Securities and Exchange Commissioner Mark Uyeda delivered a speech today in London where he criticized the SEC’s approach to enforcement generally and specifically with respect to the dealer cases.
While delivering the fifth annual Scott Friestad Memorial Lecture, Uyeda said, “While it is important for government regulators to pursue bad actors, the ease at which an official investigation can be launched suggests that there ought to be objective and articulable standards to guide the exercise of such power by enforcement staff.
“A key concept under the rule of law is that similarly situated people should be treated similarly. However, when there is a low threshold to launching an investigation that lacks sufficient guardrails, the potential for abuse increases. For instance, it would be inappropriate to single out otherwise lawful financial products that might be viewed disfavorably. Targeting lawful, but disfavored, products and conduct with investigations and administrative subpoenas based on the “official curiosity” standard runs the risk of turning the SEC into a merit regulator – which was an approach that the U.S. Congress did not take in enacting the federal securities laws.
“At times, it may be appealing to set regulatory policy through enforcement actions. But the SEC ought to be reluctant to pursue that approach, especially when it effectively creates new definitions or interpretations that affect conduct not previously deemed unlawful. If there are regulatory provisions that are unclear and/or ambiguous, the Commission and its staff can and should provide clarity to market participants, which can occur in the form of rules, interpretations, guidance, and no-action letters. This clarity should be provided before resorting to enforcement actions. The SEC’s enforcement efforts should be limited to enforcing the rules as written, and should not create novel and innovative interpretations that broaden the scope of these rules and the Commission’s jurisdiction over markets and their participants.”
He later addressed dealer specific cases.
“Today, I want to discuss three areas where insufficient clarity may result in a lack of understanding, and potentially fair notice, of novel interpretations that the SEC has undertaken in recent enforcement actions. These areas are: (1) the scope of the definition of a dealer under the Securities Exchange Act of 1934…”
While using Crown Bridge as an example, Uyeda said, “It would be understandable if Crown Bridge, after reviewing the Guide, were to conclude that their conduct did not require them to register with the Commission as a dealer since they were using their own money and did not provide services to clients or do business with the public.
“Nonetheless, the SEC sued Crown Bridge for unregistered dealer activity. The case was ultimately settled.[11] Was fair notice of this interpretation given to market participants? Would there have been better ways to communicate the SEC’s views prior to instituting an enforcement action? Questions and challenges to this approach have been raised. The Crown Bridge case is only one of a number of similar cases brought by the SEC in recent years, some of which are currently pending in the judicial system.”
The entirety of Commissioner Uyeda’s remarks can be read here.