This is a transcript of the podcast SEC Commissioner Hester Peirce shares her thoughts on 2024 and road ahead, a discussion between GRIP’s US Content Editor, Julie DiMauro, and SEC Commissioner Hester Peirce.
[INTRO]
Julie DiMauro: Greetings, everyone, and welcome to an intelligence and practice podcast. I am Julie DiMauro, US Content Manager in New York.
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I am thrilled to announce that today’s podcast session features a commissioner of the US Securities and Exchange Commission, Commissioner Hester Peirce, who joined us last year for a terrific podcast session. And we’re so thrilled to have her back. Please allow me to introduce her before we begin our discussion.
Hester Peirce was appointed by President Donald Trump to the US Securities and Exchange Commission and was sworn in on January 11, 2018. Prior to joining the SEC, Commissioner Peirce conducted research on the regulation of financial markets at the Mercatus Center at George Mason University. She was a senior council on the US Senate Committee on Banking, Housing and Urban Affairs, where she advised Ranking Member Richard Shelby and other members of the committee on securities issues.
Commissioner Peirce served as counsel to SEC Commissioner Paul Atkins. She also worked as a staff attorney in the SEC’s Division of Investment Management. Commissioner Peirce was an associate at Wilmer Cutler and Pickering now Wilmer Hale and clerked for Judge Roger Andewelt on the court of federal claims.
Commissioner Peirce earned her bachelor’s degree in economics from Case Western Reserve University and her JD from Yale Law School. Thank you so much for joining me here today, Commissioner Peirce.
Hester Peirce: Julie, it’s great to be back. Thanks for having me. I want to, of course, give my disclaimer, which is that my views are my own views as a commissioner, not necessarily those of the SEC or my fellow commissioners.
Julie DiMauro: Thank you so much. Let’s dive in.
I want to ask you about the Qatalyst Partners case. This was an off-channel recordkeeping decision issued into September as part of another sweep enforcement action in this arena at the SEC. You dissented, with Commissioner Mark Uyeda, on the decision to censor the firm without a monetary fine, saying it does not appear that firms have an achievable path to compliance.
You both say preserving business records is important and recognize that there is an industry-wide problem in preserving them. But you have problems about how the SEC has enforced these expectations.
What were your main concerns about the censure itself? And can we expect to see a brand new approach to enforcing record keeping rules in 2025?
Hester Peirce: Well, that particular enforcement action, I think was, was it really did serve as a catalyst because we’ve brought a lot of these enforcement actions now in the off-channel space. And here was one where we had a firm that really had tried to do a lot of things well, and we still ended up with an enforcement action.
And so yeah, you may say, well, look, they should be happy enforcement action happened, but there was no penalty and there have been really big penalties in a lot of these cases.
But you still have an enforcement action. And even if it’s just a censure, it’s still an enforcement action that can have collateral consequences for the firm. That turns the firm into a recidivist if there’s ever a future problem.
And it really does undermine this notion that enforcement is a tool that we have that we use when you have a firm that has not done the right thing, and has not tried to do the right thing. We’re primarily a regulatory agency.
And so we use other tools first, and then we turn to enforcement when the other tools aren’t working. And I just think this is an example of a case where we didn’t need to pick up that enforcement tool at all.
I have broader concerns about the off-channel communications sweep cases in general. And I think that this one, I think just prompted me to sort of put some of those down along with commissioner Uyeda to put some of these concerns down on paper, which, which we could talk about more.
Julie DiMauro: Yes, please. What were your concerns more broadly speaking about the sweep of enforcement actions? Was it just, you know, regulation by enforcement? Did it seem like Monday morning quarterbacking or like there was just a lack of clarity in terms of what business records needed to be preserved or what good looked like? What were your main concerns?
Hester Peirce: Yeah. So I think you, you, you ran through a number of those concerns. And so recordkeeping, just to set a base, right? Recordkeeping is very important. It’s important not only for us as a regulator, but it’s also important for regulated entities that are trying to do the right thing.
Compliance can’t do their job if there aren’t good records being kept. And so I think we share that goal of, of needing to have records of what people are doing at the firm.
