In a public statement, SEC Commissioner Luis A. Aguilar called for “sufficiently detailed facts” in orders by the SEC (“Commission Orders”) to ensure that “there is no doubt as to why the Commission brought an enforcement action, why the respondent deserved to be sanctioned, and why the Commission imposed the sanctions it did.” Specifically, Commissioner Aguilar requested greater clarity concerning federal securities law violations by Chief Compliance Officers (“CCOs”) and the resulting enforcement actions. More clarity, he said, will allow the “larger CCO community” to “take notice and try to learn as much as possible about the behavior that resulted in the Commission’s enforcement action.”
Commissioner Aguilar noted that Commission Orders currently “need only include the basic facts necessary to support the charges alleged,” and that the facts behind the enforcement actions are “oftentimes negotiated” during settlement.
Commissioner Aguilar concluded by saying that “clear guidance” in Commission Orders enables the SEC to “send the right message, helps maximize the deterrent effect of enforcement actions, and, just as important, informs others as to future behavior.”
Lofchie Comment: The Commissioner makes a number of good points about the inherent tension in enforcement actions. On the one hand, actions help to guide the conduct of those who want to understand the acceptable limits of behavior; on the other, their terms are subject to negotiations that are limited to the SEC and the party who is accused of wrongdoing. In some cases, the accused party may wish to soften the effect of the statement of its wrongdoing in order to minimize reputational damage. Thus, it might be willing to bargain for a less damaging description of the facts in exchange for a settlement. That said, we also note instances in which a party may be indifferent to what is said; in which its only interest in a settlement negotiation is in reducing the amount of the direct sanctions against it. In that case, the SEC enforcement staff may have significant freedom to describe the case as it likes, which may result in the coloring of the facts by enforcement staff to justify the sanction or to change the law through its statement of the reasons for bringing the enforcement action (such enforcement actions must be approved by the SEC; they do not go through the same review process as actual rulemakings). In short, although the statement of facts in an enforcement action inherently is an uncertain guide to what actually happened, it is also a necessary (but not ideal) substitute for actual rulemaking.
While it will never be possible to make silk purses from statements of facts in enforcement actions, Commissioner Aguilar does a public service by calling attention to their significance.