Aug. 10, 2015
This statement is about the critical importance of clarity in Commission Orders for enforcement actions. One of the Commission´s most effective deterrents against future misconduct is what it says about the enforcement actions it takes. As a result, the Commission must use its position as a regulatory authority to carefully and effectively send clear messages to securities industry participants regarding what is, and what is not, acceptable behavior. For this reason, Commission Orders need to contain sufficiently detailed facts so that there is no doubt as to why the Commission brought an enforcement action, why the respondent deserved to be sanctioned, and why the Commission imposed the sanctions it did.
The Commission and its staff should always be cognizant that there is a broad audience that carefully reads Commission Orders for guidance. This broad audience is usually not familiar with the underlying facts of a particular matter, and is relying on the Order´s description of the misconduct to appreciate why a named respondent ran afoul of the applicable laws. A clear and transparent Commission Order, therefore, is an absolute necessity to ensure public transparency and accountability.
The need for clear and transparent Orders is especially important when Commission actions involve federal securities law violations by Chief Compliance Officers ("CCOs"), a subject that has recently garnered public attention.[1] CCOs, after all, exist in large part to implement and enforce policies and procedures to prevent federal securities law violations in the first place. When a Commission enforcement action involves a violation by the CCO, there is no doubt that the larger CCO community will take notice and try to learn as much as possible about the behavior that resulted in the Commission´s enforcement action. Therefore, the importance of clarity in Commission Orders, especially the ones involving CCOs, cannot be overstated.
Indeed, public concerns about recent Commission actions involving CCOs may be attributed, at least in part, to Commission Orders that could have been clearer and more fulsome. For example, one commentator noted that, in a recent Commission action charging a CCO with violations of Rule 206(4)-7 of the Investment Advisers Act of 1940, the Commission Order could have been clearer by including more facts to distinguish misconduct that warranted an enforcement action from conduct that is merely "naïve and ineffective."[2]
It bears noting that Commission Orders, as a matter of practice, often do not include all the facts developed by the staff in its investigations. Indeed, to be legally sufficient, Commission Orders need only include the basic facts necessary to support the charges alleged. Furthermore, where respondents are settling with the Commission, the facts included in Commission Orders are oftentimes negotiated. Thus, unlike the more complete investigative facts that are provided to the Commission as part of enforcement recommendations, the settled Orders are often subject to intense negotiations between the SEC staff and settling respondents´ counsel. At times, there may be evidentiary facts that respondents´ counsel are adamant about removing from the Order as part of the settlement terms. Because achieving a just and speedy resolution through settlements is very often in the public interest, and as the staff tries to avoid undue delays, this often means not going to war over every single word in a negotiated Order.
Nonetheless, there is no doubt that a tension exists between the need for clarity in the Commission´s settled Orders and the need to reach a resolution in a particular matter.[3] In dealing with this tension, the Commission and its staff must avoid creating confusion and must strive to make sure that issued Orders—typically the only public record of what transpired in a particular case—are fulsome and transparent, especially in describing the misconduct that resulted in an enforcement action. This is a view that I have previously shared in a public statement criticizing the vagueness of a Commission Order.[4]
Clarity is important for a number of reasons. First, as to the case at hand, a clear Order allows the public to know what misconduct occurred that led to an enforcement action, what the respondent did wrong, why the respondent´s misconduct was wrong, and what sanctions and remedies are being imposed as a result of the misconduct. Second, a clear Order provides guidance going forward as to what is, or is not, acceptable behavior. This is a particularly impactful reason for clear and transparent Orders, because it is important to provide clear guidance to numerous others about how best to perform their duties and comply with the federal securities laws.[5]
Clear guidance in Orders enables the Commission to send the right message, helps maximize the deterrent effect of enforcement actions, and, just as important, informs others as to future behavior. After all, a Commission Order is the primary public record of what transpired in an enforcement action. Accordingly, a clear, transparent, and precise Commission Order is a powerful tool for sending the right message.
[*] The views expressed by Commissioner Luis A. Aguilar are his own and do not necessarily reflect the views of the U.S. Securities and Exchange Commission ("Commission" or "SEC"), his fellow Commissioners, or members of the staff.
