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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
NASAA Members and the SEC — United in the Public Interest and Making Investors a Priority


Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission

North American Securities Administrators Association
Annual NASAA/SEC 19(d) Conference
Washington, D.C.
April 28, 2009

Thank you very much for the kind introduction.

In this economic environment, fraudulent schemes are being revealed at a record pace. There is a Warren Buffett quote that feels very timely right now. He said "it's only when the tide goes out, that you learn who's been swimming naked." Fraudsters are finding themselves revealed as "naked" as they are unable to sustain their fraudulent schemes by convincing new investors to invest and/or issuing inflated performance numbers in such bad market conditions. As a result, SEC telephones are constantly ringing with calls from investors asking questions or making complaints. I know NASAA members are receiving similar calls from investors seeking information and asking for help.

It was my privilege to appear before NASAA members in January and talk about empowering enforcement. Today, while the need to empower enforcement remains a top priority, we also share the common objective of prioritizing the interests of investors in any contemplated regulatory reform.

As the discussions about regulatory reform echo through the halls of the federal government, the voices on behalf of investors are too few and too quiet.

And so in my remarks to open this conference I will focus on making investors a priority in each of these two areas, enforcement and regulatory reform. I will:

  • Provide a status report on the reforms I have suggested to revitalize the SEC Enforcement programs, and

  • Share my thoughts on regulatory reform, which I understand will be discussed more this afternoon.

The thoughts I will express today are my own, and do not necessarily reflect the views of the Commission, my fellow Commissioners, or the staff.

Status Report on Reforms to Revitalize the SEC

In my public remarks, I have outlined a number of reforms that the SEC needs to take, and areas that Congress needs to act upon, to revitalize enforcement of the securities laws, and to restore the integrity of our capital markets and to improve investor confidence.


While more needs to be done, the good news is that the SEC has taken several initial steps to unshackle its Enforcement program and prioritize investors. For example:

  • The penalty pilot program, which required SEC enforcement staff to seek prior Commission approval before negotiating penalties with corporations, has been dismantled. In addition, the Commission has streamlined and expedited approval of formal investigations;

  • The Commission is also addressing its infrastructure to handle tips and complaints and is beginning the process to reenergize its examination and enforcement staff; and

  • Finally, following a suggestion I made several months ago, the SEC is moving toward the formation of an investor advisory committee. This committee will help the Commission serve investors by providing us with investors' perspectives on regulatory issues and by making recommendations on the Commission's programs.

I want to thank NASAA members for their formal and informal support on these initiatives. I also want to acknowledge Chairman Shapiro for pushing these policies forward. As a vocal public advocate for empowering the SEC and its enforcement program, and for an investor's advisory committee, I strongly support these actions as important first steps.

Next Steps

The question now is what are the SEC's next steps? I have previously talked about a number of additional steps, such as:

  • Further streamlining the opening of routine, non-controversial formal investigations by delegating authority to the Enforcement Division Director and Heads of the Regional Offices;

  • Improving the process by which amounts collected from wrongdoers are distributed to investors;

  • Implementing a risk-based data analysis system; and

  • Revising the corporate penalty guidelines to focus on deterring misconduct.

One issue that I have spoken about before, and would like to highlight, is that the SEC's current corporate penalty guidelines need to be revised to focus on deterring misconduct. The current guidelines prioritize the following two factors over all others:

  • whether the corporation received a benefit as a result of the violation; and

  • whether the penalty would recompense or further harm the injured shareholders.

Under this framework, the conduct itself is of secondary importance. Clearly, this is a serious flaw. The purpose of penalties is to deter and punish misconduct.

By penalizing, or not penalizing, corporations based primarily on things other than their misconduct — such as whether the company happened to benefit from a fraud by issuing shares at an inflated price — the 2006 factors misdirect where the focus should be and fail to serve investors. I believe promptly revisiting the 2006 factors is a necessary step to revitalizing and empowering our enforcement program.

As the SEC works to revitalize its enforcement program, we must also continue to effectively coordinate with state and provincial regulators. I know that NASAA members and the SEC generally seek to avoid duplicative enforcement efforts, splitting the coverage of issues on large matters or focusing on information sharing and referrals. There have been many successes on this front, and let me mention just a few:

  • The North Carolina Secretary of State's Securities Division and the SEC worked closely in locating and preserving investor assets in a possible Ponzi scheme involving D. Martin Enterprises.

