SEC Commissioner Luis A. Aguilar delivered a speech at the 20th Annual Securities Litigation and Regulatory Enforcement Seminar regarding recent SEC initiatives to strengthen the enforcement program.
Commissioner Aguilar began by pointing out that much of the reputation of the SEC is based on the performance of the Division of Enforcement. Therefore, Aguilar said, ever since he first took office, he has focused on strengthening the enforcement program, leading to his nickname of “The Enforcement Commissioner.”
Continuing to speak about his work on enforcement, Aguilar noted developments in four areas: the factors that should drive the imposition of corporate penalties, holding SROs accountable when they fail to meet regulatory obligations, requiring admissions of fault in settlements, and using data and risk-based analytics to combat fraud.
Commissioner Aguilar called the SEC’s 2006 Statement Concerning Financial Penalties (“Penalty Statement”) “flawed” due to its focus on corporate benefit as the dominant factor in assessing penalties rather than the misconduct itself. Aguilar stated that he is pleased, however, that it has recently been made clear the Penalty Statement is not binding. He proposes to publish a new Penalty Statement that “appropriately focuses on deterring misconduct” by concentrating on:
- the nature of the misconduct and the violation, or the degree of harm to investors, markets, and innocent parties, and the level of intent of the wrongdoer;
- the nature of the defendant, its governance and its other conduct prior to the violation;
- self-reporting, cooperation, and remediation; and
- equitable concerns and effects on parties other than the corporation.
Aguilar stated further that he expects the SEC to take a tougher stance against SROs that have inherent conflicts of interest between their regulatory responsibilities and their business functions. He highlighted recent penalties that the SEC has imposed against NASDAQ and the Chicago Board Options Exchange, and said he is supportive of holding SROs accountable for failing to fulfill regulatory obligations. Aguilar also noted the need for the SEC to ensure that the technology running capital markets functions properly, and urged the SEC to adopt a stronger rule on technology than Regulation SCI.
Commissioner Aguilar went on to state that, after years of settling cases on a “neither admit nor deny basis,” the SEC will now require public admissions of wrongdoing in certain settlements. According to Aguilar, the SEC will require admissions when it is in the public interest to do so, where a large number of investors were harmed or put at risk, or where defendants engage in “egregious misconduct or unlawfully obstruct the Commission’s investigative process.” Aguilar stated that he believes this policy will enhance the deterrence message of settlements.
Finally, Aguilar concluded by speaking about new SEC initiatives which focus on using available data to combat fraud, including risk-based initiatives to identify fraud, and an enhanced approach to detect financial fraud. He stated that the Division of Economic Risk and Analysis (“DERA”) and the Office of Compliance Inspections and Examinations (“OCIE”), along with the Division of Enforcement, have been working to use data analytics to identify suspicious performance returns and other potential misconduct. Aguilar also noted the Division of Enforcement’s initiative, the Financial Reporting and Audit Task Force, which is “a renewed effort to combat financial fraud.”
There is no doubt that Commissioner Aguilar is correct in his observation: “It is no exaggeration to say that the SEC’s reputation is largely based on how well, or poorly, the Division of Enforcement performs.” That said, U.S. financial regulators should be focused on the mission of promulgating sensible and clear rules that can be readily understood.