[1] See, Joe Morris, SEC´s Aguilar to CCOs: Have No Fear, Ignites (July 6, 2015), available at http://ignites.com/c/1151223/123913/aguilar_ccos_have_fear?referrer_module=emailMorningNews&module_order=3&code=UTI5b1pXNUhRSE5sWXk1bmIzWXNJRE0yTURjM09UUXNJRE14TURZeE9UY3lOdz09; Ben DiPietro, The Morning Risk Report: SEC Debates Itself Over CCO Enforcement Actions, The Wall Street Journal (July 1, 2015), available at http://blogs.wsj.com/riskandcompliance/2015/07/01/the-morning-risk-report-sec-debates-itself-over-cco-enforcement-actions-newsletter-draft/ (noting that "a partner in the compliance and regulatory services practice at accounting firm EisnerAmper, said he thinks claims the SEC is targeting compliance officers are overblown"); Chris Flood, Officials at SEC debate high-profile fines in public, Financial Times (July 5, 2015), available at http://www.ft.com/intl/cms/s/0/4289d026-20a9-11e5-aa5a-398b2169cf79.html#axzz3f7qYxQDb; Jaclyn Jaeger, Regulators Increasingly Targeting Chief Compliance Officers, Compliance Week (May 13, 2014), available at https://www.complianceweek.com/news/news-article/regulators-increasingly-targeting-chief-compliance-officers#.VZqZ8HbD-70 (stating that "[c]hief compliance officers are increasingly finding themselves in the crosshairs of regulatory enforcement agencies."); Winston & Strawn LLP, Chief Compliance Officers Subject to Expanding SEC Enforcement Trend—What "Personal Liability" Means Now (Apr. 28, 2015), available at http://www.winston.com/en/thought-leadership/chief-compliance-officers-subject-to-expanding-sec-enforcement.html ("The Pension [sic] and BlackRock cases represent a disturbing trend by the SEC of bringing negligence-based cases against compliance officers and arguably expand the standards previously announced by the Director of the SEC´s Division of Enforcement governing when the SEC would prosecute cases against legal and compliance officers."); Ben DiPietro, SEC Actions Stir Concerns Over Compliance Officer Liability, The Wall Street Journal (June 24, 2015), available at http://blogs.wsj.com/riskandcompliance/2015/06/24/sec-actions-stir-concerns-over-compliance-officer-liability/; Mark Schoeff Jr., InvestmentNews, SEC´s Gallagher says agency unfairly cracks down on compliance officers (June 18, 2015), available at http://www.investmentnews.com/article/20150618/FREE/150619901/secs-gallagher-says-agency-unfairly-cracks-down-on-compliance ("Securities and Exchange Commission member Daniel M. Gallagher said the agency unfairly targeted chief compliance officers in recent enforcement actions and is leaving them unsure of the extent of their responsibility for firm behavior."); Matt Kelly, Gallagher Uncorks on SEC Action Against CCOs, Compliance Week (June 18, 2015), available at https://www.complianceweek.com/blogs/the-filing-cabinet/gallagher-uncorks-on-sec-action-against-ccos#.VY3MUzbD-70 ("The Blackrock and SFX enforcement actions … continue a trend toward strict liability for CCOs that unfairly holds them accountable for compliance failures they cannot control."); Michael Ide, SEC Commissioner Gallagher Explains Recent Dissenting Votes, ValueWalk (June 18, 2015), available at http://www.valuewalk.com/2015/06/sec-commissioner-gallagher-explains-recent-dissenting-votes/ ("Under the status quo Gallagher worries that CCOs may decide to have less stringent policies that are easier to implement so that they can´t be held liable for any wrongdoing. Even worse, compliance personnel may not want to dig too deeply into potential problems if they are unsure whether or not they could be on the hook for any misconduct that they uncover."); Stephanie Russell-Kraft, SEC Too Tough On Compliance Officers, Gallagher Says, Law360 (June 18, 2015), available at http://www.law360.com/articles/669779/sec-too-tough-on-compliance-officers-gallagher-says ("...the agency is taking too harsh of an enforcement stance against chief compliance officers, treating them too much like management and not like the gatekeepers they are."); Alex Padalka, Commissioner Says The SEC Picks on Compliance Officers, Financial Advisor (June 22, 2015), available at http://financialadvisoriq.com/c/1142383/123533/charged_with_fraud_penny_stock_case ("…the SEC has a habit of forcing compliance officers to enforce compliance procedures that aren´t always suited to—or even strict enough for—some practices and then to take responsibility for the actions of colleagues when in-house rules fall short.").
