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Speech by SEC Commissioner:
Remarks at the 43rd Annual Rocky Mountain Securities Conference


Commissioner Troy A. Paredes

U.S. Securities and Exchange Commission

Denver, Colorado
May 6, 2011


Thank you for the warm welcome. I am pleased to join you in Denver this morning at the 43rd Annual Rocky Mountain Securities Conference. Today’s panels promise to be instructive — as they have been in other years — with a notable portion of the SEC’s range of responsibilities up for discussion. The distinguished panelists are certain to share with you discerning insights about the considerations that influence the SEC’s enforcement priorities; the oversight of broker-dealers and investment advisers; ongoing developments concerning accounting and auditing; corporate governance; and other important topics.

Because I expect that you will hear many specifics from others who are participating in this conference, I am going to speak more generally, sharing with you some of my overarching thoughts for fashioning and enforcing the regulatory regime that governs our securities markets. But before saying more, I want to remind you that the views I express here today are my own and do not necessarily reflect those of the Securities and Exchange Commission or my fellow Commissioners.

The regulatory landscape governing our financial markets has changed significantly. Less than three years ago, the peak of the financial crisis gripped us, and we were challenged in responding to — and persevering through — a period of financial and economic strain unlike anything since the Great Depression. Not only did the turmoil give rise to a great deal of hardship and misfortune, but the historic crisis also evoked a historic expansion of the federal government’s role in our economy as evidenced by the Dodd-Frank Wall Street Reform and Consumer Protection Act and the hundreds of rules and regulations that it demands of the SEC and other financial regulators.

Personally, I remain concerned that the sweep of Dodd-Frank will prove to unduly burden and constrict the U.S. financial system at the expense of our country’s economic growth and the competitiveness of our financial markets. My concern is not an abstract one; for there are concrete harms when the government overregulates. Overregulation of our financial markets runs the risk that companies will find it more costly to access the capital they need to grow and hire new employees; that businesses and individuals will find it more difficult to manage their risks effectively; that consumers will find it more challenging to get the credit they rely on to buy the goods and services they need; that investors will enjoy fewer opportunities to accumulate wealth and earn income; and that important new ideas and technologies will not be commercialized.

Of course, the regulatory agenda did not start with Dodd-Frank, nor will it end with it. Since 2008, for example, the SEC has pushed forward non-Dodd-Frank-related initiatives concerning matters such as short selling;1 the election of board members;2 public company compensation and governance disclosures;3 money market funds;4 credit rating agencies;5 municipal securities;6 asset-backed securities;7 target date funds;8 broker-dealer risk management controls;9 mutual fund fees;10 dark pools;11 the custody of advisory client assets;12 investment adviser disclosures;13 and political contributions by certain investment advisers or so-called “pay to play.”14 More is sure to come.

It is not just Congress and regulators, however, that shape the regulatory landscape. There are also the courts. The courts, for example, have played an instrumental role in determining the reach and substance of securities regulation through their interpretation of the underlying statutes and rules and regulations. The U.S. Supreme Court’s role in establishing the contours of the federal securities laws has been of particular note in recent years. Since 2009, the Court has decided Jones (concerning investment advisory fees),15 Merck (concerning the statute of limitations in private lawsuits for fraud),16 Morrison (concerning the extraterritorial reach of Section 10(b) of the Exchange Act),17 and Matrixx (concerning materiality).18 We still await the Supreme Court’s decisions in Janus19 (concerning the distinction between primary and secondary liability) and Halliburton20 (concerning class certification), both of which have been argued. 21

With these markers of where we stand in the lifecycle of financial regulation in mind, I want to spend the balance of my time focusing on three topics: the enforcement of the federal securities laws; the need to promote capital formation; and the implementation of Dodd-Frank.


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 to make illicit conduct an unattractive option. Law enforcement is thought to discourage individuals from engaging in illegal 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 individuals who engage in wrongdoing and to ensure that culpable individuals are properly sanctioned.

