Insights from SEC Commissioners: Restoring Investor Trust and Promoting Compliance

Regulators are often asked to speak at industry conferences and for U.S. Securities and Exchange Commission (SEC) commissioners each presentation begins with a message on how the views being expressed are their own. Even with this standard disclaimer, these presentations can provide interesting insights on topics and activities of interest to the individual. Two recent addresses touched on topics that are also of interest to CFA Institute and its members.

Rebuilding Investor Trust

On 18 October, Commissioner Luis Aguilar spoke at the 2012 Securities Enforcement Forum. His speech, “Taking a No-Nonsense Approach to Enforcing the Federal Securities Laws,” highlighted the extent investors’ trust has declined due to the crises and scandals of the past few years. This lack of trust has befallen many aspects of the financial industry, leading to reduced confidence in government regulators.

Aguilar presented some evidence on how the SEC is working to restore investor confidence. When it comes to holding individuals accountable for their misconduct, “the facts show that the SEC has brought actions against 115 individuals and entities, naming 57 CEOs, CFOs, and other senior corporate officers for misconduct related to the financial crisis.”

Another positive step is the implementation of the new whistleblower program. Aguilar noted, “Our staff is reporting that they see a noticeable difference in the quality of the information that they are receiving. This is critical. The quality of the information determines how quickly our staff can act, whether we can increase our odds to capture the true masterminds, and whether we can prevent greater harm from occurring.”

The CFA Institute Integrity List provides a collection of 50 actions that all investment professionals can undertake to assist in restoring this lost trust. The rebuilding of trust cannot be left to the regulators alone, as the stats Aguilar provided demonstrated that the concerns stretch across the breadth of the industry.

Limitations Facing the SEC

The SEC faces limitations when it comes to enforcement and penalties. Currently, monetary penalties contain caps on the amount of the sanctions, which at times may not cover the losses sustained by investors. Aguilar noted, “I agree with Senator Grassley when he stated that, ‘If a fine is just decimal dust for an [entity], that’s not a deterrent.’” A new bill introduced in 2012 would allow the SEC to significantly increase the penalties levied against those committing misconduct.

Additionally, Aguilar recognized the need for appropriate funding to run the organization’s enforcement program. He noted “that the Commission’s resources are limited, and that our resources have completely failed to keep up with the growth into the markets we oversee — both in terms of sheer size and of complexity.” In comment letters to both the SEC and U.S. House of Representatives, CFA Institute continuously supports the call for additional resources for executing the examination and enforcement programs.

Promoting Compliance

On 23 October, Commissioner Daniel M. Gallagher delivered the keynote address at the National Society of Compliance Professionals National Meeting. This address provided a thorough review of the development and interpretations of the securities laws most directly related to Section 913 of the Dodd-Frank Act and the issue of aligning the standard of care across all individuals providing investment advisory services. The interesting aspects of the review relate to understanding the challenges being faced with harmonization and why the matter is still under discussion.

The latter part of his speech touched on an issue that directly faces both broker-dealers and investment advisers today — supervisory responsibilities. Gallagher clearly has strong thoughts concerning the “failure to supervise liability.” He stated “that as compliance personnel, your job involves risks — and our job, as regulators, is to set incentives and disincentives to encourage you to take the right kind of risks and discourage you from taking the wrong kind. Specifically, our job on the failure to supervise front is to ensure that when you’re confronted with a difficult situation that requires making tough calls, the risk that worries you isn’t the risk of liability for potentially making a less-than-perfect decision but instead the risk of incurring failure to supervise liability for declining to step in at all.”

The topic of supervisory responsibility is an aspect of the CFA Institute Code of Ethics and Standards of Professional Conduct in the section on Duties to Employers. Under this standard, CFA Institute members and candidates are expected to demonstrate reasonable efforts to prevent and detect violations or risk violating their responsibilities as members.

Additionally the guidance in the Standards of Practice Handbook on the Knowledge of the Law standard advises, “Inaction combined with continuing association with those involved in illegal or unethical conduct may be construed as participation or assistance in the illegal or unethical conduct.”

Speeches by a regulator often contain tidbits and insights that impact the way individuals conduct their professional activities. Unlike a direct visit by someone from the regulatory staff, opportunities to see or read these presentations should be sought out as often as possible. You never know when your concern or question will be addressed.