Remarks to the Los Angeles County Bar Association Securities Regulation Seminar

Commissioner Michael S. Piwowar

Los Angeles, California

Good afternoon and thank you, John [Hartigan], for that wonderful introduction.  I am glad to be with you today and appreciate everyone’s willingness to re-schedule this event in light of the federal government shutdown last month.  As many of you know, my colleague Commissioner Dan Gallagher was originally scheduled to deliver this luncheon address, but was not available on the new date.  I must admit I am still puzzled by the fact that the organizers of a conference that attracts such a distinguished group of securities lawyers would turn to me – the only non-lawyer member of the Commission – to join you instead.  Seriously, I am extremely pleased to be here to share my thoughts. 

It is good to be back in Los Angeles.  This city will always be a special place for me, since it was here – at our Los Angeles Regional Office – that I took the oath of office to be sworn in as Commissioner on August 15, 2013.  I am very appreciative of Michele Layne and her staff for organizing such a warm welcome and memorable event, which allowed the members of my family who live on the West Coast to be present for the ceremony. 

Coincidentally, today marks my one-hundredth day as a Commissioner.  So it is particularly nice to have this opportunity to return to Los Angeles, on this day, to talk about my initial observations and reactions as to what we do and how we do it at the Commission.  Before doing so, I need to provide the standard disclaimer that the views I express today are my own and do not necessarily reflect those of the Commission or my fellow Commissioners.

When I arrived, one of the first things I did was review the various documents that govern and guide the work of the Commission.  One of these documents is the Commission’s Canons of Ethics.[1]  The wise counsel of these Canons – first approved in 1958 and published in the Code of Federal Regulations – stands the test of time.  The Canons remind us to regulate in a manner “to insure that our private enterprise system serves the welfare of all citizens.”[2]  The Canons instruct the Commissioners to “carefully guard against any infringement of the constitutional rights, privileges, or immunities of those who are subject to regulation by th[e] Commission.”[3]  And, importantly, the Canons make clear that they apply to both Commissioners and staff alike.[4]  The core values expressed by the Canons come into play every day at the Commission. 

For my remarks today, keeping in mind the interests of this particular audience, I will focus on our enforcement and rulemaking programs.


The dedication and passion of the men and women in our Enforcement staff, working in 11 regional offices throughout the country – including, of course, Los Angeles – and in the Commission’s headquarters in Washington, DC, is truly impressive.  Their efforts are reflected in the Commission’s workload:  during my first one hundred days, I have already voted on more than 150 enforcement recommendations.   

Unlike most SEC Commissioners who have served, I am an economist, not a lawyer.  In fact, as far as I can tell, I am only the third economist, following in the footsteps of Charles Cox and Cynthia Glassman.  Bringing that perspective, I think of federal securities law violations as falling into three basic categories – lying, cheating, and stealing.  Even for someone like me who previously spent four years with the Commission and worked on numerous enforcement investigations, and who spent almost two years with an economic consulting firm providing expert witness services on a number of private securities litigation matters, it is astounding how many different ways people find to lie, cheat, and steal from investors.

For this reason, our enforcement program is a core part of our functions.  Enforcement supports all three parts of our core mission:  protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.  False and misleading information not only can cost investors money, but it also impedes capital formation by discouraging investing.  It contributes to increased volatility in the markets and leads to the inefficient distribution of capital.  Our Canons of Ethics speak to this important goal by noting that “possible abuses and injustice, if left unchecked, might jeopardize the strength of our economic institutions”[5] and that “members of this Commission should vigorously enforce compliance with the law by all persons affected thereby.”[6]

At the same time, I am mindful that the Commission’s enforcement powers are broad and carry with them a significant responsibility to be used in an appropriate manner.  The Canons of Ethics reflect the weight of this responsibility, by requiring Commissioners to “concern themselves only with the facts known to them and the reasonable inferences from those facts” and cautioning that a Commissioner “should never suggest, vote for, or participate in an investigation aimed at a particular individual for reasons of animus, prejudice, or vindictiveness.”[7]  I view this command to mean that we cannot allow public outcry, agency morale, politics, or jurisdictional turf battles to be reasons for pursuing, or not pursuing, an enforcement action.

Former Commissioner Troy Paredes recently said that, in his view, the Commission should base its enforcement decisions on three things:  the facts, the law, and due process.[8]  I would slightly alter this list to include two more items:  economic analysis, and nothing else.

Now, having seen a large enough sample of enforcement cases, I have been able to draw some initial thoughts about two key aspects of our enforcement program.

