SEC Aims To Streamline Complaint Process


Wall Street Journal

November 1, 2010

Technology to electronically catalog all tips and complaints about alleged securities violations is slated to be up and running by year’s end, the Securities and Exchange Commission’s enforcement chief said.

The launch is a step in the agency’s efforts to avoid bottlenecks and duplication in the handling of complaints, which traditionally have been fielded by individual SEC offices and filed there. Complicating matters is the variety of forms in which such complaints come-mail, phone calls, emails and interviews.

“This process is going to ensure that it’s all transferred into a structured format so that it can be more easily searched and analyzed,” Robert Khuzami, director of enforcement, said in an interview.

“We will have all of it in one place, searchable, which will do a lot for us in the long run,” he said.

The system will be installed in two phases. The first will improve the agency’s ability to track and search the information it receives, Mr. Khuzami said. In a second phase, which the agency hopes to complete in 2011, more tools for analyzing the data will be put in place.

The system makes it easier to file complaints online, using a tool that prompts the person making the complaint to answer certain questions, depending on the allegation. Staff who receive telephone complaints will use a similar program that will prompt them to ask callers the same questions. SEC employees will key in handwritten complaints using the same format. This will standardize the information available to staff everywhere.

An SEC spokesman, in a follow-up interview, declined to provide the name of the contractor developing the software or its cost.

A better system for sharing tips could perhaps have helped the SEC avert its failure to uncover Bernard Madoff’s multibillion-dollar Ponzi scheme. Two SEC offices, in at least one instance, separately looked into Mr. Madoff’s operation and were unaware of the other’s efforts.

They began their investigations after receiving complaints from different sources. The SEC also received, and discounted, numerous tips and documents about Mr. Madoff from Harry Markopolos, an independent fraud investigator, for nearly 10 years.

To explain the benefits of the new system, Mr. Khuzami used the example of a hypothetical law firm that becomes the target of multiple complaints related to fraudulent offerings. This could mean the lawyers are writing improper opinion letters that issuers can use to avoid registering the offering with the SEC, he said, and agents would be able to more quickly identify the firm as suspicious.

Bernard Madoff

The technology also will help the SEC to prioritize information, so officials know what to act on first, he said. Knowing that a particular law firm is suspect, for example, can help the SEC prioritize the next complaint in which that same law firm is involved, he said.

“It’s to allow us to better analyze and prioritize our resources in a context of risk, so that we can better figure out where to put our efforts first,” he said.

The SEC’s system also could be searched for specific types of high-risk complaints, such as those filed by an auditor that left a firm within the past year.

Improving the SEC’s handling of whistle-blower complaints has been a priority for its chairman, Mary Schapiro since becoming head of the agency in 2009. Ms. Schapiro took command as investors and regulators were absorbing their shock over Mr. Madoff’s scheme and pledged to improve operations.

Some information also is flowing into the SEC because of a new program established by the Dodd-Frank financial-regulatory overhaul law that compensates some whistle-blowers. People who provide “original information” about frauds that lead to at least $1 million in sanctions could net as much as 30% of the penalties and recovered funds collected by the SEC. The program guarantees at least 10% of the awards collected, a calculation that could lead to multimillion-dollar payouts.

Looking at that information in new ways also could help. “We’ve just brought a lot more vigor and discipline into the process,” Mr. Khuzami said.