Top Securities and Exchange Commission officials who oversee Wall Street's most complex financial instruments are worried that banks may be trying to game regulators on capital rules by concealing asset risks.

New rules recently adopted by federal regulators are designed to prevent banks from holding large portfolios of exotic or distressed assets that would be difficult to sell in a liquidity crunch.

But Michael Osnato, an enforcement chief at the SEC, said he fears banks faced with higher capital charges are only appearing to shed risk on sales tied to unwanted assets.

"Given the size of their portfolios and their ingenuity, that is a real issue for us," Osnato said in a recent interview.

The largest and most sophisticated banks may be using synthetic structured products sold to hedge funds and other risk-takers, or to less sophisticated buyers like small banks, to shift around asset risk. Certain sales may appear to transfer risk but in actuality do not do so, resulting in assets that receive better capital treatment than they deserve. That would be a significant problem, Osnato said.

"We are very interested in public banks' regulatory capital and Basel III compliance, and how they structure their risks and move assets around in order to drive down risk weightings to improve their capital ratios," he said.

Osnato's investigators fined Bank of America $7.7 million three weeks ago for overstating its capital by $4 billion since 2009. The Charlotte-based bank self-reported its error in April after discovering that losses on structured notes acquired from Merrill Lynch five years ago were actually greater than it realized. The Federal Reserve Board demanded the bank resubmit its annual capital plan, pushing back a planned dividend raise and causing the bank to abandon plans to repurchase $4 billion in common shares.

Outsiders said the case highlights how the SEC is policing banks over fraud and accounting-related crimes.

"The Bank of America case shows that their tolerance level is going down," said Chip MacDonald, a partner at law firm Jones Day and based in Atlanta.

The SEC may remain underfunded given battles over its budget in Washington, but it is actively recruiting more brainpower to tackle complex product markets. Reid Muoio, a deputy chief in the agency's enforcement division, said he remembers when the SEC first began unraveling collateralized debt obligations. "We were starting from zero," said Muoio.

Times have changed though, he said. Muoio's unit is now partnered with experts across the industry in their effort to not be caught so far behind. Those partnerships will be a "game-changer," he said.

Osnato, who has worked on a string of large post-crisis cases, including the SEC's response to JPMorgan Chase's London Whale episode, said the agency is "absolutely moving away" from the crisis.

"Only a handful of cases have not yet been resolved. Our unit is pivoting," he said.

Part of the pivot includes prioritizing a case-building strategy, rather than taking action on Wall Street's bad behavior one wrongdoing at a time. The thinking is that if one individual or firm is engaged in a certain kind of misconduct, the practice is probably endemic.

A broad strategy means gathering piles of evidence, which makes it easier for enforcement officers to discover leads at other firms.

An SEC senior examiner based in New York explained if investigators score a hit, they are likely to search for the same kind of misconduct until they can build a bigger case. It's a similar approach used to build cases against organized crime in New York, said the examiner, who was not authorized to speak publicly.

But there are admittedly weaknesses to that approach. Pursuing large cases masks what misconduct enforcement agents simply are unaware of, and it gives the false impression to some that smaller and isolated violations are more easily overlooked, the examiner said.

"The SEC has been seen acting like the Politburo. We hide behind these walls, and we only strike out when we want to prosecute a case we know we can win," the examiner said.

Muoio said the broad approach is effective, but among top brass, there appear to be internal disagreements over a unified enforcement approach, too. SEC Chair Mary Jo White has suggested that prioritizing may be a mistake, arguing that small violations must go punished as swiftly as larger ones. Commissioner Mike Piwowar, a Republican, believes that view is faulty.

"If every rule is a priority, no rule is a priority," Piwowar said at an open meeting last week in Washington.

Osnato's unit includes a small force of 40 lawyers. They review leads across multiple markets where trillions of dollars' worth of complex financial instruments are bought and sold. Currently, his enforcers are combing the market for collateralized loan obligations, which is on track to reach analysts' now-revised forecasts of $110 billion in new securities this year, having a month ago shattered a pre-crisis issuance record. Those securities are vehicles for leveraged loans, where regulators are highly concerned over growing froth and weaker deal protections. Bank regulators are expected to release new findings on that market soon in their annual Shared National Credit review.

"We are policing sales, structuring, ratings and trading. We are looking at 'fact-patterns,' rather than a one-off basis… We are looking to cast a net on fraud all at once, rather than just a specific case," Osnato said.

The SEC's enforcement actions have grown larger this year under White, and they have expanded also in scope and number. So far, the regulator has filed 755 enforcement actions, more than the 686 actions filed throughout 2013. It has extracted some $4.16 billion in penalties and so-called disgorgements year-to-date, according to public records. That is also more than last year's sum.

Bigger is definitely the signal the SEC is sending, according to Phillips & Cohen LLP attorney Erika Kelton. The SEC last month announced the largest ever whistleblower payout in its history. Kelton helped negotiate the record $30 million check that the SEC awarded her client.

"I'm very confident there will be even larger cases moving ahead, but they are not only focused on large ones. Others, they're not so big."

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