Delegated formal orders

My first observation relates to the Commission’s issuance of formal investigative orders.  The Commission’s power and authority to investigate under the federal securities laws is very broad.  Our Canons of Ethics recognize that the mere existence of an investigation – even without taking any subsequent enforcement action –“carries with it the power to defame and destroy.”[9]

As many of you are aware, the Commission staff can conduct an investigation either formally or informally.  In an informal investigation, the staff generally must rely on voluntary cooperation to obtain information.   Formal orders of investigation, however, authorize designated members of the staff to exercise the Commission’s statutory powers to conduct investigations.  These statutory powers include the authority to administer oaths and affirmations, to subpoena witnesses and compel their attendance, to collect evidence, and to require the production of any documents the Commission deems relevant or material to the inquiry.[10]  Failure to comply with a request made pursuant to a formal order can result in being sued by the Commission in federal court and could result in prosecution for being in contempt.

Historically, formal orders have been approved by the Commission.  This process usually required the staff to prepare a memorandum for the Commission containing a summary of the case and any possible violations, and recommending issuance of the order.  Although it was rare, if ever, for the Commission to deny a request for a formal order, the process brought forth a certain level of focus and review from not only the Division of Enforcement, but also staff in the Office of the General Counsel as well as the other divisions, such as Corporation Finance, Trading and Markets, and Investment Management.

But in a significant departure from past practice, in August 2009, the Commission delegated the authority to issue formal orders to the Director of Enforcement, on the grounds that such delegation would expedite the investigative process by reducing the time and paperwork previously associated with obtaining Commission authorization prior to issuing subpoenas.[11]  This authority was in turn sub-delegated to all supervisors in the Division of Enforcement at or above the level of Associate Director or Associate Regional Director.[12]

The initial delegation of authority was for a one-year period, in order to allow the Commission to review the Division of Enforcement’s exercise of formal order authority.  Subsequently, in August 2010, the Commission made permanent the Division’s authority to issue formal orders of investigation.[13]  In making this determination, the Commission cited the increased efficiency in the Division’s conduct of its investigations permitted by the delegation, and the Division’s continued effective communication and coordination in addressing pertinent legal and policy issues with other Divisions and Offices when formal order authority was invoked.

After the delegation, the number of formal orders jumped significantly – almost doubling between fiscal year 2008 and fiscal year 2012, with a high of 578 in fiscal year 2011.[14]  It is without doubt that obtaining a formal order has been made easier by removing the Commission from the approval process.  However, I question whether the processes currently in place are sufficient for the Commission to exercise the appropriate level of oversight of the formal order process.

I note that the initial review covered the one-year pilot program.  I am unaware of any subsequent reviews that have been performed to evaluate the continued propriety of using delegated authority for formal orders with the benefit of two additional years of operating history.  For instance, when delegated authority was initially granted, the Director of Enforcement indicated that, in appropriate circumstances, recommendations for a formal order might be submitted to the Commission for review.  However, I am not aware of any criteria and procedures for determining when such a submission would be made.  I believe a periodic review and evaluation of the formal order process using delegated authority is appropriate and necessary to effectuate Commission oversight.

Finally, the delegation of authority for approval of formal orders was deemed by the Commission to relate solely to agency organization, procedure, and practice, and therefore not subject to the notice and comment process under the Administrative Procedure Act.  The mere fact that we can institute certain rules without obtaining comment from the public does not necessarily mean that we should.  Given the significant ramifications for persons who are on the receiving end of a subpoena issued pursuant to a formal order, we should make sure that public comment is allowed on any review of the formal order process.


My second observation has to do with the issue of retroactivity.  Some cases before the Commission involve conduct that occurred before changes in a law or regulation governing the legality of the conduct or the remedies available.  In many of these situations, and as we should, the Commission applies the relevant standard at the time of the conduct.  In other words, the Commission does not retroactively apply legal standards.  Examples include audit standards and maximum civil penalty amounts.  

However, the Commission generally has taken a different approach when imposing collateral bars – which prohibit a person from associating in capacities other than those in which the defendant was associated at the time of the violative conduct – for conduct that occurred before the enactment of the Dodd-Frank Act.[15]  Prior to the Dodd-Frank Act, the Commission had authority to bar persons from associating with brokers, dealers, investment advisers, municipal securities dealers, and transfer agents.  But the bars from associating with a municipal advisor and a nationally recognized statistical rating organization are newly created by Section 925 of the Dodd-Frank Act.

Some have contended that a collateral bar may be applied without being considered retroactive, because such a bar constitutes a prospective remedy.  However, I disagree and believe that because the municipal advisor and NRSRO bars were not authorized prior to the passage of the Dodd-Frank Act, these bars are impermissibly retroactive unless any part of the violative conduct occurred after the passage of Dodd-Frank.  I see this simply as an issue of fairness.  It turns out the Supreme Court agrees.

