Speech by SEC Commissioner:
Remarks at the 2009 Southeastern Securities Conference
Commissioner Troy A. Paredes
U.S. Securities and Exchange Commission
March 19, 2009
Thank you, Kit [Addleman], for the kind introduction. It is an honor to be speaking here today at the 2009 Southeastern Securities Conference. Before I begin, I must say the standard disclaimer: The views that I express here today are my own and do not necessarily reflect those of the U.S. Securities and Exchange Commission or of my fellow Commissioners.
Many in the audience are SEC enforcement lawyers and examiners. So let me emphasize at the start the tremendous respect and appreciation I have for you and your hard work. Your dedication and professionalism are inspiring models of committed public service.
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Some outside the agency may not realize the Herculean task that the Division of Enforcement admirably shoulders. Let me offer some context.
Over 12,000 companies have securities registered with the Commission under Section 12 of the Exchange Act. Publicly-traded securities trade on eleven exchanges in the United States, as well as in the over-the-counter market. In addition, there is a huge private placement market. Although private offerings are not registered with the Commission under the Securities Act, they are nonetheless subject to our antifraud authority.
Individual investors often do not hold securities directly, but frequently prefer to invest through mutual funds. The mutual fund industry is large and critically important, particularly as a means of diversification for retail investors — itself a form of investor protection. This translates into additional responsibilities for the Commission, as investors can now choose from among 4,600 registered funds that the SEC oversees. The Enforcement Division's responsibilities don't stop there. Rather, there are over 11,000 investment advisers, along with approximately 5,500 broker-dealers. Even this understates the reach of the SEC's jurisdiction. For example, according to a recent count, the 5,500 broker-dealers have a total of over 170,000 branch offices and 665,000 registered representatives.
In short, the Division of Enforcement's jurisdiction is incredibly large, diverse, and complex. There is often an international component to securities enforcement, bringing still additional challenges for the staff. It is a vast amount of turf to cover for a Division that houses 1,100 employees.
Just keeping on top of tips and referrals can be daunting. The Commission receives an estimated 700,000 or more leads each year. Notably, the Commission recently announced that it is undertaking efforts to ensure that we have the right systems, processes, and expertise for responding to whistleblowers and tips and referrals from numerous other sources.1 This kind of scrutiny and adaptation is important if the SEC is to have the state-of-the-art capabilities we need to fulfill our mission.
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While our markets are enormous and the public's expectations of the Commission are high, the SEC's resources are limited. We have to ask a very basic question: How does the SEC efficiently and effectively advance our mission given our resource constraints?
When deciding how best to allocate the agency's efforts, the Commission has to make difficult choices. Enforcement is no exception. As much as we would like to, we simply cannot pursue to the fullest extent each and every possible violation of the securities laws. Even with more money and more staff, we will have to make strategic tradeoffs — rooted in informed policy choices that the Commission makes — in light of the relevant costs and benefits that attend the options in front of us.2
This leads to some practical challenges. Resources committed to a particular matter become unavailable for some other — perhaps better — purpose. What enforcement matters, then, should we pursue and against which of the possible defendants? What legal theories should we advance in a case? What relief should we seek and why? How might the optimal mix of cases change over time depending on the economic environment or intervening regulatory developments since the alleged misconduct occurred?
As new fraudulent and manipulative techniques infiltrate our markets to join longstanding techniques like Ponzi schemes, and as our markets become increasingly complex, we must have overarching strategic goals for enforcement that serve as guideposts to ensure that we are getting the most out of our resources.
In formulating any enforcement strategy, we must recognize that one of law enforcement's many purposes is to change the behavior of individuals by changing the consequences associated with certain conduct. In other words, law enforcement is intended, in part, to make illegal conduct an unattractive option. Law enforcement discourages individuals from engaging in illicit behavior when the expected sanction for a violation is such that compliance is the wiser course. It is, therefore, important for the Commission to position itself to detect and swiftly pursue actions against wrongdoers. That said, it is also important to acknowledge that deterrence is just one means of advancing the Commission's stated mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.
