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Remarks at the “SEC Speaks” Conference 2015: A Fair, Orderly, and Efficient SEC

Commissioner Michael S. Piwowar

Washington DC

Feb. 20, 2015

Good afternoon.  Thank you, Keith [Higgins], for that wonderful introduction.  I appreciate the opportunity to be here today with so many of the SEC staff, former SEC staff, and other members of the securities community.  “SEC Speaks” provides us with the chance to reflect on all of the Commission’s accomplishments in the past year, which are the result of the hard work and dedication of the staff.  At the same time, it is also an appropriate venue for considering what else we can do to effectively carry out our mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.  I would suggest that the answer to how we can build upon the accomplishments of the past year is to apply the same objective that we have for the markets we regulate—that they be fair, orderly, and efficient--to ourselves.  And so, I would like to discuss how we can make the SEC a more fair, orderly, and efficient agency.

Before going any further, lest you think that what I say necessary reflects the views of the Commission or my fellow Commissioners, I want to assure all of you that the views I express today are solely my own. 


The backbone of our securities laws is disclosure.  The SEC requires public companies and key participants in the securities world to disclose meaningful, accurate, and timely information to the public.  Access to this information provides investors with a common pool of basic facts that allows them to determine whether and in what to invest.  Given that we extoll the virtues of clear disclosure in our markets, and place so many requirements on others to provide useful information, it only seems fair that the Commission apply the same standards to itself.  Before we make a final determination on any matter, we should provide both sufficient information to market participants such that they will understand how they will be impacted by our decisions, and a set of clear guidelines ensuring that our regulations will be applied consistently to all. 

Rulemaking:  Fairness demands that the Commission not act arbitrarily or capriciously.  Those we regulate therefore should know the rules and standards to which they will be held.  While we cannot guarantee that everyone has actual knowledge and understanding of our entire rule set, it is incumbent upon us to make sure that those we regulate are on notice as to the rules and standards by which they must operate.  In particular, we must ensure that the rules do not change day-to-day on the whims of the Commission and/or its staff.  This means that, as required by the Administrative Procedure Act[1], the Commission must not adopt any new rule or rule amendments without proper notice and an opportunity for comment by the public.  The corollary of this principle is that the Commission and staff must not engage in rulemaking by enforcement or through examinations of regulated entities.  For example, we must resist the temptation to include undertakings in enforcement settlements or principles in examination reports that serve as de facto rule requirements.

Another issue with our rulemaking process that raises fairness concerns is the increasing length of the releases that accompany and explain our rules.  As many in this room can attest, it is becoming the norm that our adopting rule releases number well over 500 pages.  While some of this length can be attributed to a more robust economic analysis, a significant portion is simply an attempt to explain the new rule(s) or amendments.  Where 500 or 1,000 pages are required to explain the rules we have adopted, the Commission must ask itself whether our rule text is too complex for market participants to reasonably understand and apply.    Moreover, the sheer length may discourage many from even attempting to read the rules, which is a significant problem for an agency seeking to promote compliance with its own rules. 

The voluminous nature of many recent releases also suggests that rather than merely explaining our rules, these documents now include extensive guidance akin to rulemaking, which can create entirely separate fairness concerns.  For example, the most recent amendments to our money market fund rule included key guidance akin to rulemaking for all mutual funds, not just money market funds, which was buried in a footnote within an almost 900-page release.[2]  We must reduce the size of our releases.  I know that our rules can be quite complex, but perhaps we can start by breaking rulemakings into smaller pieces contained in multiple releases rather than in one omnibus rulemaking.   

Litigation:  Our enforcement program could also benefit from a look through the lens of fairness.  In order to ensure that the Commission does not engage in arbitrary or capricious conduct in enforcement matters, the Commission should formulate and adhere to a consistent set of guidelines when conducting our enforcement proceedings. 

