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E-MailLuis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent public statement; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.
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. 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.”
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. 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.
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.
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.
