Outgoing Commissioner Luis Aguilar recently published commentary reflecting upon his many years of service at the Securities and Exchange Commission. Aguilar is one of the longest serving Commissioners ever and was uniquely appointed by both a Democrat and Republican President. He follows Commissioner Gallagher‘s departure in a period of transition as the SEC prepares for two new incoming Commissioners. Aguilar joined the SEC just as the Great Recession was picking up speed. Bear Stearns had been “saved” by JPM and the demise of Lehman Brothers was just around the corner. The ensuing asset spiral placed the entire global economy at risk. Aguilar found himself in a unique position of facing economic armageddon.
During his tenure, Aguilar participated in one of the most active rule-making periods the SEC has experienced. From Dodd-Frank (which is an ongoing project) to the JOBS Act, the Commission considered 240 different rules. This was married to around 17000 enforcement actions.
Aguilar itemizes ten improvements (see below) to the agency during his stint at the SEC. He also highlights unfinished business which includes establishing a better environment for secondary trading for smaller issuers. This is a popular theme at the SEC and on the Hill and has taken greater importance with the new exemptions placed into law under the JOBS Act of 2012. Aguilar published a letter to this point in the spring of 2015.
The 8th longest-serving Commissioner closed his remarks by stating, “I hope I am leaving the SEC a better place than when I first joined it.”
The two appointed replacements is an issue that will be addressed by the Senate in early 2016.
Aguilar’s remarks are republished below.
Commissioner Aguilar: Looking Back at The SEC’s Transformation (and a few other things)
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission [*]
Dec. 21, 2015
I started my tenure as an SEC Commissioner in the late summer of 2008, only a few weeks before the collapse of Lehman Brothers and the financial turmoil that followed, and only a few months before one of the largest financial frauds in U.S. history—the Bernard Madoff Ponzi scheme—was exposed. Beyond their obviously substantial impact on the capital markets and the greater economy, these historical events demonstrated that the Commission needed to change and adapt if it was to continue to be an effective regulator. Indeed, in late 2008 and in 2009, the continuing existence of the Commission was a matter of serious speculation. Thus, whether by coincidence or circumstance—some would say a fate of timing—it is not surprising that my tenure has corresponded with one of the most transformational periods in the SEC’s august history.
Any discussion as to the events that have impacted the Commission’s current structure must start with the financial crisis. As a result, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which mandated that the SEC promulgate close to 100 separate rulemakings and mandated the creation of a number of new SEC offices. In combination with Congress’ subsequent passage of the Jumpstart Our Business Startups Act (the “JOBS Act”), and the Commission’s own initiatives, the past seven years have been one of the most active periods in SEC rulemaking history. In fact, during this period, the Commission voted on more than 240 rulemaking releases, both proposing rules and adopting final rules. Moreover, on the enforcement side, the SEC’s Office of the Secretary informs me that during my tenure the Commission considered enforcement recommendations involving more than 17,000 entities and individuals.
As I prepare to leave the Commission at the end of this month, I wanted to share some observations about how the Commission has evolved over my seven-plus years as a Commissioner. I provide the following because, even though many of the facts are known, I have not seen them collected and summarized in one concise presentation, and many observers may not fully appreciate how the Commission has evolved from a structural and organizational perspective. I realize that, as the only Commissioner remaining from those who were here when Lehman Brothers fell, I may offer a unique perspective of the path that has been traveled. To that end, I am hopeful that the Commissioners and SEC staff members who have arrived more recently at the Commission (and those yet to arrive) may appreciate insights into all of the internal and structural changes that have taken place—and how they improve the agency’s fulfillment of its mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
I am also hopeful that the information will help the public appreciate how the Commission and the staff have strived to improve the functioning of the nation’s principal regulatory agency focused on the oversight of the capital market and the protection of investors.