In significant respects, Dodd-Frank itself shapes how the federal securities laws will be enforced in the future, even setting to one side the extensive rulemaking that the legislation requires. Dodd-Frank includes enforcement-related provisions regarding, among other things, the SEC’s authority to bring aiding and abetting charges under the Securities Act and the Investment Company Act;22 the imposition of penalties for aiding and abetting liability under the Investment Advisers Act;23 recklessness as satisfying the knowledge requirement for aiding and abetting under the Exchange Act;24 the authority of the Commission to impose monetary penalties in any cease-and-desist proceeding;25 the extraterritorial reach of SEC enforcement actions;26 deadlines by which the SEC is to complete compliance examinations and inspections and enforcement investigations;27 bounties for whistleblowers;28 the Commission’s authority to seek collateral bars;29 and the disqualification of “bad actors” from certain private placements.30

To me, this complement of statutory provisions accentuates the importance of ensuring that the Commission enforces the federal securities laws effectively and efficiently and in a manner that is fair. This, then, is an apt time for me to offer two considerations that I hope will influence the SEC’s enforcement agenda and how we choose to commit our valuable enforcement resources.

First, sometimes the best choice is not to bring a particular case or advance a particular charge. When deciding how best to allocate the agency’s resources, the Commission has to make difficult choices. Enforcement is no exception. As much as we might like to, we simply cannot pursue to the fullest extent each and every possible violation of the securities laws. We have to make tradeoffs — reflective of our policy determinations — in light of the relevant costs and benefits that attend our different options.

One cost that must be accounted for is the opportunity cost of the time and effort we spend on a particular matter. Even when we pursue a meritorious case, there is an opportunity cost that may argue for allocating the Commission’s resources differently. Resources committed to a particular matter become unavailable for some other — perhaps better — purpose. Put simply, if we commit resources to aggressively pursue case A our ability to pursue case B may be compromised. The concern is that it may have been better for investors and our markets had we focused on case B instead of case A. Case selection, then, is critical.

I recognize that selecting the right cases to investigate and charge — and to take to trial as compared to settle — is very difficult in practice. There are, however, guideposts that can direct our determinations. Specifically, I think that the following considerations, among others, should inform how we allocate our enforcement resources:31

  • How and to what extent did the misconduct harm investors? The interests of investors, of course, must be stressed in fashioning our enforcement priorities.
  • Was the misconduct intentional or the result of negligence? We need to ensure that we have adequate resources available to dedicate toward aggressively pursuing those who are most culpable.
  • Have certain enforcement-related objectives already been satisfied? We should consider, for example, whether a party has already undertaken appropriate remedial steps.
  • Has the alleged wrongdoer been, or will the individual or entity be, meaningfully sanctioned through means other than an SEC enforcement action, thus reducing the marginal value of our bringing a case?
  • What is the impact of bringing one more case of a particular type? Is there any appreciable general deterrence benefit of bringing another case of this type or have diminishing returns already set in?
  • Are we able to achieve all (or nearly all) of the relief we seek by bringing a more streamlined case that does not charge every potential violation or advance untested legal theories?

Having posed these considerations, I want to reemphasize my primary point, which is this: Deciding not to press a particular investigation or advance a specific case, even if it is meritorious, can be the wisest choice if it allows us to commit our enforcement resources to better uses.

Second, the SEC must be prepared to give meaningful credit to those who cooperate with our investigations and enforcement actions. For several years now, the Seaboard Report has guided the Commission in measuring the extent of a company’s cooperation and in assessing the credit that the cooperation warrants. More recently, in 2010, the SEC announced an expanded initiative to encourage both entities and individuals to cooperate fully with the agency.32

When a defendant or a party under investigation cooperates, not only does it help the Commission build its case while conserving resources that we can dedicate to protecting investors in other ways, but it also provides an opportunity for us to get helpful information concerning the perpetration of fraud and manipulation more generally. We can learn a great deal from those we are considering charging or have charged if these individuals are willing to explain their tactics to us. The sharper our insights are into the motives and techniques of wrongdoers, the more effective we will be in rooting out misconduct before more harm is done to investors and the integrity of our securities markets.

