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Speech by SEC Commissioner:
Setting Forth Aspirations for 2011
Address to Practising Law Institute’s SEC Speaks in 2011 Program


Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission

Ronald Reagan International Trade Center
Washington, D.C.
February 4, 2011

Good afternoon.

This is my third SEC Speaks as an SEC Commissioner. As I think back over the past 30 months, the breadth and depth of the events and issues that we have confronted and continue to wrestle with are both epic and fundamental. As we embark on a brand new year, 2011, I thought I would offer my New Year’s Resolutions for 2011 and set forth my wishes for the SEC.

Before I begin, let me start by issuing the standard disclaimer that the views I express today are my own, and do not necessarily reflect the views of the Securities and Exchange Commission, my fellow Commissioners, or members of the staff.

Like me, I am sure that when you think about your wishes and goals for the future, you reflect on the past. The recent past for me, like so many of you, is defined by navigating the worst financial crisis since the Great Depression, and working to build a lasting foundation for future prosperity. Part of that process has been the dialogue I’ve had with market participants — one example is my statements at prior SEC Speaks, and the feedback I received. Two times before, I have stood before you and shared my thoughts on the problems we faced and the solutions we should work toward.

In 2009, at my first SEC Speaks, I talked about how the driving principle behind regulatory reform is to re-establish accountability and transparency to investors. This involved calls for action by Congress, including providing self-funding for the SEC, as well as policy changes at the SEC. I called for delegating the authority to issue formal orders to the Enforcement Division, establishing an Investor Advisory Committee including retail investors, and enhancing the ability of shareholders to improve corporate accountability.1

In 2010, I pointed out what has been one of the most stark truths of recent years, which is that deregulated markets actually misallocated our country’s capital and other scarce resources, resulting in trillions in mispriced assets, devastated the savings of American families and resulted in painful levels of unemployment that persists to this day. This underscored a focus on lessons learned — or should I say that we need to relearn — from the 1930s, about meaningful disclosures, and good business practices. Yes, these disclosures and practices cost time and money, but those costs are dwarfed by the costs that the financial crisis imposed on the real economy and our society. To implement these ideas, I called for several reforms that would make our regulatory system sustainable, including a consolidated and uniform audit trail, so we could see how all the trades in the market happen and be a more effective regulator.2

So it is against this backdrop, that I share with you my wishes for 2011.

I. Regulators Must Have Raw Data

As we work to right the wrongs of the past and build a robust future, my first wish is for regulators to have raw data. I am deeply envious of regulators that have ready access to meaningful data as to the markets that they regulate.

Needless to say, the SEC is not living this reality. The events of the May 6 flash crash demonstrated this deficiency in living color as our staff worked tirelessly for months to stitch together different, incompatible sets of data obtained from other organizations and reconstruct the trading activity that happened in a 20 minute period. The consolidated and uniform audit trail has been proposed in part to rectify this situation.3 This initiative has been proposed to the public and is awaiting the Commission’s next step.

However, while the proposed audit trail is a step forward, under the current proposal the SEC would not own the data, it would only have access to it. This worries me because access by itself may not be enough. There are some real world examples of data sets the SEC has “access” to, but cannot use effectively.

Let me just give you one small example of this, and what our staff is prevented from being able to do. Currently, the SEC staff has access to the registration database of broker-dealers and registered representatives. But the staff does not have the ability to search the database for trend-specific data regarding broker-dealers as an industry. Our staff can search the database for information associated with an individual representative or particular firm, but they cannot search firms in the aggregate. For example, if staff wanted to run a search to assess and assemble statistics on how many broker-dealers had representatives with disciplinary histories in the aggregate, that would not be a quick or easy search that could be run. Instead, staff must request the underlying data from the owner of the database — in this case from an SRO. Historically, our staff has requested this underlying data and not received much in return. Recently, the staff has made inroads and has started to receive some of the underlying data. However, it does not solve the central issue that the staff is still dependent on a third party to receive this data and that the staff may again find itself stymied in its efforts to get information.