Commission staff has recently indicated that they will recommend instituting more enforcement matters, including insider trading cases, through administrative proceedings rather than going through the federal district courts.[3]  Announcement of this plan to increase the use of administrative proceedings in insider trading cases followed the Commission’s loss in two insider trading cases in federal district courts.  Regardless of whether these circumstances are linked, this change has the appearance of the Commission looking to improve its chances of success by moving cases to its in-house administrative system.

Even prior to the staff announcement, more cases were being brought in administrative proceedings as a result of the enactment in 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd‑Frank Act).  Prior to the Dodd-Frank Act, the Commission only had the authority to seek monetary penalties in administrative proceedings against regulated entities and would have needed to file an action in federal court to obtain a monetary penalty against any other person.

In administrative proceedings, there is no jury and cases are presented to administrative law judges that are employees of the Commission.  In addition, discovery available to defendants is more limited.  The Commission has an extremely high success rate when litigating through administrative proceedings.  One Article III federal judge has stated that in fiscal year 2014 the SEC won 61 percent of federal court trials but was successful in 100 percent of its administrative proceedings.[4]  To avoid the perception that the Commission is taking its tougher cases to its in-house judges, and to ensure that all are treated fairly and equally, the Commission should set out and implement guidelines for determining which cases are brought in administrative proceedings and which in federal courts.

Two other areas in the litigation context that also would benefit from the consistent application of public stated guidelines or factors are the imposition of corporate penalties and the issuance of waivers.  In 2006, the Commission unanimously issued a statement concerning financial penalties that addressed whether, and if so, to what extent, to impose civil penalties against a corporation.[5]  The statement was issued because the “Commission believe[d] it important to provide the maximum possible degree of clarity, consistency, and predictability in explaining the way that its corporate penalty authority will be exercised.”[6]

The framework described in the Commission’s 2006 statement turns principally on two considerations:  one, the presence or absence of a direct benefit to the corporation as a result of the violation and, two, the degree to which the penalty will recompense or further harm the injured shareholders.  The statement also discussed seven additional non‑principal factors that would be appropriate for consideration in determining whether to impose a corporate penalty.  However, the application of the 2006 factors is now in doubt.[7]  As I have previously stated, I have become concerned by the increasing number of staff recommendations that have not been accompanied by analysis of the principal factors described in the 2006 penalty statement and would welcome a discussion about our analytical framework for corporate penalties so that we can once again give market participants the clarity they deserve in this area.[8]

A similar concern exists in the determination of whether to issue waivers.  Certain violations of securities regulations result in the automatic disqualification of the violator or related entities from participating in certain aspects of the securities industry or from relying on certain exemptions in the securities regulations.  Frequently, the violator and its affiliates will apply to the Commission or Commission staff for relief from the disqualification.  For many of these waiver requests, guidelines and policies have been developed by the staff to determine if the applicants should be granted a waiver from the applicable disqualification.

However, recently and with increasing frequency, Commissioners have been ignoring the established staff guidelines and staff’s efforts to apply them.  Although the Commission is not bound to staff guidelines, nevertheless it is important that there be an established policy or guidelines that would allow a party to determine if it would be eligible for applicable waivers.  Having established guidelines is particularly important in the context of settlement negotiations to allow a party that is considering a settlement offer to determine whether if it settles it will be able to obtain the necessary waivers to continue to engage in certain business activities.  This does not mean that the guidelines can never change.[9]  However, where we have established guidelines we must follow them.  I note that my fellow Commissioner Dan Gallagher gave a thoughtful speech on a potential path forward last week.[10]

SEC Speaks:  Given my focus on fairness, one final point merits attention.  “SEC Speaks” has become an annual tradition.  In order to prepare today’s presentations and other materials, substantial taxpayer-funded Commission resources and staff hours were expended.  Given the use of taxpayer resources, the Commission should consider whether this valuable information should also be made freely available to general public, perhaps through archived webcasts.


I recently became aware of a joke that is making the rounds with the SEC-regulated community.  “Did you hear that the SEC has invented a new stove?  It has fifty front burners.”  Not every Commission task can be on the proverbial “front burner.”  In order for the Commission to function in an orderly manner, we need to have policies to prioritize what we will focus on in rulemakings, enforcement actions, and examinations.  The Commission also must have in place procedures that ensure that exemptive applications are dealt with in an orderly and timely manner, as well as a process for determining the appropriate deployment of Commission resources.

