SEC Commissioner Explains Approach to Enforcement Actions

SEC Commissioner Hester M. Peirce explained her reasoning for often voting against enforcement recommendations, arguing that although enforcement is an important tool for the SEC, it should not act as an enforcement agency.

In remarks at the 50th Annual Rocky Mountain Securities Conference, Ms. Peirce outlined three considerations guiding her approach to enforcement actions. First, Ms. Peirce asserted that the SEC should use the other tools at its disposal before using enforcement resources, especially in cases of minor violations. According to Ms. Peirce, the “broken-windows approach,” in which minor violations are vigorously pursued, does not serve the SEC’s goals or purpose. She argued that the Office of Compliance Inspections and Examination (“OCIE”) should prioritize keeping an open, productive relationship with private parties, and avoid using enforcement to settle matters. According to Ms. Peirce, the “broken-windows approach” causes negative effects, such as:

  • diverting the SEC’s limited resources away from high-priority issues;
  • discouraging regulated entities from contacting the SEC for help concerning compliance;
  • rewarding SEC staff for the number of cases brought rather than the quality of the cases;
  • increasing an unhealthy capital formation environment by dissuading companies from considering an IPO; and
  • imposing “unwarranted costs on companies and individuals.”

Ms. Peirce advocated the use of other resources including the OCIE, investor education and advocacy, the PAUSE program, guidance and rulemaking instead of enforcement.

Second, Ms. Peirce stated that due process considerations should inform the SEC’s enforcement approach. Ms. Peirce said she witnessed: (i) attempts to bypass the Administrative Procedure Act by using the enforcement process to make policy, (ii) rushed settlements that set legal precedents, (iii) unnecessarily extended investigations and (iv) attempts to encourage people to waive attorney-client privilege.

Third, Ms. Peirce warned against the unintended consequences of enforcement actions, particularly as they relate to the work of chief compliance officers (“CCOs”). According to Ms. Peirce, imposing liability on CCOs dissuades people from taking on those roles and places unnecessary blame on them. Additionally, Ms. Peirce criticized the use of civil penalties against corporations, which are often paid by the company’s shareholders instead of by responsible actors.

Lofchie Comment: SEC Commissioner Peirce’s remarks should be the starting point for a real dialogue about the future of the SEC.

Section 2(b) of the Securities Act provides, “Whenever . . . the Commission is engaged in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.”

The SEC ought to be considering whether its rules, and the way that it enforces those rules, make for a good economy. Too often it seems that the SEC’s only measures of success are the dollar amount of the fines that it collects and the number of sanctioned entities. This is not to disparage the importance of enforcement, but if the SEC’s only measure of effectiveness is enforcement, then Congress should create a new regulator to focus on capital formation and the economy. (In this way, Commissioner Peirce’s remarks have relevance well beyond the bounds of the SEC.)

Ms. Peirce pushes us to consider fundamental questions about the purpose of the Commission, and how far afield it has strayed from that purpose. It’s about time.