The Temptations of Collecting Data at the SEC

December 16, 2019

The Blog and our companion publication the Securities Industry Commentator Feed often cover the speeches of Securities and Exchange Commission Chairs and Commissioners. During the last couple of years, we have frequently cited Commissioner Hester M. Peirce, who seems to have picked up where former Commissioner Daniel Gallagher left off -- the agent provocateur at the federal regulator. 

Weighing the Value and Cost of Data

In a recent speech, Mochas, Mariners, and Morality -- Remarks before the National Economists Club (Speech by SEC Commissioner Hester M. Peirce), Commissioner Peirce admonishes that:

The temptation to collect more data only grows with the sophistication of our analytical techniques and tools.  Collecting data, however, is not free-not for us, not for the industry from which we collect it, and not for investors.  Registrants that provide the data often incur very large direct costs to produce the data in the timeframe and at the frequency we require.  They also may experience other kinds of costs if the data fall into the wrong hands. . .

That's both a trenchant and fair observation made by Peirce -- and it's about time that we discern between the "value" of various regulatory initiatives versus the "cost" of same. Indeed, the temptation of data creates a ball of confusion.

The Price of CAT. The Cost of EBS

Commissioner Peirce argues that we need to consider both the financial costs and the personal tolls of any proposed reform of our financial markets. Consider, for example, the cost of the ongoing struggle to overhaul the outdated Electronic Blue Sheets ("EBS") system and the rising price-tag attendant to implementing the Consolidated Audit Trail ("CAT"). As Peirce warns:

[T]he so-called CAT, which is not yet up and running, will collect data from brokers across the country and aggregate it in a data pool in which the SEC and other regulators can fish.  The data pool will contain all transactions in our equity and options markets.  As you can imagine, regulators and enforcement staff love such a rich reservoir, but it is not cheap-the exchanges and brokers have already incurred huge expenses to get the CAT almost ready to launch and will continue to incur costs throughout the CAT's life; if cyberthieves break in, there will be additional costs to the investors' whose data are compromised; and, not least, there is the cost of eroded liberty, as the government monitors Americans' financial transactions. 

Indeed, it has not been cheap to launch the proposed CAT; however, as recent SEC regulatory settlements underscore, it is equally costly to maintain the floundering (nearly foundered) EBS; see, for example:, which alleges, in part, that:

The Securities and Exchange Commission today announced that three broker-dealers have agreed to pay more than $6 million to settle charges for providing the SEC with incomplete and inaccurate securities trading information in required SEC productions known as "blue sheet data," which the SEC uses to carry out its enforcement and regulatory obligations, including the investigation of insider trading and other fraudulent activity. 

According to the SEC's orders, over a period of several years, Citadel Securities LLC, Natixis Securities Americas LLC, and MUFG Securities Americas Inc. each made numerous deficient blue sheet submissions containing inaccurate or missing data; incorrect order execution times that failed to adjust for time zone changes; and incorrect or missing exchange codes, transaction type identifiers, opposing broker number and contra-party identifiers.  Citadel, the largest provider of blue sheet data of the firms charged today, submitted incorrect data for nearly 80 million trades while Natixis and MUFG submitted incorrect data for approximately 150,000 trades and 650,000 trades, respectively.  These deficiencies largely stemmed from undetected coding errors.  None of the firms had adequate processes designed to validate the accuracy of its submissions., which alleges, in part, that:

The Securities and Exchange Commission today announced that Stifel, Nicolaus & Co., Inc. has agreed to pay $2.7 million and BMO Capital Markets Corp. has agreed to pay $1.95 million to settle charges for providing incomplete and inaccurate securities trading information to the SEC. Broker-dealers are required to provide the information known as "blue sheet data," which the SEC uses to carry out its enforcement and regulatory obligations, including investigations of insider trading and other fraudulent activity.

