SEC Commissioner’s Remarks on Enforcement Issues Are Worth a Read

On October 14, 2104, SEC Commissioner Michael Piwowar gave a speech to SEC enforcement practitioners that is worth reading.  Commissioner Piwowar is an economist and his views on the role of SEC enforcement in achieving the SEC’s overall goals reflect that perspective.

The speech is included as a link in our SEC Enforcement section, and can be read here.  Here are a few excerpts:

In administering the securities laws, we seek behavioral conformity by all market participants with a particular set of expectations and norms.  Regulatory enforcement is an important tool in achieving this objective.  But our ultimate goal is not achieving regulatory compliance. Our goal is to have a healthy, robust, and resilient capital market ; hence, our mission to protect investors, maintain fair, orderly, and efficient trading markets, and facilitate capital formation.  It is important to recognize that regulatory compliance is not a final objective in and of itself, but rather a tool to assist in achieving our larger goal.  We must be cognizant to avoid situations in which this tool may in fact impede the achievement of our overall objective….

…  If every rule is a priority, then no rule is a priority.  If you create an environment in which regulatory compliance is the most important objective for market participants, then we will have lost sight of the underlying purpose for having regulation in the first place.  Rather than enabling vital and important economic activity, we will have unnecessarily shackled it – and our country will be far worse off from the absence of such activity….

…  Decisions on enforcement priorities and the use of investigative discretion must complement these efforts, rather than serve as an independent source of policy.  That is why the thoughtful application of investigative discretion in an enforcement program is a powerful tool.  These decisions, by and large, reside with the staff, so it is important that the Commission’s senior leadership provide appropriate guidance so that the nearly 1,300 employees in the Division of Enforcement can use our enforcement authority to achieve desired outcomes….

…  I oppose the use by the Commission of enforcement measures as an alternative to rulemaking under the Administrative Procedure Act. The Administrative Procedure Act, with its requirements for the government to engage in notice and comment rulemaking, implements key due process protections.  I understand the frustrations of the rulemaking process.  It takes a significant amount of time, effort, and bandwidth for the Commission to propose and adopt rules under the Administrative Procedure Act.  Nevertheless, I have significant concerns when Commission orders – especially in settled administrative actions – create new interpretations of the laws or regulations or impose new regulatory requirements.  When Commission actions create such results, we fail in our duty to uphold due process….

…  Determining overall effectiveness of our enforcement program by the amount of monetary sanctions, such as disgorgement and civil penalties, ordered against wrongdoers is also a poor metric.  I recognize that a large monetary sanction may be more likely to attract attention.  Thus, properly utilized, these types of sanctions can, in addition to removing the ill-gotten gains from the hands of wrongdoers, deter others from committing such violations.  But if there is a perception among our staff that cases with large monetary sanctions are key to recognition and promotion, then there will be, at minimum, a subconscious shift of efforts to pursue those types of cases….

…  It would be a mistake to put too much emphasis on aggregate dollars as the primary measure of investor harm.  For example, a financial reporting fraud by a large company may result in the loss of billions of dollars of market capitalization and affect, directly or indirectly, millions of investors.  But the risk to any single investor of financial reporting fraud by any single issuer can be mitigated by holding a diversified portfolio of securities.  So while investors are injured by such a fraud, individually, they may only incur a relatively small amount of harm as a percentage of their investments.  On the other hand, a dishonest or corrupt broker, investment adviser, or promoter might cause an investor to lose all of his or her investments.  Even if it is a relatively small amount of dollars, it might account for 100% of that person’s holdings.  So we must ensure that our efforts appropriately focus on these types of frauds as well….

…  corporate penalty due process concerns  have heightened since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).  As this audience is well aware, one of the provisions of the Dodd-Frank Act allows the Commission to impose a civil penalty on any person who violates, or causes a violation, of the securities laws or regulations in an administrative proceeding.  Prior to the Dodd-Frank Act, the Commission only had the authority to seek monetary penalties in administrative proceedings against regulated entities and would have needed to file an action before an Article III federal court to obtain a monetary penalty against any other person….

Thank goodness some folks over at Union Station are thinking about the proper role of enforcement in achieving the SEC’s overall “mission to protect investors, maintain fair, orderly, and efficient trading markets, and facilitate capital formation.”

Straight Arrow

October 15, 2014