Fiduciary Corner

Blaine F. Aikin

Enforcement of securities laws a must

SEC's Aguilar lays out compelling steps needed to restore investor trust in financial services

Oct 28, 2012 @ 12:01 am

By Blaine F. Aikin

There is a crisis of investor confidence in the integrity of financial market participants and regulators.

Although there are many underlying causes of the crisis, financial misconduct is clearly one that is both prominent and able to be remedied.

Speaking at the Securities Enforcement Forum 2012 this month, Securities and Exchange Commission member Luis Aguilar called for action to institute more-robust enforcement of securities laws, including legislation to increase the penalties for misconduct dramatically.

Noting that “trust is the foundation of the capital markets,” he framed compelling arguments as to why change is necessary and steps that need to be taken to help restore investor confidence and trust.

The following statistics cited by Mr. Aguilar are drawn from three recent studies that speak volumes about the weakened state of the trust-based foundation of the capital markets:

• Seventy-nine percent of investors have no trust in the financial system (“Too Big To Trust,” Chicago/Kellogg Financial Trust Index, in July).

• Fifty-two percent have no confidence in the management of public companies, and 54% have no confidence in public company boards of directors (The Center for Audit Quality's sixth annual Main Street Investor Survey, in September).

• Sixty-four percent of Americans think that corporate misconduct was a significant factor in bringing about the current economic crisis (The 2012 Ethics and Action Survey: Voices Carry, in September).

• Sixty-one percent of investors have no confidence in government regulators (Financial Trust Index), and 81% don't think that the government has done enough to stop corporate wrongdoing (CAQ survey).

Effective enforcement of securities laws, though not a cure for the crisis of confidence, must be part of a comprehensive plan to recover from the advanced state of decline in trust.


Mr. Aguilar prescribes attention to three key elements of an effective enforcement program: (1) individual accountability, (2) a maximum deterrence strategy and (3) special attention to recidivists.

Individual accountability involves focusing enforcement investigations on senior leaders at any organization involved in wrongdoing. Organizational accountability is important, but behind every breach of trust and violation of law are human acts of commission or omission for which the people involved must be held responsible.

Once again citing important studies, Mr. Aguilar said that a maximum deterrence strategy “turns on the severity of sanctions, the degree of certainty that sanctions will be imposed and the amount of time that lapses between the unlawful conduct and when the sanctions are imposed, and the extent of any extralegal consequences.”

The Stronger Enforcement of Civil Penalties Act of 2012, introduced by Sen. Charles Grassley, R-Iowa, and Sen. Jack Reed, D-R.I., would allow the SEC to issue per-violation penalties up to the greater of (1) $1 million for individuals (up from $150,000) and $10 million for firms (from $750,000), (2) three times the gross pecuniary gains or (3) the losses incurred by investors as a result of the violation.

Dodd-Frank expanded the SEC's authority to force bad actors out of the financial services industry. In addition to officer and director bars that have been available to the SEC, the commission can now issue collateral industry bars that prevent them from serving in the regulated securities industry in any role.

Career-ending bars from the industry carry enormous reputational and economic consequences, making these particularly effective deterrence measures.

Officer, director and industry bars relate directly to the third area of enforcement attention advocated by Mr. Aguilar: recidivists.

As in other areas of criminal activity, repeat offenders are responsible for a disproportionate amount of damage.

Mr. Aguilar has called for the SEC to “insist that every recidivist be subject to more-robust sanctions, including post-sanction monitoring ... that might include unscheduled office visits; access to phone records, bank records, and state and federal tax returns; and submission of periodic self-reports by the defendant.”

These are positive developments that promote a stronger fiduciary ethic in financial services, yet there is much more to be done to reduce financial misconduct and help restore the foundation of trust upon which our capital markets are built.

Blaine F. Aikin is chief executive of Fiduciary 360 LLC.


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Oct 17


Best Practices Workshop

For the fifth year, InvestmentNews will host the Best Practices Workshop & Awards, bringing together the industry’s top-performing and most influential firms in one room for a full-day. This exclusive workshop and awards program for the... Learn more

Featured video


Ed Slott: Tax strategies to help clients take advantage of market declines

When the markets decline or are volatile, it is an opportunity to put a few retirement savings strategies to work, according to Ed Slott, founder of Ed Slott's Elite IRA Advisor Group.

Video Spotlight

A Teacher’s Lesson Plan

Sponsored by Prudential

Latest news & opinion

Alternative strategies boomed after crisis, but haven't been tested

Because the S&P 500 has outperformed, convincing clients they need protection is a hard sell.

7 ways advisers fixed clients' biggest financial dilemmas

Sometimes it takes creativity, along with knowledge and outside help, to get a client out of a jam.

LPL Financial buys NPH, a broker-dealer network with 3,200 advisers

The deal, part of which is based on the advisers and revenue that eventually will move from NPH, could potentially cost LPL $448 million.

3 things advisers should make sure their clients' children take to college

Advisers can help clients avoid scary and painful situations with kids age 18 and older.

Private equity investors zero in on the RIA business

P-E proves to be ready and willing to invest in RIAs, but many will be looking to sell in three to seven years.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print