And so we need to think about how to best do that. But you’re seeing, you know, case after case where there, these off-channel communications have been happening. So clearly there is difficulty across the industry and we see it in broker dealers. We’ve seen it in some investment adviser cases. We’ve seen municipal adviser cases, credit rating agency cases.
So you’ve seen it in a number of different places. So clearly people are struggling. And so is an enforcement approach the right way to solve that problem or can we maybe take this moment to solve that problem? And then maybe take this moment to say, OK, we need to really go back, look at what the purpose of those recordkeeping rules is. Identify the kinds of information that we need to have as regulators.
And then think about the different modes through which people now communicate, which are different than when those recordkeeping rules were written so many years ago. And then think about how those two things intersect.
Think about how firms can, comply. Right? So these are the kinds of things that require a lot of thought and trying to use enforcement actions to basically scare people into compliance, I think that ignores the fact that there’s some really thorny issues here.
And even a firm like Qatalyst that really has taken a number of different measures – they’ve put policies and procedures in place; they’ve trained people; they’ve brought internal disciplinary proceedings – is having trouble because people are people and people are not always going to follow the rules.
So, let’s all sit down together and think about what reasonable looks like. I think another piece that we saw in that Qatalyst case is some language in the order that made it seem like we’ve got sort of this standard, which is a standard of perfection. And so let’s again think about what is, what is a reasonable standard? What does reasonable implementation of your recordkeeping requirements look like?
So that’s kind of a better approach, I think to build a long-term change in how the industry does things, than to try to do it with enforcement actions, because you know, if you go two years down the road, some of these same firms, you could bring them back in because people are people and you’re always going to have some instances of non-compliance. So this isn’t really a good way to solve things. What we really want to do is help firms build effective practical compliance programs.
Julie DiMauro: Absolutely. Now, in thinking about that, are you suggesting that the SEC issue a little more guidance? Think about, maybe some best practices that they can give firms to give them, you know, just a roadmap going forward, because I would assume that businesses would want to know what good looks like. Is that coming from the SEC or should it come from, you had mentioned a compliance officer advisory committee. I mean, maybe it could come from that?
Hester Peirce: Yeah. So I would like to see us set up an advisory committee made up of compliance officers. And I think this is a great issue for them to take up as one of their first issues. And the beauty of having a committee like that, is you’re bringing people to talk about these issues from different sizes and types of firms.
And they’re having their conversations in public so that other people can weigh in and comment. And it enables us to really hear directly from them, what the challenges they’re facing are and also what approaches they’re taking. I’ve talked to quite a few firms and have heard about approaches that different firms are taking, but it would be helpful to have that be a public dialogue.
Of course, that kind of a committee can serve a lot of other functions than just dealing with this issue – I’ve thought in connection with some of the rules that we’ve implemented. It would be really helpful to hear from people who are having to implement those rules. What are the challenges they’re trying to face? What questions do they need answered? So I think it could be a tremendous resource for the commission just going forward.
But yeah, so that would be one way to do it. We don’t have such a committee in existence now. So I think we could start providing some guidance ourselves around “What do we think is in scope and what’s out of scope?”
Because even there, I think some of the people who have been trying to implement this at firms have had questions about what we consider to be a record. And so that’s why I say having the chance to go back and really think about what is it that we actually need?
Because the world really has changed. And I think one of the other points that I’ve heard from a lot of people is that records have changed in part because a lot of what was done orally is now done through text. And so we really have to think about whether we want to capture all of that stuff.
I think that there’s some hard questions there, but certainly thinking about that, providing guidance about what’s in, what’s out, what’s the difference if, you know, for a broker dealer versus investment adviser versus some of these other types of entities, are there differences in the recordkeeping rules and how does that affect what they have to keep it? Should there be differences in the record keeping rules?
So I think these are all questions that we could talk to people about.
Julie DiMauro: Absolutely. I mean, we certainly hear from some of our clients about the challenges that go into all of this. I mean, you’re capturing a lot of information, a lot of conversation that, like you’re saying, is just a broad net.
And a lot of the conversation that we’re grabbing in is not business related per se, that we don’t need to actually be capturing. And obviously trying to parse those out and separate the information.
