SEC Commissioner Aguilar Questions Oversight of SROs and Settlement Admissions

October 31, 2013

On October 25, 2013, Securities and Exchange Commission ("SEC") Commissioner Luis A. Aguilar delivered a speech at the 20th Annual Securities Litigation and Regulatory Enforcement Seminar in Atlanta, GA titled: "A Stronger Enforcement Program to Enhance Investor Protection." Among his remarks, Commissioner Aguilar commented on two issues that BrokeAndBroker Blog has frequently cited as challenges for the SEC to better address: 1. the self regulation of Wall Street, and 2. regulatory settlements without admission of liability.  I commend the commissioner's full speech to you, and I highlight the two cited topics below.

SEC Oversight of Self Regulatory Organizations

An excerpt from Commissioner Aguilar's speech:

Enforcement of SRO Responsibilities

As to future enforcement priorities, I expect that the Commission will continue to take a tougher stance against SROs that do not faithfully discharge their primary duties as regulators of the marketplace. SROs play a vital role in our markets, but it has been well-recognized that SROs have had inherent conflicts of interest between their regulatory responsibilities and their business functions - and, over the years, we have seen too many instances of SROs favoring their business interests over their regulatory obligations.

The Commission must be prepared to exercise fully its oversight over SROs. To that end, I have been supportive of the Commission's renewed focus on holding SROs accountable for failing to fulfill their legal and regulatory obligations - that is particularly true of stock and option exchanges. [29] It may surprise you to know that prior to September 2012, when we imposed a $5 million penalty against the New York Stock Exchange,[30] the Commission had never imposed a financial penalty against an exchange. Since then, we have imposed a $10 million penalty against NASDAQ[31] and a $6 million penalty against the Chicago Board Options Exchange.[32]

Exchanges fulfill an important role in our capital markets, and their failures undermine investor confidence in our markets and regulatory structure. As such, the Commission must continue to hold them accountable when they do not live up to their primary duties as regulators.
For far too long, the Commission could have done more in its oversight of exchanges and other SROs. I am hopeful that those days are over.

Bill Singer's Comment

In 2013, it is long past the time when the SEC should merely engage in the rhetoric of calling for a "tougher stance" concerning its oversight of self regulatory organizations ("SROs") -- particularly when the SROs "do not faithfully discharge their duties as regulators of the marketplace." There have been and currently are far too many voices at the SEC who seem little more than apologists for the failures of and cheerleaders for the expansion of what I have long argued is a failed model of regulation.  Unfortunately, the motivation for much of the SEC's boosterism of SROs may, in part, be attributed to both the prospect of a higher paying post-SEC job at the Financial Industry Regulatory Authority and other SROs; and the rotating door that sends many SRO executives and staff to the SEC. Hopefully, Commissioner Aguilar will foster a robust debate at the SEC about whether the SRO model is even appropriate for the 21st Century regulation of Wall Street.  

In this post-Madoff era, it is disconcerting to see how little SRO oversight has improved despite the admission by a sitting SEC commissioner that it is  "well-recognized that SROs have had inherent conflicts of interest between their regulatory responsibilities and their business functions . . ." Notwithstanding, I applaud Commissioner Aguilar's concession that the SEC "could have done more in its oversight of exchanges and other SROs." Benign neglect is not a recommended supervisory protocol for the SEC's oversight of SROs, and, hopefully, Commissioner Aguilar will translate his words into deeds.

Admission of Wrongdoing in SEC Settlements

An excerpt from Commissioner Aguilar's speech:

Admissions in SEC Settlements

A robust Enforcement program also requires that defendants be held accountable for their actions and that they be required to admit publicly to their wrongdoing whenever appropriate. In the past, I have expressed concerns about the SEC's "neither admit nor deny" policy, and have had particular concerns about the practice of defendants entering into such settlements and subsequently issuing a press release disclaiming the alleged misconduct and/or claiming that regulators had overreached.[41] A month after I first publicly expressed these concerns, Judge Rakoff cited to my speech in an opinion in which he questioned the SEC's "neither admit nor deny" policy.[42]

While we frequently obtain through settlement all the monetary and injunctive relief we are likely to obtain in litigation, when we settle on a "neither admit nor deny" basis, the public is denied a finding, either by a fact finder or by the defendant's own admission, that the defendant engaged in bad conduct.

After many years of settling cases on a "neither admit nor deny" basis, the SEC will now require admissions in certain of its settlements.[43] This is a positive change - which, among other things, brings our settlement policy more in line with the policies of our criminal counterparts.[44]

Under the new approach,[45] the SEC will require admissions when it is in the public interest to do so. In particular, admissions may be appropriate in cases 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. Requiring admissions in these cases will appropriately sanction defendants for their misconduct, and will go a long way toward enhancing the deterrence message of our settlements.

In just the past few months, we have already seen this new approach being applied at the SEC.[46] I expect that as we continue to develop experience under the new policy, the admissions that we will require in the future will be stronger. For example, the focus should go beyond having defendants only admitting facts, but also accepting fault for their misconduct, and admitting to having violated specific provisions of the law.

Requiring defendants to make strong admissions of misconduct may make it more difficult to settle certain cases, and, as a result, for this approach to be effective we must be ready, willing, and able to go to trial.

While going to trial is always an option, it remains infrequent at the SEC. The SEC currently settles approximately 98% of its Enforcement cases and, in 2012, we went to trial in only 22 out of the 734 cases we brought.[47] However, a robust and effective Enforcement program requires us to take risks, especially in programmatically important cases. If necessary, the SEC must be willing to litigate and go to trial. A legitimate threat of litigation should also serve to increase the SEC's ability to obtain stronger settlements.

Bill Singer's Comment

Bravo!  Finally someone at the SEC gets it!  The SEC's historically warped industry view that the mammoth financial services firms were run by robots that did not need to own up to their violations fostered an unbalanced approach to regulation and sanctions. Part of restoring the equilibrium should include giving the big boys a taste of the same medicine that has been doled out to their lesser competitors for decades.  The mere filing of charges by the SEC against a smaller brokerage firm or its C-suite staff frequently serves as a death knell; whereas the major firms simply write a settlement check from the accounts of their public shareholders or extract a settlement void of naming anyone in their C-suite. Life ends for the smaller end of the spectrum but goes on with nary a hiccup at the other. An admission of liability in a settlement involving hundreds of millions or billions of dollars may re-balance the scales, if only a bit.