SEC Commissioner Piwowar’s Remarks on Enforcement and Rulemaking Issues

SEC Commissioner Michael Piwowar gave a speech focusing on the SEC’s enforcement as well as its rulemaking programs. On the subject of enforcement, Commissioner Piwowar first discussed informal and formal orders of investigation. He explained that informal investigations do not need SEC approval, but generally rely on voluntary information. Formal investigations, on the other hand, need SEC approval to authorize members of the staff to conduct investigations, including the administration of oaths and affirmations and the power to subpoena. Commissioner Piwowar went on to explain that, in 2009, the SEC had delegated to Division of Enforcement the authority to issue formal orders of investigation, which had in turn sub-delegated that authority to a good number of individual supervisors (whom he implied were not that senior). In light of this, he said he raised concerns as to whether this process is sufficient for the SEC to exercise an appropriate level of oversight of the formal order process, particularly in light of the very significant injury that an individual may suffer from being the subject of an investigation, even if the investigation is eventually dropped or the individual is exonerated.

Commissioner Piwowar went on to make observations regarding the issue of retroactivity, which he described as pertaining to cases involving conduct that occurred before changes in a law or regulation governing the legality of the conduct or remedies were available. Commissioner Piwowar stated that, in many cases, the SEC applies the relevant standard at the time of conduct. However, Commissioner Piwowar explained, the SEC has taken a different approach when imposing collateral bars, which prohibit a person from associating in capacities other than those in which the defendant was associated at the time of the violative conduct. Commissioner Piwowar expressed his concern with this standard, stating that he generally disfavored the application of retroactive collateral bars, as he viewed them as inherently unfair.

Finally, Commissioner Piwowar discussed the importance and necessity of high-quality economic analysis to rulemaking. This analysis, he explains, helps to ensure that decisions to propose and adopt rules are informed by the best available information about a rule’s likely economic consequences. This allows the SEC “to meaningfully compare the proposed action with reasonable alternatives, including the alternative of taking no action.” In addition, he voiced his strong support for Dodd-Frank Section 912 (“Clarification of Authority of the Commission to Engage in Investor Testing”), which clarifies the SEC’s authority to obtain certain data and information without needing to be approved under the Paperwork Reduction Act. Commissioner Piwowar stated that the disclosure of empirical data should inform the rulemaking process, which should not rely exclusively on the beliefs and opinions expressed in comment letters. He explained that the empirical data methods should be used regarding the rulemaking proposal for Reg D offerings in order to produce a more effective rule for investors and customers.

Lofchie Comment: This is a serious speech which embodies the values of fairness and economic rationality that market participants want to see in their regulators. It is encouraging that a regulator advocates for caution in the bringing of formal orders of investigation, recognizing that they can be devastating for the individual who is the subject of the investigation. Most market participants support the notion that, to the extent feasible, rules should be adopted on the basis of considered empirical support. SEC Commissioner Piwowar’s provides a model of thoughtful financial rulemaking going forward.

See: Commissioner Piwowar’s Speech.