SEC Strategy Targets Minor Offenders, Too

Admitting that the Securities and Exchange Commission (SEC) has resources “not nearly sufficient to the enormity and scope of the responsibility” it faces, SEC Chairman Mary Jo White outlined new “force multipliers” with which her organization is pursuing major and minor lawbreakers alike.

“One of our goals is to see that the SEC’s enforcement program is—and is perceived to be—everywhere, pursuing all types of violations of our federal securities laws, big and small,” White said in a speech at the Securities Enforcement Forum in Washington.

“Investors in our markets want to know that there is a strong cop on the beat—not just someone sitting in the station house waiting for a call but patrolling the streets and checking on things,” White said.

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That philosophy will translate to a policing approach targeting not just major securities fraudsters but those committing more minor violations, as well. White likened the approach to that adopted by former New York City Mayor Rudy Giuliani, whom she worked with while serving as the U.S. Attorney for the Southern District of New York.

“They essentially declared that no infraction was too small to be uncovered and punished,” she said. “They wanted to avoid an environment of disorder that would encourage more serious crimes to flourish.”

Taking an approach that focuses only on major offenses is not an option, White continued. This is because, if minor violations are constantly overlooked or ignored, they will go on to feed the bigger violations and, more importantly, start to foster a culture where laws are “increasingly treated as toothless guidelines.”

“Retail investors, in particular, need to be protected from unscrupulous advisers and brokers, whatever their size and the size of the violations that victimize the investor,” White said. 

The bottom-up strategy translates to four concrete changes for SEC operations, she said.

First, the SEC is expanding its field of vision by leveraging the strength of its exam program, incentivizing individuals to step forward, collaborating with regulatory colleagues, and harnessing the power of new technological capabilities.

Second, the SEC will focus on deficient gatekeepers and pursue “those who should be serving as the neighborhood watch but who fail to do their jobs.”

Third, the SEC will continue to look for “broken windows” in the markets—a term White used to describe violations that frequently go unpunished and contribute to a perception of poor regulatory oversight—to avoid breeding an environment of indifference to SEC rules.

Finally, White said that the SEC will continue to prioritize the biggest cases—pursuing and punishing major offenses by significant and high-profile market participants “to send a strong message of deterrence to the industry” and boost the confidence of investors.

A full copy of White’s October 9 address can be found here.

Small-Cap Growth Funds Ready for Rebound

Small-cap growth funds represent a potentially effective way for those with retirement saving shortfalls and concerns about improving portfolio growth to provide additional stock and sector diversification while adding only moderate volatility.

Such is the finding of a white paper issued by institutional asset management firm RidgeWorth Investments. Dubbed “The Overlooked Potential of Small Cap Growth Funds: The importance of growth investing in retirement plan portfolios,” the publication makes the case for adding small-cap growth funds as a relatively safe method for many Americans to catch up on lagging retirement savings goals.   

Report researchers pointed to recent figures released by the U.S. Department of Labor (DOL) showing that the average retiree will need as much as 85% of preretirement income to sustain his current lifestyle. According to the white paper, Americans have far too little saved to meet those needs, and what savings they do have are allocated too conservatively to make recovering the shortfall possible.  

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Chris Guinther, senior portfolio manager of the RidgeWorth Small Cap Growth Stock Fund, stressed that, despite high volatility typically associated with small-cap growth funds, they have historically offered the greatest capital appreciation over the long run.

“Small-cap companies tend to grow faster than their midsize and large counterparts because they have more potential for rapid revenue and earnings growth due to innovative products and services,” Guinther said. “The inclusion of small-cap equity in a retirement portfolio may provide more opportunity to capture the upside of the equity markets, especially when those investors stick with a consistent allocation over time.”

Guinther’s recommendations may already be taking effect, according to the white paper. Over the past few years, money has flowed toward dividend-oriented value stocks and away from small caps, but during the first half of this year, the small-cap sector experienced stronger inflows, suggesting a return to a longer-term trend favoring this asset class.

A copy of the white paper is available here

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