As a result, it is important to me that the audit trail initiative be implemented in such a way that that the SEC is in the position of immediately receiving raw data that it can use as it sees fit. The data received should be comprehensive and should cover market activity and the market participants.

At a time when the SEC has acknowledged it is building expertise regarding market structure and entities like hedge fund advisers and swaps dealers, it is that much more essential that we build the internal infrastructure to have data available, along with the expertise to analyze it. We need to make sure that the agency is pro-active rather than reactive, knowledgeable rather than surprised, and nimble rather than ossified.

Designing and implementing the systems we need to make sure that we are equipped with appropriate data will take hard work. And developing such systems will require money. However, the return on investment will be huge - and we need to make the investment. It’s obvious that you cannot be an effective, pro-active regulator if you don’t have the data to know what’s going on.

II. The Enforcement Division Must Bring Cases With Obvious Deterrent Effect

As we work to build a pro-active regulator, my second wish is that the SEC Division of Enforcement brings cases that have obvious deterrence value. I know that this is a wish that is shared by our Enforcement staff. This means that when the Commission announces the resolution of a matter we would notice a reaction that we haven’t always witnessed.

I envision a world where when the SEC announces a settlement in a high profile case, its impact is clearly noted — and leaves little doubt that it will make people that are engaged in similar activities think twice. An enforcement action by the SEC should be serious business, and it should cause an organization to seriously review how it has been operating. Moreover, our enforcement actions should have market-wide impact, and there should be sanctions that are significant enough to stop similar conduct in its tracks. The possibility of being sanctioned by the Commission should not be considered part of the cost of doing business.

I envision a world where our remedies are calibrated to be meaningful, not merely routine - and where federal judges can clearly see that the SEC understands its mission and seeks to protect investors and deter wrongdoers by obtaining appropriate sanctions and meaningful deterrence.

An additional wish for 2011 is to see defendants take accountability for their violations and issue mea culpas to the public. I hope that 2011 brings an end to the press release issued by a defendant after a settlement explaining how the conduct was really not that bad or that the regulator over-reacted. I hope that this revisionist history in press releases will be a relic of the past. If not, it may be worth revisiting the Commission’s practice of routinely accepting settlements from defendants who agree to sanctions “without admitting or denying” the misconduct.

III. Recognize that Underfunding the SEC is Creating Harm Right Now

My third major wish is that 2011 brings a permanent fix to the SEC’s chronic shortage of resources. Clearly, the current funding freeze at the SEC has to be resolved quickly. This situation is causing real harm with a devastating impact that could be avoided. It has been well documented4 that the Commission has had to identify several actions required under Dodd-Frank5 that it cannot implement due to budget uncertainty - including the Investor Advisory Committee, the Office of the Investor Advocate and the Office of Minority and Women Inclusion. Additionally, it has been well documented that the SEC has had to introduce draconian cut-backs on the staff’s ability to examine and investigate regulated entities and entities suspected of violating the securities laws.

As just a few examples, the lack of funding has already led the agency to institute a hiring freeze and to cut back on travel for examiners - trips involving enough distance to require an overnight stay are not possible. Moreover, the SEC has also limited the ability to hire expert witnesses in certain trials, such as in complex securities cases, or the taking of depositions in other cases. It should not be acceptable that the budget chill will further delay the day that harmed investors can get restitution through a Commission enforcement action.

There are other adverse effects. Because of the budget constraints, the SEC cannot continue to invest in technology and specialized skills that would facilitate the agency’s ability to pursue quickly evolving market practices, transactions, and products — particularly in newer areas such as hedge funds, swaps, CDOs, and other derivatives. At a time when the SEC should be expanding its expertise to appropriately oversee the markets, it is operating with a serious handicap. These budget constraints are negatively affecting the SEC’s ability to carry out its core mission.

