Speech by SEC Commissioner:
"Preventing Investor Harm Should be SEC Priority Number One"
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
SEC Open Meeting
June 30, 2010
The entire securities industry and its participants … whether it is issuers, intermediaries, fund companies, or other market participants would not be able to function, much less profit, without the trust of investors and the public as a whole. Pay to play activity—where intermediaries direct contributions in order to obtain advisory pension plan business—undercuts this basic trust by harming investors and damaging the reputations of regulated institutions and the securities industry as a whole.
As an SEC Commissioner, you quickly learn that there will always be someone somewhere engaging in securities fraud because the temptation is always there. Likewise, the temptation to engage in pay to play activity is all too clear. As you have already heard today, public pension plans control trillions of assets and represent one-third of all U.S. pension assets. The advisory business generated from these plans is tantalizing in terms of both the fees and the reputational benefit.
The Commission's purposes in this rulemaking and I quote from the release "are preventing fraud, protecting investors, and maintaining the integrity of the adviser selection process." Today's rulemaking exemplifies the Commission acting in its best tradition by approving rules that will affirmatively protect investors from being harmed and promote integrity in the adviser selection process that will benefit both investors and industry.
The Commission first attempted to tackle this issue in 1999 by issuing a pay to play proposal as the need for action was already evident.1 In the ensuing years of regulatory inaction, pernicious pay to play schemes in some of the country's largest pension funds have been uncovered. It is obvious that the failure to follow through on the 1999 proposal resulted in real harm that had real costs. These schemes harmed investors by making their retirement assets the spoils in these quid pro quo arrangements. The costs of the harm to investors and the misdirection of resources in uncovering and cleaning up these schemes can be enormous. Many people focus on the costs of regulation, but they do not consider the costs of a failure to take regulatory action. It is obvious that the decision to abandon this initiative did not account for the true costs.
Regulatory oversight functions best when we have a regulatory regime that prevents misconduct in the first instance—long before investors can be harmed. If the conduct is not affirmatively prevented, investors are harmed. It's true that once investors are harmed and lose faith in the integrity of our institutions—irreversible damage has taken place. Enforcement actions are rarely, if ever, able to make investors whole, sufficiently punish all the fraudsters, and prevent a loss of investor trust in these financial institutions and the securities industry as a whole. The best course of action is to prevent the significant harm in the first place. Prophylactic rules, consistent and effective inspections, and strong enforcement must work together to protect investors.
As I conclude my remarks, I want to say thanks to our staff. This was a team effort and the team's good work to pro-actively protect investors is evident in the release. I particularly would like to thank the staff in Investment Management who led this project. I also thank you for the work that you will do to make sure this initiative is successfully implemented and functions as intended.