There are numerous Congressionally-mandated rulemakings that the Commission must implement within an impractical timeframe.  Concurrently, other urgent issues arise that also need to be addressed through rulemaking in order for the Commission to effectively discharge its duty to oversee our securities markets.  It is impossible for the Commission to address all of these potential rulemakings at the same time.     

There are a number of ways we could prioritize rulemakings.  We could, for example, base our rulemaking calendar on the degree of political pressure, the degree of contentiousness, the speed with which a rule could be dealt, the sensibleness of the rule, the expected net benefits of the rule, or the degree to which the rule would be a good use of the Commission’s resources.  As effective as some of these might be, I believe that the first step in prioritization of our rulemakings should be a determination of whether each rulemaking advances the core mission of the Commission: protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.  Those that do not advance the core mission, or that in fact would inhibit our core mission by merely advancing the agenda of special interests seeking to achieve their own objectives, such as the pay ratio and conflict minerals rulemakings, should fall to the bottom of the list or off of the list altogether.  This would at least free up precious resources at the Commission to focus on the myriad issues that do meet our core mission.

Prioritization is also necessary in the enforcement context.  As I have previously stated, a “broken windows” approach to enforcement does not work.[11]  If you create an environment in which regulatory compliance is the most important objective for market participants, rather than enabling vital and important economic activity, we will have unnecessarily shackled it.  The Commission must prioritize which enforcement actions to pursue.  Enforcement efforts should be closely aligned with the priorities developed by our policy‑making divisions.  In addition, decisions on the use of investigative discretion must complement these efforts, rather than serve as an independent source of policy.  It is important therefore that the Commission’s senior leadership provide appropriate guidance to staff on the use of investigative discretion.

One area in which the Commission has made significant progress in setting priorities is in our examination program.  Our staff in the Office of Compliance Inspections and Examinations (OCIE) utilizes a rigorous, data-driven approach to decision-making when setting their annual examination priorities.  OCIE staff works with other groups, such as our Division of Economic and Risk Analysis (DERA), Division of Trading and Markets, and Division of Investment Management, to determine which areas may present heightened risks.  Part of this process involves a review of data and information available to the Commission, from both internal and external sources.  Once draft priorities for the upcoming year have been identified, the Commissioners are briefed on the proposed priorities and their supporting analyses and are invited to provide appropriate feedback to OCIE.  This process provides for an orderly determination of those to inspect, more efficient use of the limited number of examiners that the Commission has, and heightens the effectiveness of our inspection program.

Another area in which a lot of progress has been made is the timely processing of exemptive applications.  Of course, the amount of time for resolution of an application is highly dependent on the responsiveness of the applicant.  Still, staff has effectively reduced the amount of time from the filing of an application until its resolution.  While much progress has been made, more can and needs to be done.  There are still instances when applications drag on for years.  As an example, it took over six years for an actively managed, non-transparent exchange-traded fund (ETF) application ultimately to be denied.  While this application involved an ETF that would differ from the typical ETF, this still should have never happened. 

A significant part of the solution to the length of the application process lies with the Commission’s setting of priorities in its rulemaking.  Again, using ETFs as an example, the Commission long ago should have adopted a rule that would have allowed most ETFs to operate without the need for an exemptive order.  Such a rule would significantly lessen the number of exemptive applications, leaving more time for staff to deal with novel applications such as the actively managed, non-transparent ETF.  In fact, the Commission proposed an ETF rule in March 2008.  The rule has yet to be adopted.  The ETF rule would advance the Commission’s core mission, is sensible, would be a good use of Commission resources, and could be adopted in a short period of time.