But it is true though, that a simple conversation can turn into a solicitation pretty quickly – a process, a process. And so that’s why I think that that conversation can turn into a solicitation pretty quickly.
Hester Peirce: You know, you also have really complicated scenarios where you have someone who is friends with an adviser. And is having conversations about, could you, could you take care of my dog today? And then the next message is, oh, and can I ask you a question about my investment portfolio? And it’s really hard to tell that person: “Oh, the dog thing goes on this to this number. And the portfolio question goes to this number.” And so on.
A lot of firms have put in systems where you can, the adviser can, then send that message that comes in on the other number to, you know, to be kept. But this all requires training and work and it’s not necessarily a smooth implementation of how to do that. You know, so even if you have, if you give everyone a separate phone, you’re not going to get complete compliance from your clients.
Thinking about all those issues, I think, it really helps to have real world examples.
If we can get real world examples and we can develop some guidance, and maybe revise our rules and then, you know, have guidance. Then it’ll be easier for firms to train people and say, here are concrete examples of communications that are in scope. Here are concrete examples of communications that are out of scope. And have the training be interactive, you know, and, and really involve the person who is being trained to engage with it.
Then I think you’ll get better compliance and then figuring out for firms, they’ve got to figure out then how to make sure people are adhering to that. There are ways to do that. Firms are monitoring the firm’s own systems to see whether there are references to communications that have happened off channel. And that can then be a catalyst, no pun intended.
For the firm’s compliance folks to go and say: “Hey, looks like you’re having conversations off channel. This is problematic.”
And then of course, a firm has to, has to back up whatever it does with disciplining people who aren’t complying. So, I mean, again, these are all things that firms are thinking about and can inform our thinking.
But if we really want to get to a better place, it’s better if firms feel comfortable in having these conversations with us about what does good look like. What are examples of communications that are in and out?
And when you create this enforcement culture where it’s just you’re going to come in, you’re going to face an enforcement action, at least, but probably an enforcement action and a large fine. It doesn’t create this environment within which people feel comfortable talking to us and raising the hard questions with us.
Julie DiMauro: Absolutely, makes sense. And Commissioner Peirce, we were talking about the Chief Compliance Officer Advisory Committee you and Commissioner Uyeda have referenced a few times. I was thinking about our last conversation last year when we talked about CCO liability; this might be maybe something for that committee as well?
Hester Peirce: Exactly. I mean, I still think it would be helpful for us to have a liability framework in place to give people a sense of when the agency will pursue liability against compliance officers.
And so figuring out, I mean, there’s some obvious things that, you know, yes, you’re going to face liability if you were there designing the fraud, but there’s some other areas where it’s less clear.
And so I think that’s where I would really benefit from having the input of, and we’ve gotten some great input from National of Compliance Professionals and from the New York City Bar folks and from others on these issues. But I think it would be helpful to have everyone kind of talking to each other.
Julie DiMauro: Now, I want to ask you about the transparency around the SEC’s method for calculating penalties. It could be in the off-channel comms, record keeping cases, plus in others. Such lack of clarity not being overly helpful for businesses. Do you foresee the SEC providing more clarity around civil monetary penalties here going forward?
And maybe you can touch on the need for more clarity on how much credit self-reporting, cooperation and remediation will be afforded a firm, because those terms can sometimes be subject to some interpretation.
Hester Peirce: Yeah, these are all facts and circumstances kinds of things. And so it’s sometimes hard to, you know, give people exact clarity on what it looks like, because, as you say, remediation can look different. So I do think if we have a framework by which deciding what penalties will be, that that’s something that we should put out there for people to be able to see.
That’s not, again, it’s not always easy to do. So I think we have to be careful because there can be aggravating facts and circumstances. And, you know, you want to make sure that when you have, when people are violating the rules, that there’s a consequence to that. And you don’t want people to be thinking in terms of, well, I can afford to because I see that I’ll only have to pay X amount of money. So, you know, these are, again, difficult issues, but I think we can provide more clarity.
Whether that will happen, I don’t know. I mean, there’s been an election, so there’ll be some changes at the SEC, I’m sure, will get a new permanent enforcement director at some point, or our last enforcement permanent director left.