The Supreme Court addressed the issue of retroactivity in Landgraf v. USI Film Products.[16]   Landgraf sets forth a two-part analysis for determining whether applying a statute would be impermissibly retroactive.  The first part analyzes whether Congress expressly addressed the retroactive effect of the statute.  If the statute does not expressly address retroactivity, then a determination must be made as to whether the statute would have “retroactive effect, [that is,] whether it would impair rights a party possessed when he acted, increase a party’s liability for past conduct, or impose new duties with respect to transactions already completed.”  If the statute would operate retroactively, the courts have utilized a traditional presumption against that result absent clear congressional intent.

As the Supreme Court observed in Landgraf, the presumption against retroactive legislation is deeply rooted in our jurisprudence, and “embodies a legal doctrine centuries older than our Republic.”[17] The Court continued that “[e]lementary considerations of fairness dictate that individuals should have an opportunity to know what the law is and to conform their conduct accordingly” and “for that reason, the ‘principle that the legal effect of conduct should ordinarily be assessed under the law that existed when the conduct took place has timeless and universal appeal.’”[18]  Therefore, the Court concluded that “[i]n a free, dynamic society, creativity in both commercial and artistic endeavors is fostered by a rule of law that gives people confidence about the legal consequences of their actions.”[19]

The Landgraf opinion notes that a number of provisions in our Constitution limit the ability of the government to impose retroactive laws.  These include the ex post facto clause, the prohibition on the states impairing the obligation of contracts, the Fifth Amendment’s takings clause, and the prohibitions on bills of attainder.  Equally important is the due process clause, which protects the interests in fair notice and repose that may be compromised by retroactive legislation.

Section 925 of the Dodd-Frank Act did not expressly address whether the collateral bar provision may be applied in cases involving pre-enactment conduct.  As I said, some have argued that the presumption against retroactivity should not apply, because the bars are   prospective and would protect the public from a risk of future harm.

Prior to my joining the Commission, the Commission addressed the issue of retroactivity of collateral bars in an opinion issued in December 2012.[20]  In that opinion, the Commission concluded that the Dodd-Frank collateral bars “are prospective remedies whose purpose is to protect the investing public from future harm” and therefore are not impermissibly retroactive.  I respectfully disagree with that conclusion.  I note, in particular, that in this matter, the defendant appeared pro se without legal representation and, in fact, did not even challenge the application of Section 925 to his proceeding.  So I hope that we have another opportunity to examine this issue, and this time in a situation where both sides are well represented by legal advocates.

Rulemaking and Economic Analysis

Turning to our rulemaking program, in 2012, my former office, the Office of Economic Analysis – later known as the Division of Risk, Strategy, and Financial Innovation, and now known as the Division of Economic and Risk Analysis (DERA) – released its guidance on economic analysis in Commission rulemakings.  The guidance noted that “no statute expressly requires the Commission to conduct a formal cost-benefit analysis as part of its rulemaking activities.  But as SEC chairmen have informed Congress since at least the early 1980s – and as rulemaking releases since that time reflect – the Commission considers potential costs and benefits as a matter of good regulatory practice whenever it adopts rules.”[21]

The Canons of Ethics guiding the Commission for the past 55 years have also arguably required economic analysis.  The Canons note that the rulemaking power accorded to the Commission by Congress imposes the obligation “to adopt rules necessary to effectuate the stated policies of the statute in the interest of all of the people.”[22]  The Canons further state that “rules should never tend to stifle or discourage legitimate business enterprises or activities, nor should they be interpreted so as unduly and unnecessarily to burden those regulated with onerous obligations.”[23]

Subsequent amendments by Congress to the Securities Act, the Exchange Act, and the Investment Company Act expressly require the Commission to consider competition, efficiency, and capital formation whenever it is engaged in rulemaking and require us to consider or determine whether an action is necessary or appropriate in the public interest.[24]  Section 23(a)(2) of the Exchange Act also obligates the Commission to consider the impact of any rule under that Act on competition and to state the reasons for the Commission’s determination “that any burden on competition imposed by such rule or regulation is necessary or appropriate in furtherance of the purposes of [the Exchange Act].”

The DERA guidance provides that each rulemaking include a sound economic analysis  with the following elements:  (1) a statement of the need for the proposed action; (2) the definition of a baseline against which to measure the likely economic consequences of the proposed regulation; (3) the identification of alternative regulatory approaches; and (4) an evaluation of the benefits and costs – both quantitative and qualitative – of the proposed action and the main alternatives identified by the analysis.  High-quality economic analysis helps to ensure that decisions to propose and adopt rules are informed by the best available information about a rule’s likely economic consequences, and allows the Commission to meaningfully compare the proposed action with reasonable alternatives, including the alternative of taking no action.