  • The Utah Division of Securities and the Utah attorney general's office successfully collaborated with the SEC in an alleged offering fraud and Ponzi scheme involving VesCor Capital.

  • In SEC versus Trigon Group, the State of Idaho securities regulators supplied the Commission with key evidence used to bring the case.

  • In the SEC versus Rennie case, the Commission sued an allegedly fraudulent investment adviser with the assistance of the Massachusetts Securities Division. Massachusetts also filed an administrative action the same day we filed our case to suspend and revoke the defendant's Massachusetts broker-dealer registration.

  • And in March, the Commission obtained emergency relief against Diversified Lending Group. In preparing for the filing, the SEC worked closely with state regulators from Michigan, Arkansas, California, Wisconsin, Kentucky, South Carolina, and Texas. The SEC and state regulators coordinated their efforts to locate and develop evidence and assisted the receiver in pursuing investor assets.

In addition to working together on Enforcement cases, the SEC also receives essential information and assistance from NASAA members in connection with the Commission's public alert of unregistered solicitations program. This program provides investors with prompt information about questionable solicitations involving securities and, undoubtedly, has served to prevent many investors from being defrauded.

Congressional actions

Although the SEC and NASAA members can accomplish much, there are needed improvements that only Congress can move forward. Chief among the actions that Congress must take are:

First, Congress needs to close gaping holes in the Commission's authority, thereby appropriately linking the Commission's powers to its mission to protect investors, provide for efficient markets, and facilitate capital formation. There are enormous areas of the securities markets that lack appropriate regulation, including over-the-counter derivatives, hedge funds, and municipal securities — all because, simply stated, the SEC lacks authority.

In addition to closing regulatory loopholes, Congressional action is also needed to provide the SEC with an adequate funding basis. I am pleased that Congress and the administration have recently taken steps to address some of the tragic underfunding of the SEC over the past several years — a time I should point out of rapid capital markets expansion. But much more needs to be done. The need for the SEC to have a bigger budget is obvious.

Here are some quick statistics to highlight the SEC's needs — its budget has been in the $888 to 900 million-dollar range over the previous four years and its staff has ranged around 3,500 to 3,600. With these resources, the SEC is responsible for approximately 12,000 public companies, 11,300 investment advisers, 950 fund complexes, 5,500 broker-dealers (with over 173,000 branch offices), 600 transfer agents, 11 exchanges, 5 clearing agencies, 10 credit rating agencies, and a number of key SRO's. In addition, the SEC has oversight over the nation's financial accounting standards setter, the FASB.

By comparison, the self-funded FDIC employs approximately 5,000 staff, over 40% more than the Commission, to oversee approximately 5,100 FDIC-insured banks, and has a budget that ranges from $1.2 to $2.2 billion.

While additional resources are necessary, the SEC must also be provided with the ability to budget and self-fund its operations. This is especially vital. The SEC needs to be able to set multi-year budgets and have the resources to promptly respond to drastically changing markets. In fact, many financial regulators are self-funded and have the ability to respond quickly and plan strategically in a way that the SEC cannot.

In addition to the Federal Deposit Insurance Corporation, these include the Office of Thrift Supervision, Office of the Comptroller of the Currency, and the Federal Reserve, to name a few. The SEC should be in the same position as these other financial regulators as it faces similarly important, if not greater, challenges.

There is much to be done, and by taking these actions the SEC will emerge from this financial crisis stronger and more robust then ever before.

Regulatory Reform

I care a great deal about investors and the SEC, and I've spoken out so much about needed changes to the SEC's enforcement program, that I've been referred to as the "Enforcement Commissioner." Today's environment, however, requires one to offer thoughts on the specific programs at the SEC at the same time as thinking through how the broader regulatory structure should look. I will end my remarks with some thoughts on regulatory reform.

NASAA members and the SEC share a common objective — we all serve the needs of the hard working men and women whose retirement savings and investments are financing our economies through the capital markets. The goals of the SEC and NASAA members are again uniquely aligned on the issue of regulatory reform. After all, financial services and markets exist to serve investors.

In these times of great momentum for reform, NASAA members and the SEC must remember why our organizations exist, and bring our experience and technical expertise to work on behalf of investors and fair markets — not only in our day-to-day regulatory activities, but also as counselors to members of Congress and to the Obama administration in their reform efforts.

