Commissioner Michael Piwowar, the only economist currently on the Commission, outlined his views regarding enforcement policy in remarks delivered at the Securities Enforcement Forum 2014 last week (here).
That policy begins with the due process clause of the Fifth Amendment, the Commissioner stated. The clause “starts with fundamental notions of fairness. Persons should be on notice as to what acts, or failures to act, constitute violations of the law and our regulations.” Persons should also be on notice as to potential sanctions and liabilities.
Building on this theme, Commissioner Piwowar discussed the purpose of enforcement. The “ultimate goal” is not “regulatory compliance.” Rather, the point is to have healthy capital markets, to protect investors and facilitate capital formation.
The complexity of that task is reflected in the multiple sources of law and its complexity. Those include rules and regulations, case law, briefs, administrative orders and opinions and views stated by the staff in no-action letters, compliance alerts and similar items. In outlining this issue the Commissioner made it clear that he is opposed to making new law through enforcement measures as an alternative to rule making. While rule making under the Administrative Procedure Act may take time, Commissioner Piwowar stated that he has “significant concerns when Commission orders – especially in settled administrative actions – create new interpretations of the laws or regulations or impose new regulatory requirements.” This is a failure of due process he noted.
Critical to effective enforcement is the policy which drives it. The Commissioner expressed concern that in these complex times “a ‘broken windows’ approach to enforcement may not achieve the desired result. If every rule is a priority, then no rule is a priority. If you create an environment in which regulatory compliance is the most important objective for market participants, then we will have lost sight of the underlying purpose for having regulation in the first place.” As an alternative, the Commissioner pointed to OCIE, where the staff works with a variety of groups to determine priorities. This process increases efficiency and effectiveness for the program. Enforcement will be most effective, he noted, if its efforts are tied to the Commission’s policy provisions. To implement this effectively the senior staff has to provide leadership and appropriate guidance to the Division.
Measuring the effectiveness of enforcement presents another key issue. Simply counting the number of cases or reviewing the number of dollars imposed as sanctions is not the answer and may be counter-productive. At the same time the Commissioner raised what he called “another fundamental component of due process” regarding who is held responsible for violations. For example, when a corporation settles and no individuals are named in the action “I often wonder whether the entity is settling because the individuals have actually committed violations or whether the entity is settling simply to resolve the investigation, regardless of the merits,” the Commissioner noted.
Commissioner Piwowar then turned to the question of corporate penalties. The initial statement in 2006 was adopted to provide clarity and consistency. The real question about that statement is what role it plays. “In recent months, I have become concerned by the increasing number of staff recommendations that have not been accompanies by analysis of the principal factors described in the 2006 penalty statement,” the Commissioner noted. If the Commission is not following its announced policy, it raises a significant due process question.
The Commissioner’s concern about the predicate for corporate penalties has intensified in the wake of Dodd-Frank which authorized the imposition of penalties in administrative proceedings on any person, not just regulated entities. Increased use of the administrative forum makes it more important that a clear analytical framework exist for determining corporate penalties. Accordingly, the Commissioner stated that he would “welcome a discussion about our analytical framework for corporate penalties” and, if appropriate, a new policy could be articulated through a public notice and comment process.
