SEC Enforcement Director Says Firms Must Work to Regain Public Trust
Commentary by Steven Lofchie
SEC Division of Enforcement Director Gurbir S. Grewal emphasized the importance of "proactive compliance" amid the decline in public trust in the financial markets and institutions.
In his remarks before the New York City Bar Association Compliance Institute, Mr. Grewal warned that a decrease in public trust undermines investor confidence, which he said is essential for capital formation. He pointed out compliance failures within firms, with some having "good policies, but fall[ing] short on implementation." In addition, he cited instances where compliance personnel have been involved in misconduct, misled regulators or failed to carry out their compliance responsibilities.
To address these issues, Mr. Grewal proposed a culture of proactive compliance which he said requires education, engagement and execution. Mr. Grewal recommended that firms (i) educate themselves about the law and external developments, such as areas of heightened risks, (ii) engage with their company's different business units to understand their activities, strategies, risks and financial incentives and (iii) execute with effective policies and procedures. He also advised firms to self-report and cooperate if a securities law violation is detected, underscoring the SEC's actions to "aggressively reward[] meaningful cooperation" by recommending substantially reduced penalties or even no penalties at all.
Commentary
Director Grewal is certainly correct that trust in established institutions is on the decline. According to the Pew Research Center, public trust in the U.S. government is the lowest in 70 years with just one percent trusting the government to do what is right just about always and only 15 percent saying that they trust the government most of the time.
Against that background of mistrust of the government, the SEC Director admonishments against financial market participants seems inappropriate. It is not that financial market participants are angels, but they are heavily policed, subject to a lot of rules and can be hit with draconian fines for violations. To the extent that there is mistrust of financial institutions, some of that may be generated by the statements of the financial regulators, which often seem to market themselves on the basis of the dollar amount of the fines that they collect, as opposed to the economic benefits that good regulation provides.
As it was said in the 105th episode, the seventh episode of the fifth season, of the television series Star Trek: Deep Space Nine, "Let He Who is Without Sin..."