SEC Commissioner Stein Says Fish Stink From Head Down

November 29, 2013

Today's BrokeAndBroker blog offers two companion pieces that I recommend you read in conjunction. Both articles present recent commentary from Securities And Exchange Commissioners ("SEC") Michael S. Piwowar and Kara M. Stein.  Commissioner Piwowar raises provocative questions as to whether the SEC had ceded too much power to its staff -- and if such a relinquishment may now impinge upon due process protections. Commissioner Stein asks the often-voiced and increasingly pertinent question of whether the gatekeepers in the financial services community have historically been given far too much deference by the SEC in terms of sanctions for their misconduct.

On November 22, 2013, SEC Kara M. Stein spoke before the the American Bar Association Business Law Section's Federal Regulation of Securities Committee Fall Meeting.  We are sometimes afforded a glimpse behind the SEC's curtain through the public comments of its sitting commissioners; however, in recent years, what we see has not always been pretty or, to be blunt, professional -  at times, the comments are barbed personal shots directed at other commissioners or the Chair.  While I applaud plain speaking and regulators who discharge their roles with an ever-present sense of fair play, I wince when the discourse takes on the the worst aspects of negative politics. Too often, valid calls to reform inept regulation are lost under a morass of slung mud.

Robust But Fair

In keeping with my concerns, I appreciated Commissioner Stein's observation in her remarks that: 

[W]e all believe that resilient, fair, and efficient capital markets play a critical role in our economy. We all believe that smart regulations are critical to protecting investors and promoting capital formation and job creation. And we all believe that enforcement of our securities laws needs to be robust, but fair. 

Put simply, we all believe that the SEC needs to do its job well. 

Culture Of A Firm

I commend Commissioner Stein's full-text speech to your consideration. She touches on many important items on the SEC's agenda, including ongoing Dodd-Frank rulemaking, the Volcker Rule, the JOBS Act, crowdfunding, flash crashes, and more.  Among the more compelling sections of your remarks was this dealing with the old adage that a fish stinks from the head down:

We also need to take a hard look at some old tools. Imposing penalties on individuals and corporations is important. As you all know, the Remedies Act expanded the Commission's authority to seek civil monetary penalties in enforcement cases. Some have argued that in the corporate context, we shouldn't punish shareholders by imposing penalties on the firm's they own. But, I believe that culture is important. If a firm's culture is wrong at the top, then sometimes the best way to effectuate change is to incentivize the shareholders to make the change. Ultimately, the owners of the company are responsible for its actions. Penalties should help to deter others from similar violative conduct. And as companies and transactions grow, maybe penalties should grow to reflect to the nature and extent of the wrongful conduct. Shareholders should take notice. And shareholders should hold their management accountable.

I believe that the culture of a firm stems from the top. And a chief executive with personal accountability, will have a strong incentive to keep the company on the right track. So, it should not surprise you that I will continue to press for more direct accountability. We need to leverage our limited resources, and requiring executive attestations of compliance with rules is an extremely effective way to do that.

Third, we need to use our enforcement powers to influence gatekeepers. That means we need to be bringing the tough cases against those who could have prevented misconduct. Chief Compliance Officers, Chief Financial Officers, the accountants, and the lawyers who help individuals or firms violate the law need to be sanctioned. As we learned from the Enron case and later business scandals, gatekeeper failures became a recurring theme and contributed to significant losses for investors.

We need to be particularly focused on gatekeepers when there is misconduct and hold them accountable when appropriate. We need to send a strong message of instilling personal responsibility and accountability. These standards should apply equally for the CFO of a global bank and the CFO of a 20-person company.

Read the companion pieceSEC Commissioner Piwowar Wags A Finger At Formal Investigation (, November 29, 2013).