SEC COMMISSIONER AGUILAR'S DISSENTING STATEMENT REGARDING CPA PUNISHMENT

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Dissenting Statement In the Matter of Lynn R. Blodgett and Kevin R. Kyser, CPA, Respondents

Commissioner Luis A. Aguilar

Aug. 28, 2014

During my tenure, I have been a strong supporter of the SEC’s Enforcement program.  I have advocated for an effective Enforcement program by focusing on individual accountability, effective sanctions that deter and punish egregious misconduct, and policies designed to eradicate recidivism.[1]  The importance of a strong and robust Enforcement program cannot be overstated.  It is a vital component of an effective capital market on which investors can rely.  Much of the agency’s enforcement decisions are to be commended.  However, I am obligated to speak out when it appears that the agency falters.

Accordingly, I respectfully dissent from the Commission’s Order accepting the settlement offer of Kevin R. Kyser, a Certified Public Accountant and former Chief Financial Officer (“CFO”) of Affiliated Computer Services, Inc. (“ACS” or “Company”). 

Given the egregious conduct that Mr. Kyser engaged in at ACS, the Commission’s settlement, which lacks fraud charges or a timeout in the form of a Rule 102(e) suspension, is a wrist slap at best.   

First, let’s discuss the improper accounting at issue here.  As the Commission’s Order[2]states, ACS violated generally accepted accounting principles (“GAAP”) by inserting itself into pre-existing sales transactions between a manufacturer and a reseller for the primary purpose of booking revenues from those transactions.[3]  Thus, the Company’s involvement in those transactions had no economic substance.[4]  ACS’s misconduct enabled it to improperly report approximately $125 million in revenues,[5] and, crucially, gave the misleading impression that it had met its internal revenue growth guidance.[6]  ACS failed to disclose the true nature of these improper transactions,[7] and falsely reported its internal revenue growth in public filings.[8]

Second, let’s discuss how Mr. Kyser, in his critical role as CFO, facilitated ACS’s misconduct.  As described in the Commission’s own Order, Mr. Kyser:

• Understood that ACS had inserted itself into these pre-existing transactions and that they would impact ACS’s reported revenue growth;[9]
• Was responsible for the content of ACS’s false and misleading public filings with the Commission, earnings releases, and analyst conference calls;[10]
• Highlighted ACS’s false and misleading internal revenue growth in earnings releases and analyst conference calls;[11]
• Failed to ensure that ACS adequately disclosed and described the significance of these transactions in ACS’s public filings and analyst conference calls;[12]
• Signed false certifications in connection with the Company’s periodic filings;[13] and
• Received an inflated bonus based on ACS’s financial performance that was overstated by 43%.[14]

Accountants—especially CPAs—serve as gatekeepers in our securities markets.  They play an important role in maintaining investor confidence and fostering fair and efficient markets.  When they serve as officers of public companies, they take on an even greater responsibility by virtue of holding a position of public trust.  To this end, when these accountants engage in fraudulent misconduct, the Commission must be willing to charge fraud and must not hesitate to suspend the accountant from appearing or practicing before the Commission.  This is true regardless of whether the fraudulent misconduct involves scienter.

The Commission instead chose to charge Mr. Kyser with limited, narrow non-fraud charges, comprising of violations of the books and records, internal controls, reporting, and certification provisions of the federal securities laws.  In the past, respondents with the same state of mind and similar type of misconduct as Mr. Kyser have been charged with violations of the antifraud provisions of the Securities Act, in particular, Sections 17(a)(2) and/or (3), as well as the books and record and internal control violations.[15]

In addition, where CPAs engage in this type of egregious securities fraud—especially misconduct that relates to the CPAs’ core expertise of financial reporting—the Commission has rightly required such persons to forfeit their privilege to appear and practice before the Commission by imposing a suspension under Rule 102(e) of the Commission’s Rules of Practice.[16]  

Beyond this particular matter, I am concerned that the Commission is entering into a practice of accepting settlements without appropriately charging fraud and imposing Rule 102(e) suspensions against accountants in financial reporting and disclosure cases.  I am also concerned that this reflects a lack of conviction to charge what the facts warrant and to bring appropriate remedies. 

