SEC Commissioner Hester Peirce offered recommendations to shift the agency's focus from enforcement to compliance.
In a speech at the 51st Annual Institute on Securities Regulation, Ms. Peirce recommended identifying rules that should be adopted, amended or rescinded that would help the agency focus its enforcement resources on violations that are harmful to investors and the market.
Modification of Rules
Ms. Peirce recommended, for example:
- protecting retail investors involved in the micro-cap segment of the market and defending against fraudulent micro-cap stock promotions by (i) revising Exchange Act Rule 15c2-11 ("Initiation or resumption of quotations without specific information") and (ii) preventing illegal distributions of restricted securities by modernizing transfer agent rules; and
- creating regulatory frameworks for (i) finders who get paid for successful introductions between investors and issuers without prohibiting the finders' legitimate activities and (ii) crypto-related token networks by establishing a non-exclusive safe harbor period to allow a token network to grow without impediment from securities laws.
Compliance and Enforcement
Ms. Peirce urged the SEC to value compliance over enforcement. She stated that when the Office of Compliance, Inspections and Examinations ("OCIE") finds regulatory violations, it "may well conclude that the best course" is to ensure investors are repaid and compliance systems are fixed. She also suggested that the examination hotline, operated by OCIE and the Inspector General, be used as a resource for registrants to raise enforcement-related concerns.
Technology Implications
Ms. Peirce advised the SEC to be "sensitive" to the implications of its actions. She explained that, due to increasing advances in technology making it easier to gather information on citizens, individuals now risk the loss of privacy. For example, she criticized the Consolidated Audit Trail (or CAT), as a "massive" surveillance program that gives too much power to government regulators.
Self-Regulation
Ms. Peirce also emphasized the importance self-regulation. She advocated for regulations that make both "moral and literal" sense not only to the regulators but to the regulated individuals as well. She warned that regulations that make sense only to the regulators lessen the impetus for market participants to make their own judgments about what is right and wrong.
Commentary
Commissioner Peirce asks the "big picture" questions. Her answers reflect considerations for the long term. She is absolutely right that the SEC should be judged neither by the number of enforcement actions that it brings in a year nor by the amount of fines that it collects. Rather, the regulator's performance should be based on whether the agency adopts rules that make sense, whether it enforces those rules in a way that protect investors, and whether the SEC's overall impact is to the benefit of the economy. Of course, these effects are much more complicated and difficult to measure than just counting enforcement actions, but they are much more meaningful.
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