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Speech by SEC Commissioner:
Exemplifying Fundamentals — Back to Basics


Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission

NASAA/SEC 19(d) Conference
Washington, D.C.
March 28, 2011

Good morning. It is a pleasure to be able to join this distinguished group assembled for the Annual NASAA/SEC 19(d) Conference. I commend Congress for the foresight to mandate that the Commission conduct an annual conference with our state securities counterparts. Increased communication and cooperation between us have many benefits, but they ultimate lead to the same result — greater protection of investors and the promotion of a fair and orderly capital market that benefits participants and investors alike.

I also want to acknowledge that immediately after this joint conference ends another conference begins. As you know, the North American Securities Administrators Association’s 2011 Annual Public Policy Conference takes place this afternoon. I was particularly interested in this year’s conference theme — “Will Washington Choose Investors?” There is no more important question that can be asked. To put the focus on investors is of critical importance right now as federal regulators translate the legislation into rules that will determine whether the investor protection goals of the Dodd-Frank Act are realized.

Before I continue, let me issue 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.

For the last several years, we have been engaged in an uphill fight to restore the securities regulation framework at global, federal, and state levels to where it should be. Financial services exist to serve investors and our markets, and a focus on investors is absolutely essential to any credible regulatory restructuring.

It is time for everyone involved in the financial services industry to re-dedicate themselves to the fundamentals of regulation. It is time to go back to basics. I am going to spend my time today discussing with you our shared goal — ensuring that securities regulation works as it was fundamentally intended.

I. Back to Fundamentals of Regulation

Why am I discussing the fundamentals of regulation? Why is this still an issue 77 years after the creation of the SEC and 92 years after NASAA was organized? Because they are under siege…. I am worried that the American investor will be trampled once again. It is hard to believe that this is happening after the American public bore the brunt — and continues to bear the brunt — of the costs of the financial crisis. This attack comes on multiple fronts — from the negative consequences of underfunding the SEC to continuing efforts by the industry to claw back or delay implementation of new authority provided by the Dodd-Frank Act.

Deregulated markets were instrumental in the misallocation of our country’s capital and other scarce resources, which resulted in trillions in mispriced assets, devastated the savings of American families, and resulted in painful levels of unemployment that persists to this day. Just as a few examples . . . American families who had saved for decades — did everything right — could no longer afford to send their children to college. Hardworking men and women entering their retirement years have had to continue working because their retirement nest eggs significantly diminished. Businesses large and small watched their lending costs soar and loan commitments disappear. The negative effects on capital formation in our country were devastating.

The Dodd-Frank Act provides the opportunity to address many of the problems that were evident in the financial crisis. As one example, the SEC now has the ability to bring accountability and transparency to previously unregulated market sectors, such as over-the-counter derivatives and hedge funds.

However, even under the best of circumstances, the SEC cannot do it alone. It must work together with other regulators both here and abroad. And, in particular it must work closely with NASAA and its members.

Moreover, even all the regulators combined need help. We need the financial services industry as a whole to re-dedicate itself to basic principles — principles of integrity, fair dealing, meaningful disclosures, and good business practices. I expect and hope that the financial industry has also learned the lessons of the financial crisis and the costs imposed on the real economy and our society. I expect them to do better. However, as the old saying goes, “expect the best, plan for the worst, and prepare to be surprised.”

As regulators, we can hope for the best, but we need to be prepared. Anything less is to ignore our responsibilities. It is clear that understanding the principles of regulation and implementing those principles through robust oversight is the core mission of a regulator. A regulator must possess expertise that is informed by current, accurate data and must exercise judgment that is grounded in the mission of the institution and service to the public at large. Rules must be promulgated that implement the law and establish a fair and level marketplace. Rules must also be enforceable and must prevent environments from being fostered that allow fraud to flourish and advantage predatory behavior. A key aspect of robust oversight is ensuring compliance and prosecuting those who violate the law.

I have grown troubled that these basic precepts are not understood and articulated by all. It is even more troubling when these precepts are twisted. That is why I have been advocating throughout my tenure for the Commission to exemplify the fundamentals of regulation.