The statistics on financial reporting and disclosure cases and related Rule 102(e) suspensions reflect a troubling trend.  In fiscal year 2010, the Commission brought 117 financial reporting and disclosure cases against issuers and individuals, and imposed Rule 102(e) suspensions in 54% of those cases.[17]  In 2011, the number of financial reporting and disclosure cases against issuers and individuals brought by the Commission fell to 86, and the Commission imposed Rule 102(e) suspensions in 53% of those cases.[18]  In 2012, again the number of similar cases brought by the Commission fell, this time to 76, and the Commission imposed Rule 102(e) suspensions in 49% of those cases.[19]  In 2013, the Commission brought only 68 similar cases, and imposed Rule 102(e) suspensions in only 41% of those cases.[20]  These declining numbers reveal a departure from the Commission’s efforts to keep bad apples out of the securities industry, and this puts investors and the integrity of the Commission’s processes at grave risk.

In my six years as a Commissioner, I have watched defendants fight charging decisions on all fronts, including fighting tooth-and-nail to avoid being suspended from appearing or practicing before the Commission pursuant to Rule 102(e).  This is to be expected, as a suspension order takes a fraudster out of the industry, and often has a far more lasting impact on the fraudster than the imposition of a monetary fine.[21]

A Rule 102(e) suspension is an appropriate sanction to be imposed when people choose to engage in deception and perpetuate fraud—in other words, when people engage in flagrant, harmful misconduct.  Thus, to avoid sanctions under Rule 102(e), defendants strenuously object to scienter-based and non-scienter-based fraud charges[22] (as opposed to lesser charges, such as books and records or internal control violations).  That is to be expected. 

What is not to be expected is when defendants engage in fraud and the Commission affirmatively accepts a weak settlement with lesser charges.  This leaves the investing public significantly at risk, as bad actors are not appropriately charged or sanctioned and are permitted to continue to operate in the securities industry.  This is completely unacceptable.

I am concerned that this case is emblematic of a broader trend at the Commission where fraud charges—particularly non-scienter fraud charges—are warranted, but instead are downgraded to books and records and internal control charges.  This practice often results in individuals who willingly engaged in fraudulent misconduct retaining their ability to appear and practice before the Commission. 

I fear that cases in the future will continue to be weak.  More specifically, I fear that when the staff determines not to seek a Rule 102(e) suspension, it will also forgo bringing fraud charges.  Likewise, I am concerned that Commission Orders may, at times, be purposely vague and/or incomplete, and written in a way so as to lead the public to conclude that no fraud had occurred.  When this happens, the public is denied a full accounting and appreciation of the egregious nature of a defendant’s misconduct.  In addition, this practice muzzles my voice by not allowing any statement by me (including this dissent) to include a fulsome description of facts that support the view that the Commission should have brought fraud charges.[23]  This adversely impacts my ability as a Commissioner to provide the American public honest and transparent information—including a description of facts discovered by the staff during its investigation.  In the end, these behind-the-curtain decisions can make fraudulent behavior appear to be an honest mistake.

In my view, Mr. Kyser’s egregious misconduct violated, at a minimum, the non-scienter-based antifraud provisions of the Securities Act.  Accordingly, charges under Sections 17(a)(2) and/or (3) are warranted and a Rule 102(e) suspension is necessary and appropriate in this case.

The Commission must send a strong and consistent message to the industry that the Commission takes seriously its responsibility of requiring integrity in the financial markets.  For these reasons, I dissent.

---

[1] See, for example, Commissioner Luis A. Aguilar: A Stronger Enforcement Program to Enhance Investor Protection (Oct. 25, 2013), available at http://www.sec.gov/News/Speech/Detail/Speech/1370540071677; Taking a No-Nonsense Approach to Enforcing the Federal Securities Laws (Oct. 18, 2012), available athttp://www.sec.gov/News/Speech/Detail/Speech/1365171491510; Combating Securities Fraud at Home and Abroad” (May 28, 2009), available athttp://www.sec.gov/news/speech/2009/spch052809laa.htm;   Reinvigorating the Enforcement Program to Restore Investor Confidence (Mar. 18, 2009), available at http://www.sec.gov/news/speech/2009/spch031809laa.htm; Empowering the Markets Watchdog to Effect Real Results (Jan. 10, 2009), available athttp://www.sec.gov/news/speech/2009/spch011009laa.htm.  

[2] Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order, Securities Exchange Act of 1934 Release No. 72938, Accounting and Auditing Enforcement Release No. 3578, Administrative Proceeding File No. 3-16045 (Aug. 28, 2014) (hereinafter “Order”), available at http://www.sec.gov/litigation/admin/2014/34-72938.pdf.

