In our previous issue (see The Financial Report, Vol. 3, No. 19, October 2, 2014), we noted that SEC Chair Mary Jo White, a political independent, believes that the Commission’s Enforcement Division has been highly successful in the past year as indicated by the first fiscal year-over-year increase in the number of enforcement cases since 2011.
A recent article in The Wall Street Journal credits Ms. White for recent progress on at least two of her priorities: her policy of requiring admissions of wrongdoing to settle SEC allegations, and her “broken windows” strategy of pursuing even small legal violations. Senior SEC officials have said that the agency’s post-financial crisis strategy is to pursue wrongdoing on a broad swathe of matters, rather than focus on any particular area. The types of cases being targeted, according to SEC Enforcement Chief Andrew Ceresny, include insider trading, market structure, microcap-stock fraud, pyramid schemes, municipal securities, complex financial instruments, investment-adviser fraud, and financial-reporting fraud.
The combined near-term import of the SEC’s actions, we noted, is that additional oversight and regulatory scrutiny are all but assured. We concluded our commentary by suggesting that financial services industry participants would be well advised to comply with their regulatory responsibilities and increase their efforts to avoid misconduct. Preparation will go a long way in dealing with this bold federal expansion of new regulations and potential enforcement actions.
Speaking on Tuesday this week at the annual Securities Enforcement Forum, SEC Commissioner Mike Piwowar, a Republican, delivered remarks critical of Chair White’s approach. Piwowar said, “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.”
Commissioner Piwowar’s comments, of course, reflect only his own views and not those of the SEC. Nevertheless, his statements appear eminently reasonable. In essence, regulation needs to achieve a balance - it needs to protect, but not at the expense of eliminating the rational and necessary activity creating the risk. There is little doubt that the “vastly increasing complexity of the laws and rules that govern the securities industry” is creating significant barriers to participation in the financial markets. Ultimately, this may harm users of the marketplace more than the conduct ostensibly providing the rationale for the regulation in the first place.
Piwowar suggests that the balance can best be achieved when enforcement efforts are closely aligned with the priorities developed by the SEC’s policy-making divisions. To be sure, he emphasizes that “investigative discretion” should complement and support policy decisions rather than serve as an “independent source of policy.” Similarly, Piwowar is opposed to the Commission’s use of enforcement measures as an alternative to the required rulemaking process. He said, “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.”
Commissioner Piwowar noted in his speech that he is an economist and not a lawyer. As a non-lawyer in an agency that tends to be dominated by lawyers, Piwowar is often asked for his perspectives about the law and regulation, especially as it applies to SEC enforcement. As is true for most economic analysis, determining the “real” impact of the SEC’s increased enforcement efforts is far more difficult and complicated than a mere tally of the number of cases may suggest.