According to the SEC's orders, over a period of several years, Stifel and BMO each made numerous deficient blue sheet submissions containing missing or inaccurate data, largely due to undetected coding errors. The SEC found that Stifel failed to report data for approximately 9.8 million transactions and provided inaccurate information for approximately 1.4 million transactions. Separately, the SEC found that BMO submitted missing or incorrect data for approximately 5.4 million transactions. According to the SEC's orders, neither firm had adequate processes designed to validate the accuracy of its submissions and each willfully violated the broker-dealer books and records and reporting provisions of the federal securities laws.

Enough is Enough

Commissioner Peirce ends her speech about the cost of collecting data by sounding an alarm that "[o]nce we start down the road of collecting data, it is hard to rein ourselves in . . . we ought to think carefully about how much data is enough." How much data is enough? A fair observation, but one that prompts the equally appropriate query of  "how much fraud is enough?"  I am a libertarian by political bent, and, as such, I get the Commissioner's points -- accordingly, my riposte above is less criticism than critique. Clearly, where Commissioner Peirce and I find common ground, is in her belief that:

[O]ne way we can enlist the help of others is to do a better job at making data available for people outside the agency to analyze.  Whether it is improving the data about municipal issuers, increasing transparency about transactions in the fixed income markets, giving investors greater insight into financial institutions' balance sheets, or ensuring that brokers' customers can get information about how their orders have been executed, more data can be a powerful tool for market participants.  Armed with the data, market participants are able to make better decisions.  Even for some functions that are often found in regulatory hands, outside help can be beneficial. 2

I have been a critic of post-financial crisis regulation that looks to regulators alone to identify and solve problems; no offense to any government economists in the audience, but lots of people working independently are better at identifying problems and generating solutions than a small group of regulators holed up in musty regulatory agencies in Washington, D.C.  An important question for both lawyers and economists working in regulatory agencies is:  How can we enlist the help of people outside of government in regulating the activities we are responsible for overseeing?
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Footnote 2: Our whistleblower program is an example of how important such outside help can be.  See, e.g., Report Suspected Securities Fraud or Wrongdoing, (last visited Dec. 12, 2019).  See also Marcos López de Prado, Testimony before the Task Force on Artificial Intelligence of the House Committee on Financial Services (Dec. 6, 2019), (suggesting that outside data scientists could be enlisted to unravel discrete events like the Flash Crash).

Overhaul the SEC's Whistleblower Program

In answering Commissioner Peirce's question about how the SEC can enlist outsiders to help better regulate Wall Street, among my first responses is that the SEC must overhaul -- profoundly -- its Whistleblower program. Unquestionably, whistleblowers have proven to be a treasure trove of tips and serve as a formidable early-warning system against regulatory misconduct in the industry and the marketplace. Unfortunately, the SEC's interaction with these "people outside of government" has often been one of dismissiveness bordering on hostility. Sadly, the federal regulator displays an institutional bias by which whistleblowers are seen as criminal defendants or respondents in an administrative proceeding, in contradistinction to their roles as (to use Peirce's own words) "market participants" who are "working independently" at "identifying problems and generating solutions" beyond the confines of "musty regulatory agencies." See, for example:

"SEC Whistleblower Program Is A Black Hole Of Despair" ( Blog, April 9, 2015).

Two New York Men Charged with Manipulating Publicly Traded Stock (DOJ Release)

Two Florida Men Facing Federal Indictment in Maryland for Allegedly Scamming Elderly Victims of More Than $1.5 Million / Allegedly Collected Tens of Thousands of Dollars in Cash Payments by Falsely Telling the Victims that a Relative-Typically a Grandchild-Needed Money for Bail, Legal Fees, and Other Expense (DOJ Release)

Individual Found Guilty Of Operating "Ponzi" Scheme, Securities And Bank Fraud / Forfeiture allegation of $2,900,000 dollars (DOJ Release)

The Temptations of Collecting Data at the SEC ( Blog)

FINRA Censures and Fines Jefferies Execution Services Over Layering/Spoofing Supervision. In the Matter of Jefferies Execution Services, Inc. n/k/a Jefferies LLC, Respondent (FINRA AWC)

Report from FINRA Board of Governors Meeting - December 2019 / Board Approves Rule Proposals, Reaffirms Financial Guiding Principles (FINRA Release)