SEC Commissioner Criticizes "Broken Windows Theory" for Securities Enforcement
Commentary by Steven Lofchie
SEC Commissioner Mark T. Uyeda criticized "random acts of regulatory enforcement dressed up as broken windows enforcement," saying it undermined the regulatory predictability that efficient markets require.
In remarks at the SEC's Annual Conference on Financial Market Regulation, Mr. Uyeda considered the application of the "broken windows" theory in securities enforcement. Mr. Uyeda argued that when agency leadership emphasizes metrics like the number of enforcement actions or the dollars collected through disgorgement and civil penalties, agency personnel act in accordance with those incentives. He said the SEC's rulebook has expanded dramatically in volume and complexity over the decades, leaving significant ground for staff to exercise undue discretion.
Mr. Uyeda pointed to the SEC's sweep effort on off-channel communications. He said that sweep investigations during the SEC's broken windows era were eight to nine percent more likely to result in an enforcement action mostly because strict liability violations do not require proof of negligence or scienter.
He said that while the requirement to monitor and retain texts on personal mobile devices used by broker-dealer and investment adviser personnel might be rooted in the "technical meaning of the laws and regulations," communicating on personal devices "was not the type of behavior that was viewed as unambiguously impermissible," based on the reaction to the sweep. He also said that recent research does not appear to adjust for the fact that complex enforcement investigations can take years between initiation and action, and that enforcement initiatives undertaken by one SEC Chair often come to fruition during the tenure of a successor.
Commentary
In addition to any legal uncertainty regarding whether personal device communications were required to be kept, the practical reality was that the communications technology advanced ahead of the recordkeeping technology. Firms did not have the technology to maintain the communications and it is not practical to require that firms abstain from using a communications technology that has become common place and is used by the firm's clients.
Whatever one concludes as to whether enforcement actions should have been brought, the amount collected by the SEC in the enforcement actions was outrageous given that the actions were not tied to a substantive fraud or an intentional plan to conceal evidence from the SEC. It is hard to see the dollar fines as motivated by anything other than a belief that collecting huge fines gives the impression that the SEC is doing a good job.