II. Information is Power; Transparency is a Good not an Aspiration

One of the fundamentals of regulation is that regulators must have direct access to information about those we regulate and the activities that they engage in. I have spoken out often and loudly about the Commission’s need to receive real-time, high quality data. The events of May 6 illustrated the Commission’s paralysis because of its lack of access to basic data. May 6 occurred, and the Commission could only act as a repository — it could only receive questions and request data of others. It could not directly access data in real time and, certainly, could not supply answers.

It remains shocking to me that the Commission is deprived of basic data in so many ways. I have repeatedly spoken about the need for the Commission to have direct access to real-time data about the markets and market participants that we regulate, and I will continue to do so until this goal has been reached. Specifically, I have advocated for the Commission to have ongoing, direct access to real-time trading data and current and historical broker-dealer registration data. Currently we need to request this information from third parties. While we have taken some steps to establish this access, much more progress can and should be made.

Thus, it is with great delight that I can report one success story in the battle to improve information provided to investors and to the Commission. It is in the money market fund arena. Over the last two years, the SEC proposed and adopted a comprehensive set of money market fund reforms that significantly impacted the industry.1 A key component of that rule package that I advocated for included new disclosure requirements that would exponentially improve the data available to investors and to the Commission.

Money Market Fund Information

Specifically, the SEC now requires that money market funds report detailed portfolio data to the SEC on a monthly basis. These reports started arriving last December. In order to lead this initiative and reap the benefits of this information flow, the Division of Investment Management planned to hire several money market fund experts to analyze the data, and build the right data analytic tools. However, as is true throughout the SEC, because the SEC’s budget remains in flux and the SEC has had to operate under the stop-gap continuing resolution limitations, the Division has not been able to hire the full staff it needs. Nonetheless, despite this severe budget constraint, the Division of Investment Management has prioritized implementing this initiative, and they have hired an experienced former money market fund portfolio manager to help analyze the data and identify potential problems.

Similar to every new data collection the Commission implements, there is a transition period where the registrants need to learn the proper way to understand the form requirements so that the right data is reported. We are just now ending the start-up phase, and this data has already proven to be a game-changer in terms of the information that the SEC has about industry participants and their portfolios.

For example, this data greatly enhances the SEC’s ability to identify and monitor both existing and developing risks. The SEC can now examine risks arising out of a money market fund’s portfolio composition, exposures to different types of issuers, changes in portfolio maturities, pricing of securities, exposure to repo counterparties, investment in new types of securities (including structured securities), available liquidity, and spreads between market-based NAV per share and the $1.00 share price.

In plain English, the SEC is now able to answer questions it could not in the past. An important benefit to investors is that the SEC staff is now able to quickly identify money market funds that present greater risks. Some fund managers have already received phone calls from SEC staff asking about outlier portfolios or unusual holdings. Our examiners are now armed with better information and greater expertise when they walk in the door to examine a money market fund, and that is an improvement for all involved. This new data has also been used recently to present a composite picture of the industry to the Financial Stability Oversight Council (FSOC).

We are still in the initial development stage; the use for this data will expand and evolve over time. I am hopeful that the value of this work will be recognized and that the Division will be able to fully staff these efforts. The data being collected and the way it is immediately disseminated for use across the Commission — to the Commissioners, to the rulemaking staff, to the examination staff, and to our enforcement staff — are great examples of how the fundamentals of regulation are supposed to work.

In the same vein, I’m particularly enthusiastic about the consolidated and uniform audit trail that has been proposed by the SEC.2 If this audit trail had been in place on May 6th, the Commission could have acted in a more prompt and robust fashion to determine what went wrong, and would have been in a position to swiftly implement corrective measures. I was an early and strong supporter of this audit trail and look forward to the Commission’s next step to bring it to fruition.

When a regulator is equipped with real and timely data as to the industry it oversees — and is provided with the expertise and resources to understand and analyze the information — it is then able to take action on multiple fronts to ensure compliance and prevent investors from being harmed.

