Commissioner Piwowar Challenges SEC To Be Fair And Effective

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For me, due process starts with fundamental notions of fairness.  Persons should be on notice as to what acts, or failures to act, constitute violations of the law and our regulations. Persons should also be on notice as to the potential sanctions and liabilities that may be imposed as a result of those violations.

. . .

Additionally, I oppose the use by the Commission of enforcement measures as an alternative to rulemaking under the Administrative Procedure Act.[3]  The Administrative Procedure Act, with its requirements for the government to engage in notice and comment rulemaking, implements key due process protections.  I understand the frustrations of the rulemaking process.  It takes a significant amount of time, effort, and bandwidth for the Commission to propose and adopt rules under the Administrative Procedure Act.  Nevertheless, I have significant concerns when Commission orders - especially in settled administrative actions - create new interpretations of the laws or regulations or impose new regulatory requirements. When Commission actions create such results, we fail in our duty to uphold due process.

In administering the securities laws, we seek behavioral conformity by all market participants with a particular set of expectations and norms.  Regulatory enforcement is an important tool in achieving this objective.  But our ultimate goal is not achieving regulatory compliance. Our goal is to have a healthy, robust, and resilient capital market; hence, our mission to protect investors, maintain fair, orderly, and efficient trading markets, and facilitate capital formation.  It is important to recognize that regulatory compliance is not a final objective in and of itself, but rather a tool to assist in achieving our larger goal.  We must be cognizant to avoid situations in which this tool may in fact impede the achievement of our overall objective.

One particular problem has been the vastly increasing complexity of the laws and rules that govern the securities industry.  As a simple example, one need only look at the 2014 version of the Code of Federal Regulations published by the Government Printing Office, which now needs three volumes to cover the securities-related regulations, up from two volumes in years past.  But more regulations do not necessarily result in better outcomes.  Moreover, the Code of Federal Regulations only contains the formal regulations issued by the Commission. In determining their behavior, market participants must consider an ever increasing number of positions taken by the Commission in other contexts, such as the preambles to rulemaking releases, briefs filed with the courts, and a variety of administrative orders and opinions.  In addition, there are a large number of views expressed by the staff in no-action letters, frequently asked questions, compliance and disclosure interpretations, risk and compliance alerts, and comment letters to registrants.

It is under these circumstances, in which there is a high level of complexity and at times significant ambiguity, that a "broken windows" approach to enforcement may not achieve the desired result.  If every rule is a priority, then no rule is a priority.  If you create an environment in which regulatory compliance is the most important objective for market participants, then we will have lost sight of the underlying purpose for having regulation in the first place.  Rather than enabling vital and important economic activity, we will have unnecessarily shackled it - and our country will be far worse off from the absence of such activity.

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In fiscal year 2013, the Commission brought more than 675 enforcement actions and obtained monetary sanctions in excess of $3.4 billion.[4]  However, as Enforcement Director Ceresney points out "Numbers tell only a part of the story."[5]These numbers are flawed metrics to use as a measure of enforcement effectiveness. We need to re-think how we evaluate and describe the effectiveness of our enforcement program.  Because when the agency and the media make the number of enforcement actions a key measure, it is bound to create pressure on the staff to increase those numbers year after year.[6]  It harks back to the adage, "what gets measured gets done."  But we need to make sure that the focus is on measuring outcomes, not outputs.

Most Americans would be outraged if we measured the effectiveness of traffic safety efforts primarily based on the number of tickets issued by police officers and the amount of monetary fines collected.  Rather, we look to a more important metric - whether the number of deaths from traffic accidents has increased or decreased.

Determining overall effectiveness of our enforcement program by the amount of monetary sanctions, such as disgorgement and civil penalties, ordered against wrongdoers is also a poor metric.  I recognize that a large monetary sanction may be more likely to attract attention.  Thus, properly utilized, these types of sanctions can, in addition to removing the ill-gotten gains from the hands of wrongdoers, deter others from committing such violations.  But if there is a perception among our staff that cases with large monetary sanctions are key to recognition and promotion, then there will be, at minimum, a subconscious shift of efforts to pursue those types of cases.

Part of the focus on the amount of monetary sanctions may stem from how we think about measuring investor losses.  It would be a mistake to put too much emphasis on aggregate dollars as the primary measure of investor harm.

For example, a financial reporting fraud by a large company may result in the loss of billions of dollars of market capitalization and affect, directly or indirectly, millions of investors.  But the risk to any single investor of financial reporting fraud by any single issuer can be mitigated by holding a diversified portfolio of securities.  So while investors are injured by such a fraud, individually, they may only incur a relatively small amount of harm as a percentage of their investments.  On the other hand, a dishonest or corrupt broker, investment adviser, or promoter might cause an investor to lose all of his or her investments.  Even if it is a relatively small amount of dollars, it might account for 100% of that person's holdings.  So we must ensure that our efforts appropriately focus on these types of frauds as well.

Many victims of securities fraud are senior citizens.  With the first Baby Boomers becoming age 65 in 2011, the U.S. population is poised to experience a population aging boom over the next two decades, as the percentage of population that is 65 years or older is projected to increase from 13.0% percent in 2010 to 16.8% in 2020 and 20.3% in 2030.[7]  The Commission's Investor Advisory Committee held a discussion of elder fraud at their July meeting,[8] our Investor Advocate has placed the topic on his policy agenda for 2015,[9] and Commissioner Aguilar organized a conference on the topic held at our headquarters this past February.[10]  However, the Commission as a whole has not held a senior summit since September 2008[11] - nearly six years ago - and the Commission publicly needs to put the protection of seniors back high on the agenda.

Investigations of frauds committed against seniors need to remain a high priority of our investor protection mission. As the Division of Enforcement continues to implement the many important and needed post-Madoff and post-financial crisis improvements, attention to these types of violations should not be overlooked.  I pay special attention to the enforcement recommendations relating to elder abuse and senior fraud and I am particularly grateful for the dedication of the staff who bring these cases.  We must continue to be vigilant and unrelenting in our pursuit of these wrongdoers.  We must continue to work with criminal prosecutors - whether at the federal or state level - to appropriately address these types of frauds.

• Piwowar
• Gallagher
• SEC
• Due Process
• Bill Singer
• BrokeAndBroker