Finally, the Commission has to come up with a process to appropriately deploy its financial and human resources.  The securities industry is not stagnant.  In fact, it is constantly changing.  Deployment of the Commission’s limited resources also must change in response to changes in the industry.  For example, Wall Street firms are increasingly moving their back offices outside of New York.  This change results in many firms’ records being located outside of New York and into the geographic footprint of our other regional offices.  Therefore, the Commission needs a process in place that takes industry changes into consideration when determining the staffing of regional offices. 


The Commission must use its limited taxpayer resources in an efficient and prudent manner.  There are a number of areas where the Commission has already implemented strategies for improving its efficiency.  At the same time, there are still other areas where we can do better.

One tool which the Commission has used and can continue to deploy to increase our efficiency is strategic investments in cutting-edge technology.  Perhaps the best example of this was our investment in and implementation of the Market Information Data Analytics System, or MIDAS.  MIDAS, which was launched in 2013, provides the SEC with data about every displayed order posted on national exchanges.  The information comes from the consolidated tapes and proprietary feeds of each exchange.  This data greatly improves our understanding of the way today’s markets function.  Benefits from this information cut across the different divisions and offices within the Commission.  MIDAS can help us monitor and understand mini‑flash crashes, pick up on possibly troublesome or illegal behavior, reconstruct market events, and more importantly, provide dramatically better insight into the functioning of a market that moves many millions of dollars in thousandths of a second.

Another area through which we have and can continue to increase efficiency is through well designed reorganizations and reallocations of our resources.  In 2010, we undertook an effective and efficient reorganization of the Division of Enforcement.  The reorganization created five national specialized units that are dedicated to particular highly specialized and complex areas of securities law and a new Office of Market Intelligence that is responsible for the collection, analysis, and monitoring of the voluminous number of tips, complaints, and referrals that the SEC receives each year.  The reorganization created the Asset Management, Market Abuse, Complex Financial Instruments (formerly known as Structured and New Products), Foreign Corrupt Practices, and the Municipal Securities and Public Pensions Units. 

The specialized units allow for improved understanding of complex products and markets, earlier and better capability to detect emerging fraud and misconduct, and an increase in expertise within the Enforcement Division.  In addition, because these units operate nationally, there is more consistency in the handling of enforcement cases.  Other areas of enforcement have also seen recent efficiencies.  The Office of Market Intelligence enables the Enforcement Division to better focus resources on those tips and referrals with the greatest potential for uncovering wrongdoing.

While the Commission has made good use of the tools I just discussed to increase efficiency, there are a number of other tools available to the Commission that it could use with greater frequency.  These tools include increasing the usage of investor testing, pilot programs, and retrospective reviews of existing rules.  They also include earlier involvement by our in-house DERA economists in the rulemaking and enforcement processes, as well as improved engagement and collaboration with academic and industry experts.

Better use of these tools could significantly help the Commission determine the effectiveness of current rules and programs, the potential utility of new rules or rule amendments, and identify new issues that might require Commission action.[12]  For example, investor testing can help us determine weaknesses in our current disclosure requirements as well as what information would be most helpful to investors and in what format.  Pilot programs, such as the one that we are currently considering to assess stock market tick size impact for smaller companies, enable us to test hypotheses and use the results to determine whether change is needed without causing harm to investors.

Engaging with academics, attorneys, and others from the securities industry who work outside the SEC could greatly enhance our ability and effectiveness in identifying changes to improve our regulatory regime.  This type of engagement provided immense assistance to the Commission in 1961 when Congress directed the Commission to investigate the adequacy of the rules of national securities exchanges and national securities associations utilizing individuals from private law practice, academia, and industry.  As Milton Cohen, the director of this study stated, “[i]f the Commission members themselves were to have gone as deeply into each of these processes as the Special Study has done, either the scope of the Study would have had to be narrower, or the time longer, or the recommendations very much less specific.”[13]  The Commission should reinstitute the process that Mr. Cohen utilized to review our current market structure.  The Commission also should continue and expand its hiring of academics, attorneys, and members of the securities industry as fellows in different parts of the Commission, which allows the Commission to tap their expertise in areas of specific concern to the Commission on a temporary basis.

