The SEC’s Agenda: Enforcement and Regulatory Priorities

Compliance week starts off with a Keynote speech from U.S. SEC Commissioner Luis A. Aguilar, dubbed “The Enforcement Commissioner” by Compliance Week in March 2009, will provide an update on SEC’s enforcement developments and priorities, including topics such as penalty guidelines and the SEC’s streamlining of the formal order process. Commissioner Aguilar will also explore broader regulatory priorities and the SEC.

I’m sure the full text of the speech will be published soon after this speech. (UPDATE- Text of the speech: Market Upheaval and Investor Harm Should Not be the New Normal.) These are my notes, live from the presentation:

(Of course, the statements are his and not necessarily the view of the SEC.)

Its been an interesting year since he gave last year’s keynote at Compliance Week 2009. We have seen breakdowns in the markets and failures that could have been prevented by better and more extensive regulation. Re-regulation was part of the problem and the public expects reform. Wall Street and Main Street are in a struggle over regulation, with Wall Street making the loudest statements and are better connected.

He does not lay the blame solely on Wall Street. The legislature and regulators have to accept some of the blame for not reigning in the exotic financial transaction. He put forth four themes:

  1. Regulatory oversight is piecemeal.
  2. The SEC needs a real-time transparent view into the markets.
  3. The regulations  need to revisit the concept of the “sophisticated investor.”
  4. We must remember the crucial role that the SEC plays in rigorous oversight.

He spent some time using the Flash-Crash on May 6 as an example of the problems. There was a significant failure and still, weeks later, we don’t understand what happened or how to prevent it.

He is looking forward to the self-funding mechanism in the Dodd bill to escape the perennial funding shortfall at the SEC.

by Francine McKenna

He thinks the approach to the “sophisticated investor” is short-sighted. Even these investors need transparency and full disclosure. Since these institutional investors are often just an aggregation of small investors, therefore having a huge impact on small investors. A pension fund may have billions in assets, but those assets reflect the retirement savings of its workers.

He wants to focus on effective deterrence, by scaring people with the possibility of sanctions. “I do not want that to happen to me.” That means harsher sanctions, more individual sanctions, and more money penalties (not merely disgorgement). Crime should not pay.

“Corporate penalties come out of the shareholders pocket.” He dismisses that concept. Management controls how money is spent. He thinks lots of that penalty would go to bonuses. He threw out the idea of SEC penalties coming out of the bonus pool for the company.

He thinks insider trading penalties should not be merely disgorgement plus a penalty equal to a disgorgement. He thinks the SEC should set penalties at the maximum under the statute: 3X.

He is also looking for stronger de-debarment powers to kick bad actors out of the securities industry and out of the management of public companies.

Unfortunately, the Commissioner need to run out to the joint SEC-CFTC meeting on Emerging Regulatory Issues.

One question was about the PCAOB case in the Supreme Court. He said the SEC has some contingency plans (he chose not to disclose), but recognizes that it will be up to Congress to change the law.

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