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Aguilar Calls for End to Penalty Preauthorization Pilot Program

Commissioner Luis Aguilar has called for an end to the SEC's enforcement penalty preauthorization pilot program because he believes the process is too onerous and amounts to "micromanaging." In his view, the pilot program should be ended immediately. He has recommended its termination to the president-elect's transition team and said he will ask the SEC chair to make this its first official action under new leadership.

In remarks at the North American Securities Administrators Association's winter enforcement conference, Commissioner Aguilar outlined his ideas for shifting SEC policies and practices and his recommendations for Congressional action. Shortly after his appointment Aguilar expressed concern about the decline in large investigations and the amount of penalties sought by the SEC. The SEC has been subject to criticism, he said, and it should answer its critics by demonstrating its commitment to being the market's watchdog. He said that, in addition to eliminating the penalty preauthorization program, the SEC should also rebuild its enforcement staff and concentrate on cases with a greater impact on the market.

Commissioner Aguilar believes the SEC's previous system of allowing SEC attorneys to enter into settlement talks without obtaining permission in advance worked well. The new requirement for preapproval limits the discretion of the enforcement staff, in his view, and fails to send a strong message of deterrence. Since the pilot program was implemented, he said the amount of penalties against corporate issuers has dropped significantly. He also believes the pilot program takes longer to resolve cases than in the past.

The commissioner is concerned that the pilot program sends a message to the staff that it should forgo seeking penalties or should seek smaller penalties against corporate issuers that engaged in fraud in order to gain Commission approval. "That is not the way to run a robust enforcement program," he said.

Commissioner Aguilar also pointed to a reduction in the number of attorneys who investigate cases. He said the staff should be at full capacity and should have the power to aggressively pursue investigations. The approval of formal orders to open investigations and issue subpoenas should be streamlined in order to reduce the time it takes to obtain Commission approval, he added. The commissioner said that cases heard by the SEC should also take place within an appropriate time frame. He has heard that controversial cases tend to remain open for years, which he deemed unacceptable. Aguilar said the Commission should enforce an internal timetable for considering staff recommendations.

The downward trend in enforcement cases should be "aggressively reversed," in Mr. Aguilar's view. He also called for increased communication and cooperation among regulators. He suggested the establishment of a standing SEC-NASAA task force to monitor activities and risks, and to share information about appropriate actions. Alternatively, he said that NASAA could appoint a representative at the SEC.

Congress should renew its commitment to the SEC and strengthen its ability to advance its mission and protect investors, Commissioner Aguilar said. He believes that the merger of the SEC and the Commodity Futures Trading Commission makes sense, but said the manner in which products are regulated is more important than who regulates them. The SEC and the CFTC have different objectives and different models of oversight. The commissioner warned against following the mistaken belief that "efficiency, integrity and honest will arise naturally" from the markets.

Mr. Aguilar believes the SEC would be able to fulfill its mission more effectively if it had dedicated, independent financing. The current appropriations process weakens the SEC's ability to perform its mission in his view. He noted that the budget allocation has been relatively flat for four years while the SEC is expected to be the watchdog over the world's largest and most complicated financial market.

The commissioner also called on Congress to amend the Investment Advisers Act to give the SEC authority over hedge funds. He urged Congress to close the loopholes in swaps regulations. Congress should repeal the exclusion of security-based swap agreements from the definition of a security under the Securities and Exchange Acts, he said, and should include within the definition of a security any financial products that can be economic substitutes for securities. He added that all securities transactions should be required to be executed on a registered securities exchange and cleared through a registered clearing agency. The SEC could use its existing exemptive authority as appropriate.

Mr. Aguilar said that Congress should pass legislation to require stronger disclosure with respect to municipal securities. The SEC has repeatedly asked Congress for the authority to bring municipal disclosure in line with corporate disclosure.

He also suggested that the SEC be empowered to prosecute criminal violations of the federal securities laws when the Department of Justice declines to act. The Justice Department declines to take a number of criminal enforcements each year due to resource constraints, among other reasons. If the SEC authority was enhanced it could expand the number of cases that may be brought, he said. Finally, Commissioner Aguilar also urged Congress to give the SEC the authority to bring civil and administrative proceedings for violations of 18 U.S.C. 1001, a criminal statute which addresses knowingly and willfully falsifying or concealing material facts. The SEC should be able to seek civil money penalties against anyone who lies to a government official, in his view.