I will focus on two specific issues in regulatory reform:

  • first, the need for the SEC to remain an integrated, comprehensive capital markets regulator, and

  • second, the proper objectives of regulatory reform and systemic risk regulation.

SEC as the integrated capital markets regulator

As we move forward with regulatory reform we need to recognize that a consolidated approach to capital markets regulation is essential for effective regulation. The institutions and functions that make up the capital markets are tightly interconnected. If you alter one aspect of these intertwined markets, others are affected and potentially significantly weakened. Thus, one regulator must maintain primary control over all the elements that intersect to form the capital markets.

Just reflect for a moment on the various market functions involved in a typical straightforward initial public offering of common stock and how the SEC has a hand in making sure the deal is done in an appropriate way that protects investors, strengthens capital formation, and maintains fair and orderly markets. Even in a straightforward IPO, nearly all of the capital markets functions and participants are involved and are subject to the oversight of the SEC. There is an issuer, a syndicate of underwriters, a registered public auditor, an exchange where the securities are listed and on which they will trade in the secondary market, broker-dealers who help effect the transactions, and a clearance and settlement system for the trades.

The SEC oversees each of these entities and facilitates the disclosures that these entities provide to the public. And, of course, many of the actual investors are themselves regulated entities such as registered investment companies or are advised by registered investment advisers or other market participants.

There are a number of steps in an IPO, and each step relies on understanding how the entire transaction interacts with each of the market functions. For example —

  • To affect the IPO, the issuer and underwriters prepare a prospectus under SEC rules that require that high quality information be provided to investors. The process also involves compliance with various rules designed to prevent conflicts of interest at the underwriter and its compensation arrangements, and to assure the independence of the auditor. In creating a public market for the securities, arrangements must also be made for a clearing agency to clear and settle trades. The clearing agency will have been registered with the SEC and is monitored for adequate risk management and other systems.

  • After the offering is registered, and as the underwriters and dealers market the securities, the SEC oversees rules that govern the process so that the selling conduct is fair to investors. Under these rules, not only must the conduct of broker-dealers and investment advisers toward investors be in accordance with their duties, but the conduct of the selling syndicate in the market, such as stabilizing transactions, also must be appropriate.

  • The listing and trading of the newly registered securities on an exchange (such as the NYSE or NASDAQ) are subject to appropriate standards overseen by the SEC, and the operation of the exchanges must follow rules providing for just and equitable principles of trade, free and open trading as part of a national market system, and coordination with clearance and settlement services and other parts of the markets.

  • The public is also served by ensuring that broker-dealers are structured to protect the interests of investors. Thus, investors seeking to engage in trading do so through accounts at broker-dealers, and the SEC helps ensure that these accounts appropriately segregate investor assets, that adequate margin is posted, and that other investor protections are observed.

  • During the time the issuer's securities trade on the regulated exchange the issuer is required to continue to provide ongoing reporting about its business and finances in periodic and current reports. This ongoing reporting supports informed decisions by investors.

  • Layered on IPO and secondary market trading are the essential capital providers — the investors themselves. When investors engage in the initial or secondary market for securities, they can do so as individual natural persons, or through institutions such as mutual funds and hedge funds. There is a regulatory interest in the practices of these intermediary funds, such as managing conflicts of interest and ensuring the disclosures by funds to their investors are of high quality.

Aside from these, there are many other important pieces to the capital markets, such as transfer agents, and alternative trading systems. There also are a variety of different kinds of securities and offering processes — from Dutch auctions to 144A exchange offers.

What I just described is a high level summary of a straightforward IPO. I know that this audience is familiar with the interconnectedness of the capital markets, and I appreciate your patience, but it's vital to highlight this interconnectedness in order to underscore the danger in breaking up the oversight of these inter-related events among various regulators.

All of these seemingly discrete entities and seemingly separate functions are part of a sophisticated but highly intertwined marketplace — all of which are subject to SEC oversight, or should be, such as hedge funds.

If you remove any aspect of a coordinated regulatory supervision of these functions and entities, the result would likely be less efficient markets, an adverse impact on capital formation and weakened investor protection. A consolidated capital markets regulator such as the SEC clearly has a role to play in any reformed regulatory structure.

