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Permanent Bars as an Effective Deterrent

At the SEC Speaks 2015 Program on February 20, 2015, two SEC Commissioners gave their personal remarks on the Commission seeking permanent bars on wrongdoers to prevent further misconduct by such persons, and to deter future misconduct by others. SEC Commissioner Luis A. Aguilar set forth his views that one of his goals for 2015 is “for the Commission to bring more enforcement cases that have real impact—and that send the strongest message of deterrence.” Commissioner Aguilar stated that he had been a strong supporter of the Division of Enforcement, and had advocated “focusing on individual accountability, effective sanctions that deter and punish egregious misconduct, and policies designed to eradicate recidivism.”

While noting that there are important remedies when finding misconduct -- including seeking “to enjoin such activity, disgorge ill-gotten gains, and impose civil penalties against the wrongdoers” -- Commissioner Aguilar said that one of the most potent remedies“ is for the Commission to prevent wrongdoers from being allowed to remain in a role that permits them to continue to hurt investors”, declaring that the Commission needs to be more aggressive in seeking permanent industry bars and officer and director bars. Commissioner Aguilar said these bars not only serve to punish the wrongdoer, but also protect investors from future misconduct by that person, and also deter others who might also be engaging in fraudulent activities.

Commissioner Aguilar went on to say that an “SEC enforcement action should not be viewed merely as a cost of doing business; rather, it should cause individuals and companies—whether or not they are part of the Commission’s specific action—to seriously reflect on their own conduct.  This is particularly true in the case of recidivist violators.  If our remedial sanctions were ineffective in reforming a fraudster, then we must seriously consider removing them from the industry—permanently.  The SEC must do this to protect American investors.”

Similarly, Commissioner Kara M. Stein said in her statement that the so-called “bad actor” bars can be a “powerful deterrent”, and that the automatic disqualifications can have a significant impact on firms. Commissioner Stein went on to note “More fundamentally, problems of compliance start and end at the top. The degree to which those at the top knew or should have known about a violation or a failed culture of compliance is an important factor in analyzing whether an automatic bad actor bar should occur. I have been urging the Commission to adopt and use this factor in the context of evaluating these bars.”

Commissioner Stein further stated that “the bars provide a forward-looking or prophylactic tool, designed to deter and prevent recidivism and restore trust in the markets.”

Our Perspective

While Commissioners Aguilar and Stein are speaking only for themselves, it is noteworthy that two of the five Commissioners are now urging the use of permanent bars as a remedy to deter misconduct. If the Commission begins to pursue permanent bars of wrongdoers, we expect many firms will start taking compliance matters much more seriously than they may have been taking them, rather than risk being banned from conducting their business. This would include those firms with prior deficiencies who risk being deemed recidivists if they do not adequately remediate their prior deficiencies.

SEC3 can assist your firm in reviewing or creating, implementing and maintaining your compliance policies and procedures. For further information, please contact your SEC3 representative or contact us at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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