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Luis Aguilar: The Enforcement Commissioner

Bruce Carton | March 19, 2009

Commissioner Luis Aguilar joined the SEC in July 2008. In his short time at the SEC, Aguilar has quickly positioned himself as the SEC Commissioner with the strongest interest in enforcement issues. In several speeches over the past eight months, Aguilar has taken strong positions advocating changes in the enforcement program and even being critical of certain SEC policies and practices. In his speech yesterday before the District of Columbia Bar (click here for the full text), Aguilar added to his growing series of speeches focusing on Enforcement issues, and offered several specific actions that he would like the SEC to take in order to "reinvigorate the SEC's enforcement program."

Aguilar observed that in his eight month tenure at the Commission, it has become "obvious to him that there are actions that must be undertaken to simultaneously unshackle and empower the SEC Enforcement staff." These steps go well beyond those that have already been implemented recently, i.e., Chairman Schapiro's dismantling of the penalty pilot program and her move to permit Commission approval of formal orders by the Duty Officer (previously discussed here).

Aguilar proposed changes in four areas.

1. Further Streamlining the Formal Order Process

Aguilar stated that the SEC should further streamline the formal order process by delegating the power to issue a formal order, in circumstances that do not present extraordinary issues, to the Enforcement Division Director and Heads of the Regional Offices. He observed that while the reform put in place in early February by Chairman Shapiro that authorizes many formal orders to be approved by the Commissioner designated as Duty Officer for that day is an improvement, "delegating formal order authority for the routine, non-controversial matters streamlines the entire process, not just the final step."

2. Improving the Distributions Process

Aguilar then discussed the long-ignored area of distributing SEC settlement funds to investors, focusing on two key problems that need to be addressed. First, he said (quite correctly), the time between the collection and distribution of money to investors is too long. Second, the Commission's administration of the distribution needs to be less bureaucratic. Aguilar observed that since the SEC was granted Fair Fund authority in 2002 under Sarbanes Oxley, it has authorized approximately 220 Fair Funds or distributions to shareholders totaling approximately $9 billion. Only $4.6 billion of this has been distributed to date, however.

It was this bottleneck that led the SEC to create the Office of Collections, Distributions and Financial Management (OCD&F) in 2007. Aguilar pointedly stated, however, that this two-year old office still does not "have the personnel and expertise to shoulder full responsibilities for distributions" and that it remains the case that "the same investigative staff responsible for successful cases resulting in large monetary distributions to investors are also tasked with trying to create, implement, and monitor these distribution programs." Aguilar emphasized the importance of building out the SEC's distribution capabilities via OCD&F so that the SEC's investigative staff can go back to investigating potential cases, not administering settlement funds.

3. Implementing a Risk-Based Data Analysis System

Aguilar next stated that it was necessary for the SEC to make better use of technology to keep pace with the tremendous growth in the financial sector, including improving its rules for electronic recordkeeping and reporting. He said that all information "should feed into state-of-the-art surveillance and analysis programs, manned by appropriately trained staff, to monitor for quantitative signals of possible misconduct."

He added that the SEC must also have a robust risk assessment program in place that can assess and spot problems before they cause even greater harm. He noted that the SEC already has begun to address this (presumably referring to the SEC's Office of Risk Assessment), but is "not doing nearly enough to effectively implement and sustain such a program. This requires immediate attention."

4. Revising Corporate Penalty Guidelines

Finally, Aguilar suggested revising the Commission's 2006 statement on factors concerning whether a financial penalty against a corporation is appropriate. He said that the SEC's 2006 statement on this subject was a "first attempt" that can be "significantly improved. It certainly does not reflect my views."

Aguilar offered a detailed proposal for the SEC, stating that in evaluating whether a corporate penalty is appropriate, he believes the following factors should be considered:

  • The nature of the misconduct and the violation;
  • The nature of the defendant, its governance and its other conduct prior to the violation;
  • Self-reporting, cooperation, and remediation (conduct after the violation); and
  • Equitable concerns and effects on parties other than the corporation.

Finally, Aguilar suggested three areas that he believes need Congressional action in order to empower the SEC's Enforcement program:

  • Expand the SEC's civil authority to include the ability to bring cases against people who obstruct a Commission investigation, such as by lying or destroying documents;
  • Provide authority to bring criminal charges where the Department of Justice has declined to do so; and
  • Provide the the SEC with an adequate budget.

On the budget issue, Aguilar further suggested that the SEC should be provided with the ability to budget and self-fund its operations, similar to the Federal Deposit Insurance Corporation, Office of Thrift Supervision, Office of the Comptroller of the Currency, and the Federal Reserve.