III. Relationship between Government Regulators and Industry Participants

A second fundamental of regulation is the need to have robust regulatory oversight. This goes beyond passively receiving information; this requires that the regulator go out and obtain information. And when regulators obtain information, they must be prepared to act on it. A strong regulatory regime must have as one of its pillars a vibrant examination program. An exam program is vital for numerous reasons. In addition to investor protection benefits of making sure any particular regulated entity is operating in compliance with applicable laws, information gathered in the Commission’s exam program is often critical to informing judgments the Commission makes in a number of rulemaking and policy matters.

At the SEC, examinations are conducted by staff in the Office of Compliance Inspections and Examinations (OCIE). I’ve been very vocal about the value OCIE provides to the Commission and the critical need for OCIE to be provided with appropriate resources and support.

In particular, I’ve spoken out about the need to remove handcuffs from OCIE.3 For example, historically, OCIE was able to make voluntary inquiries of unregistered entities when the information would be relevant and helpful to our oversight and investor protection mission. This is a situation that the Commission commonly confronts when an unregistered entity operates side-by-side with a regulated entity, with extensive business dealings between the two. Naturally, under such circumstances, a comprehensive inspection of the regulated entity would lead to questions about the unregistered entity, and OCIE would pose those questions and ask to see relevant records. These inquiries by OCIE successfully led to significant enforcement actions to halt on-going fraud.

In 2007, however, this practice was altered, severely curtailing its usefulness. Internal policies were imposed on the staff that strictly limited OCIE's ability to ask questions of unregistered entities. In addition, even when inquiries were permitted, additional administrative procedures created time-consuming hurdles. The danger, of course, is that by the time all these hurdles were cleared, investor funds had vanished.

I have been concerned about these burdensome hurdles, and publicly called for a reversal of this policy last year. To that end, I’m particularly pleased to report that OCIE has recently implemented new guidelines to facilitate soliciting information from unregistered entities. By removing needless restrictions, we can increase the efficiency and competency of our exams, yielding greater protection to investors.


Before I end my remarks, I want to say a few words about the staff across the states and at the SEC. In this country, regulating the securities marketplace has long been a partnership between the SEC and the state regulators. NASAA has been a forceful and reliable advocate for investors and the American public, and I have been privileged to work with you on many issues. We are in this together, and I commend all of you for the work you do as regulators. As I think about the recent criticism that has been directed at many regulators, I am reminded of Theodore Roosevelt and of his “Man in the Arena” speech. While I am tempted to change “man” to “individual,” I will read you his words as he spoke them:

It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.4

Please remember these words the next time you’re unfairly criticized. Please remember that you’re actually in the Arena — you’re not one of the timid souls — and never forget that the work we do as regulators is essential to ensuring market integrity and protecting investors.

I also want to speak directly about NASAA. I have been the NASAA Commissioner liaison throughout my tenure as a Commissioner, and I am grateful that NASAA has not been sitting on the sidelines. NASAA and its members have been very active in speaking on behalf of investors — whether it has been to champion the fiduciary standard, a higher standard than that currently in place, for broker-dealers who render investment advice, or to work toward enhancing protection for investors in private placements.

I’ve also greatly appreciated NASAA’s support for the SEC to be appropriately resourced. Just two weeks ago, your President, David Massey, sent a letter to Congressional leaders urging them to provide the SEC with needed resources.

I look forward to NASAA engaging with even more vigor. The broader regulatory reform debate will greatly impact investors. NASAA has been a stalwart champion of investors, and your contribution to this dialogue is essential.

I thank you — both SEC staff and NASAA members — for your efforts, and I express my gratitude for the tireless work to come. I also ask you to send me your thoughts on the ways the Commission and NASAA can work together to leverage our expertise and increase our protection of investors.

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

1 See Money Market Fund Reform, SEC Release No. IC-29132; File No. S7-11-09, S7-20-09, 17 CFR Parts 270 and 274.

2 See Consolidated Audit Trail, SEC Release No. 34-62174; File No. S7-11-10, 17 CFR Part 242.

3 Luis Aguilar, Commissioner, Securities and Exchange Commission, A Shared Responsibility: Preserving the Fiduciary Standard. IA Compliance Best Practices Summit 2010 (March 26, 2010).

4 Theodore Roosevelt, President, Citizenship in a Republic. The Sorbonne, Paris (April 23, 1910).



Modified: 03/28/2011