[2] See Scott Killingsworth, CCO Liability: Winds of Change at the SEC?, The Compliance & Ethics Blog, available at http://complianceandethics.org/cco-liability-winds-of-change-at-the-sec/ (last checked on Aug. 3, 2015) (discussing In the Matter of SFX Financial Advisory Management Enterprises, Inc., and Eugene S. Mason, Advisers Act Rels. No. 4116 (June 15, 2015)).
[3] Indeed, a recent case involving a CCO underscores this point. This matter—In the Matter of Parallax Investments, et al.—is not a new case. See In the Matter of Parallax Investments, LLC, John P. Bott, II, and F. Robert Falkenberg, AP File No. 3-15626 (Aug. 6, 2015), available at http://www.sec.gov/litigation/admin/2015/34-75625.pdf (hereinafter, "Parallax Order"). In fact, I noted this case in my June 29, 2015 statement regarding CCOs. See SEC Commissioner Luis A. Aguilar, The Role of Chief Compliance Officers Must be Supported (June 29, 2015), available at http://www.sec.gov/news/statement/supporting-role-of-chief-compliance-officers.html. This matter was originally filed as a litigated matter almost two years ago, and involves a CCO who failed to carry out his core responsibilities, including by failing to implement specific procedures to safeguard client assets, and by failing to establish, maintain, and enforce a written code of ethics. See Parallax Order at 6-7, ¶¶ 23-35. Even worse, the CCO in Parallax went so far as to mislead the Commission´s exam staff, by telling them he had conducted an annual review of Parallax´s compliance policies and procedures, when in fact he had not. See id. at 6, ¶¶ 23-24. This is unacceptable behavior, especially for a CCO whose very job is to prevent others from violating the law, and his behavior clearly violated Rule 206(4)-7.
The Parallax Order, however, may contain a clause that, if taken out of context, could be subject to misinterpretation. In particular, in the Background section of the Parallax Order, the Commission alleges that "[the CCO], however, devoted approximately nine hours per month to Parallax´s compliance program . . . and delegated daily compliance tasks to other compliance employees in his absence." (emphasis supplied). See Parallax Order at 3, ¶ 10. Taken out of context, the italicized language could suggest that there is something inherently wrong with delegating daily compliance tasks to other compliance employees, when such is not the case. Instead, this italicized language should be read in the context of the overall Background section, which paints a picture of a CCO that did not give proper attention to his compliance duties at the company, and thereby provided an environment for the violations to occur.
In fact, I asked the staff to clarify this issue in the Parallax Order, but it ultimately was not changed. As discussed in this statement, this is an example of the tension the Commission often faces in settled matters where the precise language of the Orders is the result of challenging negotiations. However, as should be clear, these background facts do not constitute violations in and of themselves.
[4] See Commissioner Luis A. Aguilar, Dissenting Statement In the Matter of Lynn R. Blodgett and Kevin R. Kyser, CPA, Respondents (Aug. 28, 2014), available at http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370542787855 (noting my concern that "Commission Orders may, at times, be purposely vague and/or incomplete, and written in a way so as to lead the public to conclude that no fraud had occurred. When this happens, the public is denied a full accounting and appreciation of the egregious nature of a defendant´s misconduct.")
[5] Some have suggested that Commission enforcement actions are, at times, "regulation by enforcement" in that they may address behavior and activities that may not be clearly and specifically proscribed by the applicable statute or rule. Whether the criticism of Commission enforcement actions as "regulation by enforcement" has merit is a broader topic for another day. However, in my view, Commission Orders that clearly and transparently describe the specific misbehavior and why it resulted in a violation of existing law can do much to mitigate the concerns raised by the "regulation by enforcement" criticism.