SEC Commissioner Hester Peirce called on the agency to “resist” the distraction of focusing on achieving numerical and penalty amount targets with respect to enforcement actions.
In remarks at the Annual Securities Litigation and Regulatory Enforcement Seminar, Ms. Peirce contended that the number of initiated or settled enforcement cases and penalty amounts is a “meaningless measure of the effectiveness of the enforcement program.” She stated that analyzing the different types of cases brought by the SEC would be a better indicator of the success of the agency’s enforcement work.
Ms. Peirce further advised the SEC to consider the entirety of the case – rather than just the potential penalty amount – when deciding on whether to divert resources to a specific enforcement action. According to Ms. Peirce, a case with a smaller penalty amount may set a more meaningful precedent than one with a larger penalty amount.
“Halting a Ponzi scheme or an affinity fraud that touched the lives of retail investors might be more meaningful than halting a practice in which one large financial institution gives a bad deal to another.”
Additionally, Ms. Peirce highlighted several issues the SEC should ask for help in pursuing. In particular, she suggested that the SEC:
- revisit SEC rules that are implementing antifraud statutes to ensure the rules are accomplishing their intended mission;
- consider rulemaking to alter the transfer agent rules and reporting requirements; and
- help public companies build more effective Foreign Corrupt Practices Act programs.
Ms. Peirce also expressed concern regarding recent enforcement actions targeting suspicious activity report (“SAR”) filing errors, especially when a firm has an operational SAR program in place. According to Ms. Peirce, the recent SAR enforcement actions may cause (i) an increase in quantity, rather than quality, of SAR filings or (ii) legitimate firms to exit the “microcap space,” forcing investors to rely on “unsavory firms” instead.
Lofchie Comment: Commissioner Pierce makes a number of important points.
The SEC has treated its imposition of financial penalties as if the agency were a corporation that was under pressure to announce greater profits each year. The SEC’s mission is larger than that; it is, or at least should be, to create a capital market system that functions well and serves the economy. Catching and punishing bad actors is part of that, but a limited part. Rather than boast of fine amounts, the SEC would do better to consider the decrease in the number of initial public offerings.
Commissioner Pierce is absolutely right to point out that sanctioning firms for operational issues in filing SARs, or in other anti-money laundering procedures, is driving legitimate firms out of a variety of lawful activities.