I am pleased that self-regulatory organizations have acknowledged the value of sound economic analysis.  The Financial Industry Regulatory Authority (FINRA), the Municipal Securities Rulemaking Board (MSRB), and the Public Company Accounting Oversight Board (PCAOB) have recently announced initiatives to incorporate economic analysis in their own rulemaking efforts.[25]  While all of their initiatives are consistent with the Commission’s guidance, each is slightly different.  I think this diversity is a good thing; regulatory experimentation has the advantage of allowing experimental or quasi-experimental evaluation on a smaller scale and we can learn from each other about different approaches to economic analysis – what works and what does not.

Of course, economists are not perfect in their foresight and predictions.  Whenever the Commission adopts a rule – or Congress enacts a statute – there will always be unforeseen and unintended consequences.  But sound economic analysis, including the use of any available data, needs to guide and accompany our decision-making. 

One provision of the Dodd-Frank Act that I strongly support is Section 912, which clarified the authority of the Commission to obtain certain data and information without needing to be approved under the Paperwork Reduction Act.  Specifically, Section 912 amended the Exchange Act and authorizes, “[f]or the purpose of evaluating any rule or program of the Commission issued or carried out under any provision of the securities laws” and for “the purposes of considering, proposing, adopting, or engaging in any such rule or program or developing new rules or programs,” the Commission to gather information from and communicate with investors or other members of the public, to engage in temporary investor testing programs, and to consult with academics and consultants.

This provision makes it much simpler for the Commission to engage in investor testing by eliminating the need to obtain separate approvals under the Paperwork Reduction Act.  To focus for a moment on a type of rulemaking where investor testing could be of particular value, I expect that the staff will consider, in rulemakings with a disclosure component, whether it is appropriate to engage in investor testing of the proposed disclosure.  It is a far better approach to consideration of disclosure proposals to have empirical data, rather than rely exclusively upon the beliefs and opinions expressed in comment letters.

For example, we are currently considering a rulemaking proposal that affects offerings under Rule 506 in Regulation D.  As proposed, the rules would require several lengthy legends with cautionary language about the offering.  We need to know whether these legends would be effective.  Do they convey the warnings that we seek to provide investors?  Knowing this information would be in the legends, how will investor behavior change, if at all? 

Consumer products and services companies routinely engage in testing to see how their products and services are perceived.  The Commission should be no different.  We must determine whether our rules that require the delivery of important investor information in fact service the goals being articulated.  I hope that the Commission commits itself to a robust investor testing program that examines the efficacy of not only proposed rules, but our existing rules as well.


Thank you all for your attention.  I appreciate the opportunity to share with you some observations from my first 100 days as a Commissioner.  Overall, it has been a far more exciting and rewarding experience than I could have ever imagined.  I have thoroughly enjoyed working with my colleagues on the Commission, as well as the dedicated and hard-working members of the staff.   We hear a lot from the public about what we do right, what we do wrong, and what we can do better.  I look forward to continuing to hear such honest feedback from you during the course of my next 1,656 days as a Commissioner.  Thank you for allowing me to join you today, and I hope that you find today’s program to be interesting and useful.


[1] 17 CFR § 200.50 et seq.

[2] 17 CFR § 200.53.

[3] 17 CFR § 200.54.

[4] 17 CFR § 200.51 (“It shall be the policy of the Commission to require that employees bear in mind the principles specified in the Canons.”).

[5] 17 CFR § 200.53.

[6] 17 CFR § 200.55 (emphasis added).

[7] 17 CFR § 200.66 (emphasis added).

[9] 17 CFR § 200.66.

[10] Section 21(b) of the Exchange Act; see also Section 19(c) of the Securities Act, Section 42(b) of the Investment Company Act, and Section 209(b) of the Investment Advisers Act.

[11] Exchange Act Rel. No. 60448 (Aug. 5, 2009).

[12] Enforcement Manual at §2.3.3 (Oct. 9, 2013), available at

[13] Exchange Act Rel. No. 62690 (Aug. 11, 2010).

[14] Select SEC and Market Data 2008, 2011, and 2012, available at

[15] Public Law No. 111-203, 124 Stat. 1376 (2010).

[16] 511 U.S. 244 (1994).

[17] Id. at 265.

[18] Id. (quoting Kaiser Aluminum & Chemical Corp. v. Bonjorno, 494 U.S. 827, 855 (1990)).

[19] Id. at 265-66.

[20] In the Matter of John W. Lawton, SEC Admin. Proc. File No. 3-14162 (Dec. 13, 2012).

[21] Current Guidance on Economic Analysis in SEC Rulemakings (Mar. 16, 2012), available at

[22] 17 CFR § 200.67.

[23] Id.

[24] Section 2(b) of the Securities Act, Section 3(f) of the Exchange Act, and Section 3(c) of the Investment Company Act.

[25] FINRA press release (Sept. 19, 2013), available at 

; MSRB press release (Sept. 26, 2013), available at  ; PCAOB press release (Nov. 6, 2013), available at  .  


Last Reviewed or Updated: Nov. 22, 2013