In my remaining time, I would like to offer four suggestions to explore to help ensure an efficient and effective allocation of resources in the Division of Enforcement. In the weeks ahead, I plan to share these ideas and others with my colleagues on the Commission and with the new director of the Division of Enforcement, Robert Khuzami. I welcome Rob to the SEC and look forward to his leadership.
To be most effective, any enforcement program, including the Commission's, must have a strategy for selecting the investigations and enforcement actions to pursue and then determining how aggressively to pursue them. As I mentioned earlier, given our finite resources, the decision to pursue a particular matter can compromise our ability to investigate and bring other cases that better serve investors and our markets. So case selection is critical.
In constructing the right blend of cases, several questions should be asked, and here is a sampling:
How and to what extent did the misconduct harm investors? Our mission is rooted in investor protection, so the interests of investors must be stressed in fashioning our enforcement agenda.
Was the misconduct intentional or the result of negligence? While we should not abstain from bringing cases for negligence-based violations, we need to ensure that we have adequate resources available to dedicate toward aggressively pursuing those who intentionally violate the federal securities laws.
Are there alternative ways to address the violation without bringing an enforcement action? Certain technical violations and honest mistakes, for example, may be better addressed through remedial steps that parties have already undertaken or agree to undertake without an enforcement action.
What is the impact of bringing one more case of a particular type? Is there an important deterrent effect from bringing another case of this type or have diminishing returns already set in?
Similarly, what is the marginal benefit of bringing a particular charge or advancing a particular legal theory? We may be able to get all (or nearly all) the relief we seek without expending more resources to bring a more far-reaching case. Indeed, a more far-reaching case, particularly when built on untested legal theories, may evoke a more strenuous defense that prolongs the matter at the expense of valuable Commission time and effort.
Will the alleged wrongdoer be meaningfully sanctioned through other sources? If an individual is being pursued by state authorities or federal criminal authorities, it may be more productive for the SEC to dedicate its efforts to matters that others may not pursue. Further, active private enforcement through private litigation may counsel against an SEC action, as the marginal benefit of our bringing a case against the same defendants is reduced.
Should a case that is pursued be settled or tried? The Division of Enforcement has relatively few trial attorneys and cannot try every case. We should consider increasing the size of the Trial Unit. Not only would more trial attorneys provide the Commission with additional resources to try cases when warranted, but more trial attorneys could be more actively involved in charging decisions and the ongoing development of cases. Trial lawyers have a unique perspective. Having an expanded pool of experienced trial lawyers to engage early on would help us bring even stronger cases and would increase the prospect of our getting more exacting relief when appropriate.
At the end of the day, the right incentives have to be in place for those making the actual decisions. This means, in part, that we need to make clear to our enforcement team that deciding not to pursue a particular case or charge — provided that the decision is informed and made after weighing the relevant costs and benefits — can make a valuable contribution to serving the agency's mission. In judging an enforcement lawyer's performance, we should not overemphasize the number of cases he or she has brought or the overall magnitude of the relief that defendants have settled to; such statistics are an incomplete measure of performance. Our enforcement lawyers should never feel that they must bring or continue a matter if resources can be spent more productively elsewhere.
Recent events have placed an unfortunate stigma on closing investigations. If the decision to close an investigation is based on a thorough analysis, the Commission must stand behind the staff and defend the staff's decision against second-guessing by others. With a case selection strategy in place, the decision to close a case is that much easier to defend.
Our willingness to close cases serves another very important interest: due process. The SEC has been criticized for allowing investigations to linger for years without any real attention.3 Besides inefficiently expending resources by dragging on past a productive point, inactive investigations present due process concerns that should trouble all of us. It is a serious matter for the government to exert its authority against an individual. We must not forget that investigations can wreck havoc on people and their families. If we are not going to bring an enforcement action, we owe it to people to close the investigation and send them a closing letter.