Improvements to the Commission’s Internal Structure and Processes
What follows is a brief, non-exhaustive list of notable structural and process improvements that the Commission has made over my tenure. Some have been designed to comply with the Dodd-Frank Act, while other efforts stem from the recognition that the Commission needed to change to be a more effective regulator. While a few of these changes reflect Congressional mandates and the hard work of various Chairs and Commissioners (both past and present), the changes primarily reflect the excellent work of the Commission staff—individuals who are among the finest public servants in the federal government.
First, the SEC has created a panoply of new Divisions and Offices, including the following: the Division of Economic and Risk Analysis (“DERA”), the Office of the Investor Advocate (which includes the SEC’s first ombudsman dedicated to issues pertaining to retail investors), the Office of Credit Ratings (“OCR”), the Office of Municipal Securities (“OMS”), the Office of Strategic Initiatives, the Office of Minority and Women Inclusion (“OMWI”), and the Office of Support Operations.
Second, the Division of Enforcement took a hard, critical look at its organizational structure and, as a result, determined changes were needed. Subsequently, as part of a major restructuring of the Enforcement Division, the following new Enforcement groups were created to focus on, and triage, specific risk areas: the Asset Management Unit, the Market Abuse Unit, the Complex Financial Instruments Unit, the Foreign Corrupt Practices Act (“FCPA”) Unit, and the Municipal Securities and Public Pensions Unit. Moreover, the Enforcement Division also created an Office of the Whistleblower and an Office of Market Intelligence. In addition, although too many to be noted here, the Enforcement Division has created numerous task forces to address specific, identifiable areas that needed focus. These areas include the Financial Reporting and Audit Task Force, the Microcap Fraud Task Force, and the JOBS Act Task Force.
Third, in order to better focus on (1) asset-backed securities (a product that contributed substantially to the financial crisis); (2) the offering of securities by financial institutions; and (3) new and novel financial products, the Division of Corporation Finance created two new offices—the Office of Structured Finance, which focuses on asset-backed securities and other structured products, and the Office of Capital Market Trends, which focuses on new securities products and developing trends in securities offerings.
Fourth, one of the takeaways from the financial crisis was that the SEC either lacked data and information about certain aspects of the markets it regulated, or it otherwise was not processing the information in as effective and timely manner as would be expected from an effective regulator. As a result, in addition to DERA’s efforts, a number of new Offices were formed to enhance the Commission’s aggregation and analysis of large amounts of data from varied sources and its quantitative risk analysis, including the following:The SEC’s Division of Enforcement established the Center for Risk and Quantitative Analytics (“CRQA”).
The Division of Investment Management (“IM”) formed a new Risk and Examinations Office (“REO”), which was created, in part, to provide the Division with a greater capability to perform quantitative risk analysis.
The Division of Trading and Markets created a new Office of Analytics and Research (“OAR”). In January 2013, in response to data deficiencies exposed as a result of the 2010 “Flash Crash,” the OAR helped launch the Commission’s Market Information Data Analytics System (“MIDAS”), which has enabled the staff to collect and analyze trade and quotation data from the public tapes for equities and options, and from proprietary feeds from the equity exchanges and applicable futures exchanges.
The Commission’s Office of Compliance Inspections and Examinations (“OCIE”) established a Quantitative Analytics Unit (“QAU”) to expand the scope of its data collection and analysis program, and a Risk Analysis and Surveillance Group (“RAS”), which aggregates and analyzes data to help identify activity that may warrant further examination.
Fifth, in order to improve various internal functions, a number of new positions were created at the Commission, including the agency’s first Chief Compliance Officer (to, among other things, oversee securities trading and holdings by the SEC staff), its first Chief Operating Officer to oversee basic administrative functions (such as the Office of Human Resources, the Office of Information Technology, and other finance, accounting, and records management functions), and, more recently, given the growing cybersecurity concerns, the agency’s first Chief Information Security Officer.
Sixth, the Commission took a number of steps to better focus on its mission to protect investors, including the following: Launched its first website devoted exclusively to investor education, known as Investor.gov.