I agree with Senator Johnson, the new Chairman of the Senate Banking Committee, when he stated that the current continuing resolution could force our agency to face a lack of resources that “ultimately leaves investors more vulnerable.”6 I believe this is a wholly unacceptable outcome.

Beyond the short-term needs, we also need to assure that the Commission has a stable source of resources. As many of you know, shortly after my arrival at the SEC, and after getting a firsthand view of how the scarcity of resources had crippled the agency, I called for the SEC to be able to fund itself and set its own budget, while remaining subject to Congressional oversight. Obviously, that hasn’t happened and the SEC’s needs remain critical. We need the proper funding to do our job and meet our basic obligations.

I thank those of you who have supported properly resourcing the Commission and I ask that you join me in continuing the fight to fix the chronic funding problems facing the SEC.

IV. Let’s Not Break Things That Are Working

My fourth wish is that the Commission refrain from actions that could break things that are working. For example, even after the oversight of investment advisers with less than $100 million under management is transferred to the states,7 a majority of the advisers remaining with the SEC will be small businesses. Recently, in connection with the publication of the staff’s study on extending a fiduciary duty to broker-dealers, there has been much discussion about “harmonizing” the rules. In the rush to “harmonize,” I am not in favor of a multitude of new rules that may institute barriers to entry and could be anti-competitive to small business. Small businesses have flourished in the advisory industry and I would not want to see them disappear and/or be forced into consolidation because the Commission has adopted a series of rules that may not be needed. My hope is to avoid increasing costs by harmonizing just for the sake of harmonizing.

Our securities regulatory regime is grounded in the ideals that the regulators set the level playing field and market participants operate within that structure. Gutting the principles-based regime for advisers in the name of harmonization would be to break a regulatory structure that that has worked well for over 70 years. We need to take great care as we move forward.


I want to end my remarks with one final New Year’s resolution for the SEC — and that is to wish that 2011 returns the SEC to its traditional role as the “Crown Jewel of Government Agencies.” I am proud to serve alongside a group of the most committed and hardest working men and women you will ever meet. These are men and women that have worked tirelessly during my tenure as a Commissioner and the work continues at an inhumane pace. This is true even though they could be paid so much more in the private sector. As Lord Turner, head of the UK’s Financial Services Authority said so succinctly, the “poachers are better paid then the game keepers.”8 Our staff deserves a well-funded agency that provides the tools they need to protect investors and fulfill the agency’s mission. Investors expect no less.

Thank you for your attention this afternoon and for your efforts to strengthen the SEC.

1 Luis A. Aguilar, Commissioner, Securities and Exchange Commission, Increasing Accountability and Transparency to Investors. The SEC Speaks in 2009 (February 6, 2009).

2 Luis A. Aguilar, Commissioner, Securities and Exchange Commission, Sustainable Reform Prioritizing Long-Term Investors Requires the Right Orientation. The SEC Speaks in 2010 (February 5, 2010).

3 Securities and Exchange Act Release No. 34-62174 (May 26, 2010) [75 FR 32556 (June 8, 2010)].

4 Congress Passes Government Funding Bill: SEC Left in the Cold. James J. Green, AdviserOne. December 22, 2010.

5 The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

6 Comments as Senate Passes Continuing Resolution. Press Release Issued by Senator Tim Johnson. December 21, 2010.

7 See Section 410 of the Dodd-Frank Act; Advisers Act Section 203A [15 U.S.C. 80b-3]; Investment Advisers Act Release No. 3110 (Nov. 19, 2010) [75 FR 77052 (Dec. 10, 2010)]

8 See Financial Crisis Inquiry Commission. Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (January 2011), http://c0182732.cdn1.cloudfiles.rackspacecloud.com/fcic_final_report_full.pdf, Page 64. (quoting Lord Adair Turner, interview by FCIC (November 30, 2010)).



Modified: 02/04/2011