To get the benefits of cooperation, however, we cannot be stingy with the credit we give in exchange. Defendants have to legitimately expect that they will receive enough credit to make cooperating worth it.

As the SEC’s enforcement responsibilities and powers evolve, and as the agency’s effectiveness tends to get measured in accordance with the Commission’s assertiveness in bringing enforcement actions, I want to recognize, if only in brief, that it is a serious and sobering occasion for the government to exert its power against a person by alleging that he or she has violated the law. Therefore, when we enforce the federal securities laws we always have to account for the due process and fairness interests that are at stake.

Capital Formation

When considering what the scope and nature of the securities law regime should be, I find it useful to keep the following in mind: That the essential purpose of our financial system is to promote capital formation and to facilitate the allocation of capital to its most productive uses in our economy. Indeed, an animating objective of the federal securities laws is to encourage investors to invest so that businesses can raise the capital they need to drive economic growth.

The real-life gains society enjoys when we promote capital formation can perhaps best be appreciated by appraising the highlights of how small business contributes to our economy and our standard of living. Startups and maturing enterprises generate new innovations and technologies, provide opportunities for investors to earn higher returns and accumulate wealth, and spur job creation. Companies that today are household names can trace their origins to entrepreneurs and innovators of earlier periods who had the wherewithal and backing to start and grow a business.

In providing our economy with cutting-edge goods and services, new and smaller companies in turn pressure more established firms to run themselves more effectively; the market discipline of competition holds larger incumbent enterprises accountable. Not only do we benefit from the range of innovative products, productivity gains, and new jobs that small and emerging businesses offer, but we are better off because larger firms must be even more responsive to the demands of stakeholders to remain competitive.

All of which says, as I see it, that small business is key to maintaining and furthering our country’s competitive edge in an increasingly global marketplace.

It also is important to underscore that capital formation advances core investor goals. Investors primarily invest so that they can earn income and accumulate gains. This means that investors need opportunities to invest. More to the point, it means that investors are better served when they are offered more investment choices. If the regulatory regime stifles capital formation by making it more difficult and more costly for businesses to raise funds, investors enjoy fewer investment options and firms investors do invest in may be disadvantaged by a higher cost of capital or, in more extreme circumstances, an inability to raise needed funds. Furthermore, to the extent the flow of capital is hindered, investors may earn lower returns or suffer losses because overall economic growth is not what it could be.

There is thus a coincidence of interests between issuers and investors: Issuers need to raise capital and investors want to provide it. When companies are frustrated in attempting to raise capital, the risk is that investors end up with an inferior mix of choices for putting their money to work. In other words, promoting capital formation is part and parcel of fulfilling the desire of investors to commit their financial resources to valuable investment opportunities.

For all of these reasons, the SEC should look for opportunities to alleviate regulatory strictures and burdens that stifle capital formation and the funding and growth of small business. This means that we should press forward on refining the regulatory regime to allow issuers more flexibility to raise capital privately and that we need to consider regulatory changes that address the risk that the regulatory regime itself unduly dissuades companies from going public and listing on U.S. exchanges.33

Accordingly, I am pleased by the recent discussions that have centered on such worthwhile ideas as modernizing the prohibition on general solicitations under Regulation D so that businesses can raise funds more efficiently and at lower cost; increasing the shareholder threshold at which a private company is forced to report publicly; and substantially increasing the current cap on offerings under Regulation A; as well as on ways of making it more attractive for smaller companies to go public. I encourage interested parties to provide us more suggestions for how we can best facilitate capital formation — a goal that is fundamental to the SEC’s mission.