Established an Investor Advisory Committee (“IAC”) (actually, two such committees) as a formal mechanism to receive input from an investor’s perspective. I am particularly proud of the success of the IAC. Early in my tenure, I publicly called for, and subsequently sponsored, the Commission’s first IAC meeting. Ultimately, the success of the initial IAC led Congress, as part of the Dodd-Frank Act, to mandate that the Commission create a second IAC to become a permanent fixture at the Commission.
Provided a forum to address the growing issues faced by our retirees and senior citizens. Specifically, in 2014 and 2015, the SEC held annual conferences focused on the investment challenges facing our nation’s seniors, retirees, and the elderly population in general. The challenges faced by our retirees and senior citizens have been a particular concern of mine and, as a result, I initiated these annual conferences. I also want to expressly commend the SEC University and other Commission staff for their work in making the conferences a reality.
Seventh, to focus on the continuing, and rapid, development of our equity trading markets, in January of this year, the Commission created a new Equity Market Structure Advisory Committee (“EMSAC”) to focus on emerging issues facing the structure and operations of the U.S. equities markets. This Committee is another example of how the Commission is working to be a 21st Century regulator, and I have high expectations that the markets and investors will benefit greatly from the creation of this Committee.
Eighth, even before the formation of the EMSAC, in October 2013, the Commission unveiled a new publicly-available website known as the Market Structure Data and Analysis website, which serves as a central location for the Commission to publicly share evolving data, research, and analysis as the agency continues its review of the equity of market structure.
Ninth, in 2011, the Commission established an Advisory Committee on Small and Emerging Companies (“ACSEC”) to provide the Commission with advice and recommendations specifically related to privately-held small businesses and publicly traded companies with less than $250 million in public market capitalization. This Committee was recently renewed.
Tenth, in an effort to provide enhanced transparency into our activities, at my urging, the Commission established a website this year that provides full transparency into the status of the Commission’s outstanding rulemaking initiatives since 2008. Until this website was made available, the public had no reliable way to track the Commission’s progress on Commission rulemakings. It is my belief that this transparency will make the Commission a more accountable and effective regulator.
Finally, to make the Commission’s examination program more effective, the Commission’s OCIE underwent significant changes. In addition to the quantitative analytics units that were established to modernize the examination program’s data analysis capabilities (see the descriptions of QAU and RAS, above), OCIE established several programs to focus on specific risk areas and to more efficiently utilize the examination staff. These include, among others, the Technology Controls Program (“TCP”), which focuses primarily on cybersecurity controls and market disruption issues, the Large Firm Monitoring Program (“LFMP”), which focuses on the largest SEC-registered broker-dealers, and the Office of National Exam Program (“NEPO”), which comprises a group of examiners that focuses on national risk initiatives and high risk trends in the investment adviser and investment company space.
These representative initiatives—both individually and collectively—clearly demonstrate the transformative process that the Commission has undertaken. Everyone involved is to be commended for taking a hard, introspective look at the SEC and its processes, and determining how to best improve the agency—and then working diligently to do so. Obviously, there’s no resting on one’s laurels (so to speak); accordingly, I expect the Commission and its staff to continue to be vigilant about taking a critical look at the agency and how it goes about its work, and implementing other future changes when needed.
Some Unfinished Business
While the Commission has accomplished much since July 2008, there are many things that remain unfinished. In particular, the following are a few items that I hope the Commission will address in the coming year.
- Finish the rulemakings mandated by Title VII of the Dodd-Frank Act.
- Establish a better environment for the secondary trading of the securities of smaller issuers. This is an existing problem that is only going to get worse if left unattended. It is my hope that the IAC and EMSAC address this issue (and, in the case of the ACSEC, continue to address this issue) and provide recommendations to the Commission as to possible ways to enhance the liquidity of the secondary trading markets for smaller issuers.