Second, our case tracking system should be enhanced so that the Enforcement Division can more effectively track the status of ongoing investigations and cases. The current system at the Commission is useful, but more should be done, including ensuring that our information technology is and remains current.
A robust centralized tracking system would serve investors well. By affording senior Enforcement Division officials a comprehensive look at the range of ongoing and potential investigations and cases, the system would empower the Commission to allocate our resources more strategically and to make proper adjustments over time regarding how resources are expended. It is impossible to choose the best blend of cases without an at-the-ready panoramic look at our options and a complete understanding of what resources are being dedicated to what matters. An enforcement strategy without the information needed to implement it will fall short of its potential.
More robust centralized tracking would also better position the agency to achieve important synergies out of complementary enforcement efforts. For example, on an ongoing basis, senior Division officials would be better able to see interconnections among investigations and cases that, once identified, would allow the staff to work the matters more efficiently and effectively. State-of-the-art centralized tracking would help the agency get the most out of the expertise and experience that are spread throughout the Enforcement Division. Such tracking also may enable the Commission to spot trends in fraud and manipulation cases sooner rather than later, thus allowing us the chance to take appropriate investigative, enforcement, or even regulatory steps expeditiously.
Third, we should encourage defendants to cooperate. Encouraging parties to self-report violations and otherwise cooperate with our investigations is an important enforcement tool. Not only does cooperation help the Commission conserve resources, but it also provides an opportunity for us to get helpful information concerning the perpetration of fraud and manipulation. We can learn a great deal from those we are considering charging or have charged. The sharper our insights are into the motives and techniques of wrongdoers and into the markets as a whole, the more effective we will be in rooting out and pursuing misconduct.
However, we don't "get" without "giving." The Commission's 2001 Statement Concerning Cooperation — the so-called Seaboard Report — guides the Commission in measuring the extent of a party's cooperation and assessing whether to bring an enforcement action or particular charges. Cooperation credit is an asset that the Commission has at its disposal to grant. We should consider whether we can improve our practice of giving credit to ensure that we get the most out of the potential for cooperation. If we are too stingy with credit, defendants may not see the "credit for cooperation" trade as worth it.
In addition, we need to guarantee an atmosphere where whistleblowers and other persons feel comfortable contacting our enforcement lawyers and examiners with a lead or helpful industry information without fear that they themselves may become the subject of an investigation.
Finally, we owe it to ourselves and the American public to ensure that we are fulfilling our regulatory responsibilities as effectively as possible. To be blunt, we have to live up to the goals we set. Accordingly, we should periodically undertake a frank and demanding self-assessment that audits our progress and we should adapt as needed, even if it means doing things very differently. We must explicitly ask and rigorously evaluate whether the Commission's enforcement program is accomplishing its goals. This will not be easy to measure. However, I believe one thing is clear: We cannot measure the actual impact of our enforcement program by overemphasizing the number of cases brought or the monetary sanctions imposed. The analysis, if done right, will be more nuanced and refined than focusing on such metrics to the exclusion of other considerations.
Let me offer a word of caution. Our self-audit should not be taken as an opportunity to second-guess the staff, which often must make decisions under enormous time pressure and without perfect information. Any review, to be constructive and fair, must account for the actual environment in which decisions were made, recognizing that our lawyers do not have the luxury of making decisions with the benefit of hindsight.
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In closing, I would like to thank each of you for your dedication and hard work. The individuals in this room represent a number of agencies with a track record of successful cooperation. Building on our prior success working together, we should look for new opportunities to coordinate even more effectively, including ensuring that we have strong relationships and effective means of communication — always mindful, of course, of due process considerations.
To the SEC staff, your work is absolutely critical not only to our agency, but to investors and the markets. The SEC is an agency with a tradition of excellence that dates back 75 years. We have weathered challenging times in the past, and I am confident looking around this room that we will weather today's challenges and emerge stronger than ever.
Thank you and enjoy the rest of the conference.