The broad study I previously mentioned is one form of retrospective analysis of our rules.  In general, a retrospective analysis of our rules would help us identify which if any of our current rules should be modified, streamlined, expanded, or repealed for the purpose of making our regulatory regime more effective or less burdensome in achieving our core mission.  While President Obama signed an Executive Order requiring such a retrospective analysis more than three years ago, the Commission has not yet undertaken a serious effort to conduct this type of analysis of our existing rules.[14]  In order for the Commission to administer its regulatory program more efficiently, this must change.

Finally, including DERA in rulemaking and enforcement cases early in the process would increase the efficiency of the rulemaking and enforcement processes just as it has helped make our examination program more efficient.  DERA’s involvement early in the rulemaking process can provide rulemaking staff with DERA’s analysis of whether the issue staff is seeking to address through rulemaking is one that requires Commission action at that time.  Early involvement by DERA also could help staff identify multiple alternatives to address the issue and the costs and benefits of each at the outset of the rulemaking process prior to the staff locking in on a particular solution.  In the enforcement context, early DERA participation can help determine materiality, harm to investors (if any), ill-gotten gains (if any), whether the benefits of pursuing a particular enforcement action outweigh the costs, and whether it would be prudent to pursue alternative enforcement actions.

*   *   *

Let me finish by thanking the staff for the incredible work being done right now.  The Commission’s staff works tirelessly to support and protect our nation’s capital markets, for the benefit of the entire investing public.  I am thankful for their dedication, and I thank you for being a wonderful audience.  Enjoy the rest of the conference.

[1] 5U.S.C. Sec. 551 et seq.

[2] Money Market Fund Reform; Amendments to Form PF, Investment Company Act Release No. 31166 (July 23, 2014) [79 FR 47736 (Aug. 14, 2014)] at n. 873.

[3]See Ronald E. Wood, SEC May Ramp Up Administrative Proceeding, Daily Journal Supplement (July 23, 2014), at 7, available at ; Sarah N. Lynch, U.S. SEC to File Some Insider-Trading Cases in its In-House Court, Reuters (June 11, 2014), available at; James Meyers, SEC Gives Itself Home-Court Advantage, Law 360 (Aug. 5, 2014), available at  

[4] See Nate Raymond, U.S. Judge Criticizes SEC Use of In-House Court for Fraud Cases, Reuters (Nov. 5, 2014), available at

[5] SEC Press Release No. 2006-4, Statement of the Securities and Exchange Commission Concerning Financial Penalties (Jan. 4, 2006), available at

[6] Id.

[7] See Mary Jo White, Deploying the Full Enforcement Arsenal (Sept. 26, 2013), available at

[8] See Michael S. Piwowar, Remarks to the Securities Enforcement Forum 2014 (Oct. 14, 2014), available at  

[9] For example, upon my request, the guidelines regarding waivers from ineligible issuer status (WKSI Waiver) were amended to remove “too big to fail” as a consideration in granting such a waiver.  See Sarah N. Lynch, SEC Alters Waiver Policy to Remove ‘Too Big to Fail’ Concern (June 17, 2014), available at

[10] See Daniel M. Gallagher, Why is the SEC Wavering on Waivers? Remarks at the 37th Annual Conference on Securities Regulation and Business Law (Feb. 13, 2015), available at

[11] Michael S. Piwowar, Remarks to the Securities Enforcement Forum 2014 (Oct. 14, 2014), available at  

[12] Section 912 of the Dodd-Frank Act authorizes the commission to gather information from and communicate with investors or other members of the public, engage in temporary investor testing programs, and consult with academics and consultants in evaluating any rule or program of the Commission or for the purpose of considering or developing new rules or programs. 

[13] Milton H. Cohen, Reflections on the Special Study of Securities Markets (May 10, 1963), available at

[14] See Executive Order 13579 – Regulation and Independent Regulatory Agencies (July 11, 2011).  See also M-11-28 – Memorandum for the Heads of Independent Regulatory Agencies (July 22, 2011).

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Modified: Feb. 20, 2015