By Anne Sherry, J.D.
In a keynote address at the NASAA 2023 Public Policy Symposium, SEC Commissioner Jaime Lizárraga emphasized some areas of common ground between federal and state securities regulators: the need to promote capital formation and protect investors, all with relatively limited resources. The commissioner lauded NASAA’s work in such areas as helping victims of fraud achieve restitution, while also highlighting recent proposals at the SEC aimed at providing transparency and clarity for investors.
Lizárraga said that the term “blue sky laws” evokes a certain optimism that working families channel when they invest with hopes of a brighter future. The partnership between the SEC and NASAA can make a real difference here, he said, by making sure investors have the information they need to invest confidently in markets that operate with integrity.
Capital formation. In one respect, that means ensuring responsible capital formation. To the commissioner, this means transparency, both in public and private markets. Access to capital by underrepresented communities also plays a role, and Lizárraga encouraged the audience to consider how to reach “the smallest of the smallest businesses in our most underserved communities so that they … also have the opportunity to meaningfully raise growth capital that lifts them and the communities they serve.”
Enforcement. Lizárraga also stressed the deterrence power of enforcement. Last year, state securities regulators obtained more than $145 million in fines, a threefold increase from the year before. The SEC set a record for penalties and disgorgement in fiscal year 2022, imposing almost $6.5 billion in these sanctions. The commissioner said that, like the state regulators, the SEC has to work with limited resources, having only 4500 staff members to monitor a $100-trillion capital market.
The saddest enforcement cases are those involving fraud against seniors, service members, ethnic and religious minorities, and other vulnerable groups, Lizárraga said. Victims are usually unable to recover their losses. The commissioner praised NASAA for developing a model law to help victims achieve restitution.
Regulation Best Interest. Lizárraga also complimented NASAA on its work to assess broker-dealers’ compliance with Regulation Best Interest. Implementation of the regulation, “flawed as it is,” is important to ensure investors feel confident and protected when they engage in the markets.
Other SEC initiatives. Finally, the commissioner discussed some other proposals at the SEC meant to provide transparency and inform investors about issues that matter to them. Via the issuer climate proposal, the SEC listened to investors’ requests that companies disclose their climate risks. The SEC also proposed rules that would require funds and advisers to disclose how they take ESG factors into account in their decision-making processes. Another proposal on truth in advertising for fund names would likewise ensure that funds stand behind their ESG claims.
Learning from the past. To conclude his remarks, Lizárraga looked to history for lessons and inspiration. NASAA and the SEC were formed during a time of “staggering and uncontrolled fraud and abuse,” he said. The resulting blue sky laws and federal securities laws have served well, but a key lesson from the 2008 financial crisis is that effectively overseeing and updating the rules are critical to preserving confidence in the markets.
“The lessons from that time remind us all that our rules must be as robust and current as possible and as protective as possible of the investing public,” Lizárraga said. “We must also ensure that we’re doing our best to communicate the benefits of these protections to the public.”