So, you know, clearly there’ll be some opportunity to think about these issues afresh. And we’ll get a sense of whether there are areas where, you know, again, it’s sort of like this idea with the CCO liability framework, you can provide some general guidance so people have a sense of what to expect, understanding, of course, that individual facts and circumstances can change it.
And same on the self reporting and remediation front, you can provide some general guidance about this is kind of what remediation looks like. And sometimes you see that in orders that come out from the commission, examples are provided of what remediation looks like. But again, it’s going to be, you got to read it all in the context of those facts and circumstances.
I certainly want to be in a place where people feel that they can self-report. And often I think self-reporting should result in no enforcement action. Facts and circumstances matter a lot there too. But I don’t see why in an instance like Qatalyst, for example, you could just say we don’t need to bring an enforcement action. You can achieve a lot without an enforcement action. You know, there are times where an enforcement action is appropriate. And even in instance, some instances where there’s been a self-report that might very well be appropriate.
But I think we should be doing a better job of encouraging a climate where people can communicate with the commission and say, hey, we messed up here. We’re fixing it. And then we can say, good, go fix it. And we’re not going to waste your time now with an enforcement action.
We’d rather have you concentrate on fixing the problem, spend the resources you would have spent in an enforcement action on actually fixing the problems that we don’t see you back here again. So those are some of the things that I think about as I think about whether we should be bringing enforcement actions or not.
Julie DiMauro: What’s interesting about it is after Qatalyst, I went to a couple of industry events and the panelists were all of the same mind, which is just, there’s no value in self-reporting.
They were really upset about that fact and more leaning toward instructing other firms to not self-report because they weren’t sure there was enough benefit in it. If you’re going to get a censure and it’s going to go on your record and there’s going to be a very public disclosure it, and maybe even you’re going to be lumped in with other entities in terms of an enforcement action, a sweep action.
What benefit did you derive from the self-reporting when it took a lot of effort on your part to get to that point? And you’re suggesting like, the SEC can still come in, investigate, ask a lot of questions, provide some guidance. That’s still a lot of work that you’re doing together and still resource intensive. So I think that that still would be instructive to the firm, as you’re mentioning, rather than actually needing the censure to be imposed as well.
Hester Peirce: Yeah, no, I think that’s certainly true. And I do welcome people coming to talk to me when they see something that’s coming out of the SEC that they think discourages good compliance or good communication with the SEC, because I really want to build a regulatory world in which the good actors feel confident in coming to talk to the SEC, even when something bad has happened at their firms.
And when we can concentrate our enforcement resources on the firms where that is going to be more meaningful.
You know, again, that doesn’t mean that there are going to be no enforcement actions. That’s certainly not. It’s a question of us preserving our scarce enforcement resources and using them in the place where they’re going to have the greatest effect and then have firms really being able effort to improve how they’re doing things, then have the back and forth with us to make sure that they’re getting to the right place, but not necessarily in the context of an enforcement action.
Julie DiMauro: Absolutely. If you don’t mind, I want to make a quick pivot to crypto regulation. You’ve advocated for more legal clarity in this area, so our regulatory approach does not deter digital asset development in such offerings in the US. What might a more practical approach look like?
Hester Peirce: Well, again, this is going to be an area where we need to get input from a lot of people, and so I hope that now we’ll have an opportunity to take a proactive look at the area and develop some guidance and some regulation and use our exemptive authority.
I think that we can start out by providing guidance around what falls within our jurisdiction and what doesn’t. We’ve been rather hesitant to provide that kind of guidance in the past several years, and I think it’s led a lot of people to not do things that are not in our jurisdiction for fear that we will reach over and grab them and pull them into our jurisdiction, so providing guidance around what doesn’t fall within it, and then helping broker-dealers, investment advisers, and other intermediaries figure out when something is actually a securities transaction or when it’s a digital asset security or whatever you want to call it.
What can they do? Can they deal with it? What do they need to do differently? What rules need to be changed to accommodate what they’re trying to do in a way that still meets our goals as a regulator charged with protecting investors and facilitating capital formation and fostering fair, orderly, and efficient markets?
