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PRESENTATION ON THE CARIBBEAN LATIN AMERICAN SECURITIES ENFORCEMENT AND MARKET OVERSIGHT

TRAINING PROGRAMMEMAY 23 – 27, 2005 - BARBADOS

By: Virginia MappGeneral Manager

The Securities CommissionBarbados

The Programme

• The Latin American and Caribbean Securities Enforcement and Market Oversight Training Programme

• Hosted by the Securities Commission of Barbados (SCB) and the US Securities and Exchange Commission (US SEC)

• Sponsored by the Caribbean Regional Technical Assistance Centre (CARTAC) and the U.S. Agency for International Development (USAID)

• Held at the Sherbourne Conference Centre, Barbados, Between 23 – 27 May 2005.

• The programme consisted of a number of presentations on various aspects of enforcement and oversight from resource persons retained by the US SEC.

• Provision was made for discussion of case studies drafted by the US SEC and the presentation of enforcement problem cases to the participants by individual speakers.

Speakers

• Z. Scott Birdwell - Senior Counsel, US SEC Office of International Affairs

• Kurt Gresenz - Branch Chief, US SEC Division of Enforcement

• Michael J. Kulczak - Director, Capital Markets Development & Market

• Regulation - NASD International• Robert Strahota - Assistant Director, US SEC

Office of International Affairs• John Walsh - Chief Counsel, US SEC Office of

Compliance, Inspections & Examinations

The Participants

• The programme targeted enforcement officers of the regulatory supervision agencies of the securities markets of Latin American and Caribbean countries.

• 36 persons attended with four staff members and one Commissioner from the Securities Commission of Barbados. These were:-

• Ms. Cherie Jones - Legal Counsel & Corporate Secretary• Mr. Frank Hunte - Accounting Officer• Ms. Cheryl Wood - Research & Compliance Officer• Mr. Brodrick Bourne - IT Officer• Commissioner Lesley Walcott • There was strong representation from a number of other local

regulatory authorities e.g. Office of the Director of Public Prosecutions, the Office of the Supervisor of Insurance, the Central Bank of Barbados, the Financial Intelligence Unit and the Attorney General’s Chambers, the Registrar of Corporate Affairs & Intellectual Property.

Areas of Training

• Presentations were made by the speakers on a variety of topics including the following topics relevant to the role and function of a regulator:

– Investigative Techniques and Issues– Testimony Techniques & Procedures– Investigating Insider Trading– International Cooperation in Securities Regulation– Money Laundering & the Securities Industry– Self Regulation and SRO Examinations and– Conduct Regulation for Securities Regulators & SRO’s

• The programme also included group discussion on financial fraud cases and of each of a number of problem cases submitted by participants.

• The US SEC printed a booklet containing further reading on all of topics presented and a diskette containing many of the presentations made by speakers.

Investigative Techniques and Issues

• It was noted that:-• Investigations by the US SEC may be triggered by random US

SEC inspections, referrals from SRO’s, review of filings or public complaints;

• The US SEC considers investigations private and in this way tries to protect the individual or entity under investigation. Once the Commission staff have findings to suggest wrongdoing, a recommendation is made to the Commission for enforcement action;

• Most investigations start as ‘informal’ or ‘voluntary’ exercises where the Commission has no power to compel testimony. A formal investigation requires a formal Commission Order which empowers the Commission to compel evidence and testimony.

Testimony Techniques & Procedures

• Points to note:-

1. Facts gathered from witnesses should be ordered for easy review e.g in chronological order

2. Facts should be reviewed against the investigator’s theory of the case;

3. When interviewing witnesses, it is best to allow them to tell the story and not to lead them down any particular path.

Investigating Insider Trading

• There is no statutory definition of ‘insider trading’ but it is generally understood to be associated with purchasing or selling securities while in possession of material non-public information concerning such securities or tipping such information.

• It was interesting to note that the US SEC generally determines what is ‘material’ by the actual impact of the information on the market and not the impact which it is expected to have so that information which unexpectedly does not impact the market, is not considered ‘material’.