The objectives of regulatory reform

As we talk about regulatory reform, I think it is important to ask what should be the objectives of regulatory reform.

I was heartened to see that NASAA has published Core Principles for Regulatory Reform, and welcome further exploration by NASAA on what the regulatory structure should look like and what should be its objectives.

There appear to be two main lines of thought on regulatory reform. One line seeks to close blatant gaps in regulation and authority — such as with respect to hedge funds and swaps, that were clearly policy mistakes. This could and should be done quickly.

A second line of thought is that dedicated regulation of systemic risk is needed. I think there is merit to this idea as well, with important conditions.

We need to have some clarity in our thinking about what are systemic risks. How you define systemic risk directly influences your ideas about how the financial regulatory system is structured. Many think of the regulation of systemic risk as being primarily focused on preserving the viability of institutions that are "too big to fail." But this definition of systemic risk can result in a financial regulatory model that focuses on institutions, not investors, and positions a government regulator to pick winners and losers among companies at the expense of investors and market certainty.

Instead, systemic risk regulation should recognize that the market functions exist to serve investors and other users — and that the focus needs to be on ensuring the continuation of systemically important market functions, and on investor protections.

This would involve identifying the systemically important market functions that an entity provides and working to isolate these functions within the entity. The objective is to ensure that the functions would be heavily reinforced against failure, and could be separately maintained should other parts of the entity weaken. The regulation could also provide for cross-entity relationships or standardized market systems to allow one or more other entities that provide similar market functions to step in and continue the functions seamlessly. For example, if the NYSE-Arca systems were to fail, the SEC has designed our market system so that NASDAQ would quickly pick up the important market functions.

The SEC's approach to regulating the capital markets works because it consciously proceeds from a holistic understanding of the overall system. The SEC's overriding goals are to maintain the integrity of the system and its usefulness to investors. The institutions that make up the market system are considered in light of these goals. The institutions operate to make a profit, but the SEC views their needs as subordinated to the needs of investors.

Relationship between SEC and Systemic Risk Regulator

Based on some press and pundit discussions, it has become obvious that there is some confusion as to what the SEC currently does. Let's be clear — the SEC is the only federal financial regulator charged with protecting investors, maintaining fair and orderly markets, and promoting capital formation. The SEC is and should be considered the first line of defense for the financial regulatory system with respect to the capital markets and investors.

If systemic risk regulation is truly focusing on the overarching risk to the financial system, the systemic risk regulator should be viewed as a supplement to — rather than a replacement for — the primary financial regulators, such as the SEC. The SEC is well-structured as a primary regulator, able to use its technical expertise and familiarity with the operations and practices in the markets to enforce the laws, as well as design sound regulation.

The SEC's structure as a consolidated capital markets regulator also appropriately reflects the understanding that the regulation of the capital markets — from securities offerings, to investment management firms, to exchanges — all should be oriented to serve investors. Additionally, the SEC's enforcement authority gives its regulatory program real teeth.

Currently, there are many models of regulatory reform being proposed with regard to a potential systemic risk regulator. The options range from a monolithic systemic risk regulator to a council of regulators. While there are advantages and disadvantages to the various models, one model that seems to offer a comprehensive and realistic option is to establish a "council of regulators."

I've recently spoken out about the potential benefits of a council of regulators and about some of the key issues that would need to be considered. There is not time this morning to discuss them, but my remarks on these issues are available on the SEC's website.


I am grateful that NASAA has not been sitting on the sidelines. But I call on you, in accordance with our common objective to serve the public interest and investors, to engage with even more vigor. The broader regulatory reform debate will impact you and investors. Decisions made as to the structure of the systemic risk regulator will have a profound impact on your relationship with federal regulators. Your contributions to this dialogue are essential.

Investors' confidence has been deeply shaken by the misconduct and lack of transparency in some aspects of financial services. Congress, the administration, and other interested parties have to remember that financial services exist to serve investors and our markets, and a focus on investors is absolutely essential to any credible regulatory restructuring.

I am glad to be here with you today. I also am humbled that you asked Chairman Schapiro that I serve as the Commissioner designated as the SEC's liaison to NASAA. I am honored to do so and look forward to continuing to work together. Investors need you and the SEC in this time of reform, and I urge you to make the most of today's conference and the days ahead.

Thank you all again for your continued service in the public interest.


Modified: 05/04/2015