- Modernize the Transfer Agent regulatory regime. This is long overdue. It is my hope that the Commission will shortly take steps to address this issue by issuing a concept release that, among other things, seeks comment on concrete rules that the Commission could propose in the near term.
- Enact effective Target Date Fund reforms that work for retail investors.
- Finalize rules to amend Regulation D. (Admittedly, this is an effort that has proven difficult to bring to fruition.)
- Finish the work on a fiduciary standard for those broker-dealers that provide personalized investment advice. (While this is an issue that was substantially discussed before I even got to the Commission, it remains unresolved.)
Some Personal Facts (That May Only Be of Interest to Me)
Finally, as I reflect back over the events that have taken place during my years as an SEC Commissioner, I am grateful for having had the opportunity to serve our nation’s investors. The timing of my tenure allowed me to be a part of a historical transformation as the Commission undertook unprecedented new responsibilities and mandates imposed by the Dodd-Frank Act, the JOBS Act, and the evolving needs of the capital markets and investors. Hopefully, I made a positive contribution to those efforts.
While a Commissioner’s work is regularly taken up by reviewing, weighing-in, calibrating, and voting on numerous (one is tempted to say, countless) enforcement matters, agency regulations, and other staff recommendations (whether involving internal matters or matters external to the agency), there are other aspects to a Commissioner’s experience beyond these responsibilities. To that end, the following is a very brief summary of some of my own “other experiences” as an SEC commissioner:
During my tenure, I have served with four Chairs, a number of different Commissioners (composing six different Commissions), five General Counsels and at least three different heads of the SEC’s major division and offices (and, additionally, the head of each of the SEC’s eleven regional offices has changed at least once). This somewhat continual change in SEC leadership is one reason why I hope my brief description of how the Commission has evolved post-financial crisis will be helpful to those unfamiliar with what the Commission has done to make itself a better regulator. Just as importantly, I hope it serves as a reminder to future Commissioners and staff that they should not hesitate to make further changes when it is clear that change is needed.
One way that I have worked to contribute to positive changes at the Commission is through the “bully pulpit” and to call for new policies, initiatives, stronger enforcement actions, and more effective regulations. To that end, I have given more than 250 public statements or speeches to the public, including: (1) at least 122 sets of remarks at open meetings dealing with rulemakings, statements at Commission-sponsored forums, advisory committee meetings, or roundtables; and (2) more than 130 speeches in public settings, and other public statements.
I am often asked about the large number of footnotes and annotations in my public statements and speeches. The reason why I use so many footnotes is simple: I believe an SEC Commissioner needs to be as transparent and thorough as possible in substantiating the data, facts, and perspectives from which statements and views are derived. I admit that some of the readers of my speeches and statement have seen their fair share of footnotes. In particular, my statement entitled U.S. Equity Market Structure: Making Our Markets Work Better for Investors, posted on May 11, 2015, has 184 footnotes. Another example is my Statement on Making the Municipal Securities Market More Transparent, Liquid, and Fair, posted on February 13, 2015, with 119 footnotes.
I have also found great benefits in having effective communications with fellow regulators. To that end, I was both proud and humbled to have been asked by the North American Securities Administrators Association (“NASAA”) to serve as their SEC liaison during most of my tenure. In addition, I also served as the SEC liaison with the Council of Securities Regulators of the Americas (“COSRA”).
I have also worked to improve the Commission’s diversity. To that end, I served as the inaugural Chair for the first SEC Diversity Council, and as the sponsor for the Hispanic and Latino Opportunity, Leadership, and Advocacy Committee, the African American Council, and the Caribbean American Heritage Committee. Admittedly, improving diversity at the SEC remains a work-in-progress and there is more work to do. The SEC’s workforce must reflect the face of today’s America.
Ultimately, I feel honored to have been one of only three Commissioners since 1934 to have been nominated by two U.S. Presidents from two different political parties, and to have become the 8th longest-serving Commissioner. As I leave the Commission at the end of this year, I hope I am leaving the SEC a better place than when I first joined it.