We want to be able to do those things but also allow these projects to be commercially viable, thinking about what happens if you have a trading venue that’s trying to trade something that is classified as a security alongside something that isn’t classified as a security.
Can they do that and how? So there are some of these questions we can answer, and so there’s a lot of work to be done in this space, but again it’s my theme of we need to do it with the input of people who are actually working on things, and we need to get to a place where we really do put everyone in a better position. I think this lack of clarity that we’ve had in this area has been bad for the American public.
It’s been bad for the firms that are trying to experiment in this area, and it’s been bad for us as a regulator because we’ve spent a lot of enforcement resources doing things that we would have been better off doing with our regulatory divisions, and this is a really expensive way for us to regulate, and those resources that we’ve spent on bringing registration cases in the crypto context have not been spent on other things where I think they could have been better used.
Julie DiMauro: That’s a good point. And you brought up the investing public. I mean these products are extremely popular.
Hester Peirce: Yeah, and you know, we’re not supposed to be a merit regulator, and so people can make their own decisions about whether they want these products or not, but you did see when those bitcoin exchange-traded products finally came live after so long, there was definitely market interest in those products.
And then I think another piece of this is that the technology underlying crypto assets and a lot of the experimentation that has happened in the purely crypto-native world has real applications for streamlining processes in the traditional financial world, but because we just have such an aversion to anything that has anything to do with crypto, traditional financial firms, are not experimenting with that technology here in the US.
They’re doing that outside the US, and they’ve been hesitant to try those things here, and that I think is so foolish on our part because blockchain doesn’t solve everything, of course, but it might certain things more efficient.
Tokenizing certain kinds of securities may make a lot of sense, because you get the ability to program them with smart contracts, you get more immediate settlement, you can take away some of the intermediaries and the costs that go along with that, and so we’re really losing out by not letting people play around with that kind of application in the traditional financial world to see where it makes sense and where it doesn’t.
So I’m hoping that in 2025 we can open up the room for experimentation. Some of those experiments are going to produce interesting things.
Others are probably not going to work out the way people expected, but we’ll learn from all of those experiments, and so I’m optimistic that we can be in a better place in 2025.
Julie DiMauro: Commissioner Peirce, following this historic election, I know that there’s only a certain amount that you can speak to with regard to this, but could you provide any insights, any thoughts about what we can expect at the SEC in general terms from the pace of rulemaking activity going forward to your own role there?
Hester Peirce: Well, the election just happened, so I think everyone is trying to figure out what will change and whatnot, but when you get a new chair, you get a new agenda, you get it’s a new boss for the staff at the agency, and it’s really a chance to kind of think what the agenda should look like. The agency has been very busy in recent years.
There’s a lot of implementation that’s happening now with some major rules and so there has to be an understanding of letting those rules get implemented in a way that makes sense and having engagement from the regulator, and so I think there’ll be probably changes not only on the agenda side of things in terms of what the commission is thinking about in terms of new rules, but also in how the Commission is approaching implementation, and also how the Commission is open for business in the sense of if people need guidance, they should be able to come in and get it.
If people want to try new things, they should be able work with the Commission staff to get the exemptive orders or no action letters that they need, even if it’s just a question of how do I apply the rules in my existing circumstances, just having the opportunity to discuss that with the staff.
I think one of the things I’m looking forward to is a more open door to having those kind of conversations, and so welcome people’s thoughts on other things that the agency could do better.
This is an opportunity for us to try to be a better regulator. Our markets are the best in the world, and we want to keep them that way, so we want to make sure that we’re approaching regulation in a way that’s reasonable, that’s effective, that is encouraging of people to come to our markets to build things, and it’s protective of investors, and so therefore encouraging of investors to come here and put their hard-earned money to work.
Julie DiMauro: Wonderful. I want to give a truly heartfelt thank you to you, SEC Commissioner Hester Peirce, for joining me today and sharing your incredible, thoughtful insights with us. I want to thank her amazing team at the SEC who made it possible, and who were a joy to work with as well.
And, as ever, I have to thank our listeners as ever for tuning into this GRIP podcast. Please keep visiting our array of compliance and regulatory articles and discussions on our daily website at GRIP.GlobalRelay.com, and we’ll see you back here for another podcast program soon.