The SEC continues to be in the throes of several Dodd-Frank rulemakings, so let me turn there. Among the scores of Dodd-Frank rulemakings that fall within the Commission’s jurisdiction — not to mention the numerous studies that Dodd-Frank instructs the agency to conduct — are regulatory initiatives regarding derivatives; asset securitization; the “Volcker Rule”; credit rating agencies; hedge funds, private equity funds, and venture capital funds; municipal securities; clearing agencies; and corporate governance and executive compensation. The substance of these and other rules and regulations that the agency promulgates will go far toward determining Dodd-Frank’s ultimate impact. Without question, the stakes are high.

Instead of speaking this morning to the particulars of any rulemaking, I want to conclude with two cautionary notes that cut across the entirety of the SEC’s Dodd-Frank regulatory agenda.

First, we cannot rush our rulemakings under Dodd-Frank. Many of the rulemakings Dodd-Frank charges the agency with are to be completed by mid-July of this year according to the statute. Trying to do so much so quickly is fraught with risk.

Administrative agencies like the SEC are built on their expertise.34 The practice of the Commission as an “expert agency” is bolstered by its very structure: five Commissioners, no more than three of whom may be from the same political party. The wisdom of this structure is the promise that as five unique perspectives contribute to the Commission’s decisions, the dynamic will produce a better regulatory regime — one that incorporates a wider range of informed viewpoints, insights, and judgments.

The agency’s expertise, however, is not self-executing. The Commission is best equipped to exercise its expertise in overseeing our securities markets and to draw upon its members’ diverse views and experiences when the agency has good information and when we are afforded room to thoughtfully digest the information we have. For example, a demanding cost-benefit analysis that permits us to make informed tradeoffs across a range of potential outcomes is the best way of achieving the common good, of ensuring that unintended consequences are avoided when implementing Dodd-Frank. Such rigor requires time and careful attention.

Accordingly, we cannot try to do too much too fast for the sake of meeting a deadline. Our paramount responsibility is to get the rules right.

Second, we need to ensure that the regulatory regime does not compromise the international competitiveness of U.S. financial markets. Capital and labor are mobile. Capital moves especially freely without regard to geographic boundaries. It takes little for capital flows and transactions to be redirected from one jurisdiction to another.

The U.S. has long played a leading role in the world of finance, but other countries have taken — and will continue to take — noticeable steps to present competing financial centers. As financial markets around the world continue to develop and innovate, and as transactions and securities offerings increasingly occur across borders and in other countries, the U.S. must continually reevaluate its regulatory framework to ensure that our competitive lead in the global financial marketplace is maintained. Indeed, we should ensure that the U.S. regulatory regime is properly calibrated to guard against the imposition of regulatory demands that spur economic activity to migrate to other jurisdictions. Relatedly, it is worth cautioning against an extraterritorial extension of Dodd-Frank’s reach that could place U.S. financial institutions at a distinct disadvantage when competing against their foreign counterparts for business.

My regard for U.S. competitiveness is part and parcel of my concern that the regulations implementing Dodd-Frank will prove to be overly burdensome and prescriptive. The U.S. is far along in revamping our financial regulatory framework, outpacing other countries in key respects. One often associates moving first with having an advantage. Yet when it comes to regulating the financial system, there is a risk that if the U.S. regulatory regime is too restrictive and burdensome, moving first could be particularly disadvantageous for U.S. markets. The U.S., by putting significant new features of its regulatory framework in place first, may be disadvantaged as compared to other jurisdictions that can benchmark against the U.S. regime to offer a regulatory system that proves to be more conducive to the business of investment and finance. One way to mitigate this prospect is for the U.S. regulatory regime to ensure that market participants are afforded an appropriate degree of flexibility and choice in running their enterprises and in transacting.


There is much more to be said about many more topics. But for now, let me end by thanking you for the opportunity to share with you some of my thoughts.

Enjoy the rest of the program.

1 See http://www.sec.gov/rules/final/2010/34-61595.pdf.

2 See http://www.sec.gov/rules/final/2010/33-9136.pdf. But see http://www.sec.gov/rules/other/2010/33-9149.pdf (Commission order granting stay of final rules pending resolution of judicial challenge).

