attacks on public and private infrastructure.”), available at

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Last modified: March 20, 2015

http://docs.house.gov/meetings/HM/HM00/20140226/101722/HHRG­113­HM00­Wstate­JohnsonJ­20140226.pdf; Testimony of Ari Baranoff, Assistant Special Agent in Charge, UnitedStates Secret Service Criminal Investigative Division, before the House Committee onHomeland Security, Subcommittee on Cybersecurity, Infrastructure Protection, and SecurityTechnologies (Apr. 16, 2014), available athttp://docs.house.gov/meetings/HM/HM08/20140416/102141/HHRG­113­HM08­Wstate­BaranoffA­20140416.pdf (“Advances in computer technology and greater access to personallyidentifiable information (PII) via the Internet have created online marketplaces fortransnational cyber criminals to share stolen information and criminal methodologies. As aresult, the Secret Service has observed a marked increase in the quality, quantity, andcomplexity of cybercrimes targeting private industry and critical infrastructure.”); TheHonorable Leon Panetta, Remarks by Secretary of Defense Leon E. Panetta to the BusinessExecutives for National Security (Oct. 11, 2012), available athttp://www.defense.gov/transcripts/transcript.aspx?transcriptid=5136 (“As director of the CIAand now Secretary of Defense, I have understood that cyber attacks are every bit as real asthe more well­known threats like terrorism, nuclear weapons proliferation and the turmoil thatwe see in the Middle East. And the cyber threats facing this country are growing.”).