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Piwowar Criticizes Rulemaking Process and Regulation by Enforcement

SEC Commissioner Michael Piwowar offered several criticisms the SEC in a recent speech at SEC Speaks, focusing his comments on ways in which the SEC could be more fair, orderly, and efficient. He called for greater fairness in the rule making process, where he argued that “the Commission and staff must not engage in rulemaking by enforcement or through examinations of regulated entities,” and specifically that the agency “must resist the temptation to include undertakings in enforcement settlements or principles in examination reports that serve as de facto rule requirements.”

Piwowar also took aim at the length of recent rule releases, noting that “where 500 or 1,000 pages are required to explain the rules we have adopted, the Commission must ask itself whether our rule text is too complex for market participants to reasonably understand and apply.” Such length means that some may not even attempt to read the rules, according to Piwowar, and indicated that in many cases the documents went beyond explaining the rules and actually included de facto rules in the guidance.

He lamented a lack of certainty and fairness for parties in interacting with the SEC given the departure from set guidelines in corporate penalties and waiver issuance.  He also criticized the agency’s increasing use of administrative courts. He argued the move, particularly in the wake of two high profile losses in federal court, has given the appearance that the Commission was acting to increase its success rate.

Turning to “order,” he stressed the need for the SEC to properly set priorities, specifically in the areas of rulemaking and enforcement. Piwowar suggested that the Commission should focus on efforts that closely align with its mission and criticized the “broken windows” approach, stating that “[i]f you create an environment in which regulatory compliance is the most important objective for market participants, rather than enabling vital and important economic activity, we will have unnecessarily shackled it.” Lastly, Piwowar applauded certain efficiencies gained, but suggested that increased use of investor testing, pilot programs and retrospective reviews, as well as increased engagement with experts outside of the agency and greater use of Department of Economic and Risk Analysis in the rulemaking process would greatly benefit the agency.

In her address, Chair Mary Jo White reiterated remarks made late last year regarding her priorities for the asset management industry and highlighted staff efforts in developing recommendations in the areas of data reporting, controls to identify and manage portfolio risk, and stress testing.


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