3 See http://www.sec.gov/rules/final/2009/33-9089.pdf.

4 See http://www.sec.gov/rules/final/2010/ic-29132.pdf.

5 See http://sec.gov/rules/final/2009/34-59342.pdf; http://sec.gov/rules/final/2009/34-61050.pdf; http://sec.gov/rules/proposed/2009/34-61051.pdf.

6 See http://sec.gov/rules/final/2010/34-62184a.pdf.

7 See http://sec.gov/rules/proposed/2010/33-9117.pdf.

8 See http://sec.gov/rules/proposed/2010/33-9126.pdf.

9 See http://sec.gov/rules/proposed/2010/34-61379.pdf.

10 See http://sec.gov/rules/proposed/2010/33-9128.pdf.

11 See http://sec.gov/rules/proposed/2009/34-60997.pdf.

12 See http://sec.gov/rules/final/2009/ia-2968.pdf.

13 See http://sec.gov/rules/final/2010/ia-3060.pdf.

14 See http://sec.gov/rules/final/2010/ia-3043.pdf. I look forward to continuing to evaluate the comments on the Commission’s outstanding proposals.

15 Jones v. Harris Assocs. L.P., 130 S. Ct. 1418 (2010).

16 Merck & Co., Inc. v. Reynolds, 130 S. Ct. 1784 (2010).

17 Morrison v. Nat’l Austl. Bank Ltd., 130 S. Ct. 2869 (2010).

18 Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309 (2011).

19 Janus Capital Group Inc. v. First Derivatives Traders, 566 F.3d 111 (4th Cir. 2009), cert. granted, 130 S. Ct. 3499 (U.S. June 28, 2010) (No. 09-525).

20 Erica P. John Fund, Inc. v. Halliburton Co., 597 F.3d 330 (5th Cir. 2010), cert. granted, 131 S. Ct. 856 (U.S. Jan. 7, 2011) (No. 09-1403).

21 These cases add to earlier securities law opinions coming from the Roberts Court, including Dabit, 547 U.S. 71 (2006), and Kircher, 547 U.S. 633 (2006) (concerning SLUSA); Billing, 551 U.S. 264 (2007) (concerning the interplay between the federal securities laws and the antitrust laws); Tellabs, 551 U.S. 308 (2007) (concerning the PSLRA’s heightened standard for pleading fraud in a class action); and Stoneridge, 552 U.S. 1481 (2008) (concerning secondary liability).

22 Dodd-Frank 929M.

23 Id. 929N.

24 Id. 929O.

25 Id. 929P(a).

26 Id. 929P(b).

27 Id. 929U.

28 Id. 922.

29 Id. 925.

30 Id. 926.

31 For a similar articulation of factors to consider when deciding which cases and charges to bring, see Troy A. Paredes, Commissioner, U.S. Securities & Exchange Commission, Remarks at the 2009 Southeastern Securities Conference (Mar. 19, 2009), available at http://sec.gov/news/speech/2009/spch031909tap.htm.

32 See http://sec.gov/news/press/2010/2010-6.htm.

33 Precisely because I believe that the Commission should do more to avoid burdening smaller companies with unwarranted regulatory demands, I dissented when the Commission adopted its final rule affording shareholders of public companies a vote on executive compensation (so-called “say on pay”), a vote on the frequency of shareholder say on pay, and a vote on certain golden parachutes paid in connection with business combinations. See http://sec.gov/rules/final/2011/33-9178.pdf. The Commission only afforded smaller reporting companies a temporary exemption from the say-on-pay and frequency votes until 2013; the Commission provided no similar phase-in for smaller companies when it came to golden parachute compensation. The Commission, in my view, should have afforded smaller public companies an outright exemption from the new regulatory requirements. Similarly, the Commission should have afforded newly public companies an exemption, if only until after the company’s first annual meeting. Unfortunately, the Commission chose not to.

34 See generally Stephen Breyer, Breaking the Vicious Circle: Toward Effective Risk Regulation (1993); James M. Landis, The Administrative Process (1938).



Modified: 05/25/2011