• There are a number of investigative steps which the US SEC follows – analyze trading records– obtain chronologies, itineraries and other documents– conduct interviews – analyze monthly account statements– analyze telephone records– analyze other documents– chart connections between traders and insiders– take testimony– follow the money– create and update databases– search master databases– interact with others

International cooperation in Securities Regulation

• The US SEC emphasized that the cross-border nature of global securities markets and the increasing sophistication of financial products and financial fraud, required a global cooperative approach to regulation, which it actively pursues through information sharing both formally and informally and pursues additional avenues for cross-border regulation;

• In this regard, the US SEC is a signatory to the IOSCO Multilateral MOU as well as several bilateral Memoranda of Understanding with other regulators but uses informal contacts in other regulatory agencies to gain information as well;

• Special issues are encountered in relation to cross-border asset freezes and asset repatriation, which must often be pursued through Mutual Legal Assistance Treaties (MLAT’s) although these can take a considerable amount of time. The US SEC also retains counsel in other jurisdictions to seek recognition of US judgments or to file suit in foreign territories on its behalf.

Money Laundering & The Securities Industry

• The presenter on this topic emphasized that very often the perpetrators of securities fraud seek to launder the money gained by their fraudulent activities and that persons who carry out other fraud also seek to use the securities market to launder money;

• In this regard it was noted that the National Association of Securities Dealers and other SRO’s have

– very strict rules relating to anti-money laundering initiatives. – Broker/Dealers are subject to anti-money laundering laws and– must develop internal policies and procedures to ensure AML

compliance including requirements such as the appointment of compliance officers,

– the establishment of on-going employee training programmes on AML techniques for filing suspicious activity reports and the monitoring of accounts used for suspicious activity.

Self Regulation and SRO Examinations

• The US SEC often engages in ‘double inspection’ i.e. they inspect a market actor which has already been inspected by the relevant SRO, to assist the US SEC in determining whether the SRO is properly carrying out its regulatory oversight function for its members;

• Prior to conducting the examination, which may be without notice, the US SEC determines the scope and purpose of the examination and determines the types of transactions to be reviewed, this assists in the preparation of a materials list to be requested of the SRO.

Advantages of Self Regulation

• Several advantages of a system of self-regulation were noted including– that the interim layer of regulation ensures close oversight of

certain market actors without the SEC having to expend considerable resources to get this

– because SRO’s are governed to a large extent by their own rules, there is greater flexibility of SRO response to regulatory needs than there is for the US SEC which administers laws which are more difficult to change

– a main disadvantage of this system is the conflict between the commercial interests of the SRO and its regulatory responsibilities. In this regard, the oversight by the US SEC is helpful, especially as it relates to their authority to regulate market actors directly where it finds that the SRO fails to take appropriate action to enforce its rules.

Disadvantage of Self Regulation

• Main disadvantage of SRO system is the conflict between the commercial interests of the SRO and its regulatory responsibilities. In this regard, the oversight by the US SEC is helpful, especially as it relates to their authority to regulate market actors directly where it finds that the SRO fails to take appropriate action to enforce its rules.

Conduct Regulation for Securities Regulators

• The US SEC upholds high standards of conduct for employees and has made provision in its organizational chart for a position of ‘Ethics Counsel’ to advise employees and Commissioners on ethical matters;

• The systems of ethics at the SEC depends on a number of foundation principles including that:-

– Public office is a public trust– There should be no partiality or favoritism in the public service

application of regulatory principles– The maxim that ‘justice must not only be done.

• The hallmarks of successful ethics regulatory systems include a written code, leadership by example and fair and vigorous enforcement.

Benefit of Programme

• In her report the Commission’s Legal Counsel found participation in the programme to be of great benefit in performing her daily functions at the Commission, especially in relation to the preparation and conduct of enforcement actions and the associated investigative techniques and procedures.

• The only area in which she felt the programme could have been improved related to the practical aspects. In that regard, she was of the view that participants could have benefited from additional sessions involving enforcement scenarios and a step-by-step simulation of how regulators should respond to a given set of facts. As regional regulators, and certainly in Barbados, we have not been exposed to as many and as sophisticated cases as our North American counterparts and additional practical sessions would have given us the benefit of their experience in this regard and the opportunity to explore the practical application of many of the theoretical aspects of the programme.