Gatekeepers, Enforcement, and the SEC

Public dissents in enforcement cases by commissioners are unusual. Enforcement cases are approved by a non-public vote. The drafting a dissenting statement, therefore, means that the approved action was not unanimous. Moreover, given the workload of the commissioners and their staff, they are unlikely to draft dissents every time they disagree with the outcome of a decision.  

So we note with interest the dissent by Commissioner Luis A. Aguilar, in In re Blodgett & Keyser, Exchange Act Release No. 72938 (admin. proc. Aug. 28, 2014). The dissent focused on settlement with Mr. Keyser, a CPA and former CFO, describing it as a "wrist slap at best." See Id. ("Given the egregious conduct that [the CFO] engaged in at [the company], the Commission’s settlement, which lacks fraud charges or a timeout in the form of a Rule 102(e) suspension, is a wrist slap at best.").  

Disagreements over the application of the facts to the law are likely to be common. The thrust of Commissioner Aguilar’s dissent, however, was over a broader issue, the possible pattern with respect to enforcement.  

  • Beyond this particular matter, I am concerned that the Commission is entering into a practice of accepting settlements without appropriately charging fraud and imposing Rule 102(e) suspensions against accountants in financial reporting and disclosure cases. I am also concerned that this reflects a lack of conviction to charge what the facts warrant and to bring appropriate remedies. 

He backed up the assertion with statistics: 

  • The statistics on financial reporting and disclosure cases and related Rule 102(e) suspensions reflect a troubling trend. In fiscal year 2010, the Commission brought 117 financial reporting and disclosure cases against issuers and individuals, and imposed Rule 102(e) suspensions in 54% of those cases. In 2011, the number of financial reporting and disclosure cases against issuers and individuals brought by the Commission fell to 86, and the Commission imposed Rule 102(e) suspensions in 53% of those cases. In 2012, again the number of similar cases brought by the Commission fell, this time to 76, and the Commission imposed Rule 102(e) suspensions in 49% of those cases. In 2013, the Commission brought only 68 similar cases, and imposed Rule 102(e) suspensions in only 41% of those cases. 

His conclusion? "These declining numbers reveal a departure from the Commission’s efforts to keep bad apples out of the securities industry, and this puts investors and the integrity of the Commission’s processes at grave risk."

The SEC has a number of enforcement priorities. The Commission has, for example, toughened its approach to enforcement by sometimes obtaining actual admissions from those settling cases. But the risk of admissions, while imposing a meaningful price for bad behavior, is not likely to have a significant deterrent effect. Imposing meaningful penalties on gatekeepers, on the other other hand, is likely to have  a deterrent effect. That, it seems, is the primary thrust of the position taken by Commissioner Aguilar.   

J Robert Brown Jr.