[3] “At or near the end of each quarter ended September 30, 2008 through the quarter ended June 30, 2009, Affiliated Computer Services (“ACS”) arranged for an equipment manufacturer to re-direct through its pre-existing orders through ACS, which gave the appearance that ACS was involved.”  Order at p. 2.  “ACS improperly applied GAAP in determining the amount of revenue to report in each of its quarters in FY 2009.  In making a determination of the amount of revenue to report, ACS did not appropriately take into account all of the critical terms of the arrangement and therefore failed to reflect the lack of economic substance of the ‘resale transactions’ under GAAP.”  Order at p. 4.  See also SEC Press Release, “SEC Charges Two Information Technology Executives With Mischaracterizing Resale Transactions to Increase Revenue” (Aug. 28, 2014) (hereinafter “Press Release”),available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542786775 (“The Securities and Exchange Commission today charged two executives at a Dallas-based information technology company with mischaracterizing an arrangement with an equipment manufacturer to purport that it was conducting so-called “resale transactions” to inflate the company’s reported revenue.”).

[4] “ACS, however, had no substantive involvement in the orders, and there were no changes to the terms of the pre-existing orders.”  Order at p. 2.  “In making a determination of the amount of revenue to report, ACS did not appropriately take into account all of the critical terms of the arrangement and therefore failed to reflect the lack of economic substance of the ‘resale transactions’ under GAAP.”  Order at p. 4.    

[5] “ACS improperly reported approximately $125 million in revenue due to such arrangements.”  Order at p. 2.  “In total, ACS reported revenue of $124.5 million from such arrangements during fiscal 2009. …  In making a determination of the amount of revenue to report, ACS did not appropriately take into account all of the critical terms of the arrangement and therefore failed to reflect the lack of economic substance of the ‘resale transactions’ under GAAP.  In addition, ACS’s internal controls were insufficient to provide reasonable assurance that ACS reported revenues in conformity with GAAP, primarily because ACS failed to appropriately evaluate the economic substance of the ‘resale transactions.’”  Order at p. 4.

[6] “The revenue from these ‘resale transactions’ enabled ACS to meet its publicly disclosed internal revenue growth (“IRG”) guidance for three of the four quarters for that fiscal year.”  Order at p. 4.

[7] “Even though the ‘resale transactions’ were the largest contributors to ACS’s internal revenue growth, ACS did not disclose them in its September 30, 2008 Form 10-Q.  In subsequent quarters, ACS disclosed these transactions as ‘information technology outsourcing related to deliveries of hardware and software.’  This description did not accurately disclose the nature of these transactions, and falsely suggested that they were executed as part of existing ACS outsourcing contracts.”  Order at p. 4.

[8] “As a result, ACS falsely reported its internal revenue growth, which Blodgett and Kyser highlighted in earnings releases and analyst conference calls during the period.”  Order at p. 2.

[9] “Blodgett and Kyser understood the origination of these ‘resale transactions’ and their impact on ACS’s reported revenue growth.”  Order at p. 5.  See also Press Release, supranote 3 (“ACS positioned itself in the middle of pre-existing transactions without adding value, but still improperly reported the revenue.  Blodgett and Kyser knew the truth about these deals, and they were responsible for ensuring that ACS accurately disclosed the full story to investors.”) (quoting David R. Woodcock, Director of the SEC’s Fort Worth Regional Office and Chair of the SEC’s Financial Reporting and Audit Task Force).

[10] “During all relevant periods, Respondents Blodgett and Kyser were, respectively, ACS’s chief executive officer and chief financial officer.  As such, they were responsible for the content of ACS’s filings with the Commission, as well as ACS’s earnings releases and analyst conference calls.”  Order at p. 2.

[11] “As a result, ACS falsely reported its internal revenue growth, which Blodgett and Kyser highlighted in earnings releases and analyst conference calls during the period.”  Order at p. 2.

[12] “Blodgett and Kyser understood the origination of these ‘resale transactions’ and their impact on ACS’s reported revenue growth.  However, Blodgett and Kyser did not ensure that ACS adequately described their significance in ACS’s public filings and on analyst calls.”  Order at p. 5. 

[13] “Blodgett and Kyser certified each of ACS’s fiscal year 2009 Forms 10-Q and 10-K.”  Order at p. 5.

[14] “As a result of the improperly reported revenue, Blodgett and Kyser received bonuses based on fiscal 2009 performance that were 43% higher than they would have received if ACS had properly applied GAAP with respect to determining the amount of revenue to report from the resale transactions.”  Order at p. 5.

[15] It has long been held that the second and third subsections of Section 17(a) of the Securities Act, Sections 17(a)(2) and (3), can be satisfied by proof of negligence, rather than scienter as is necessary for Section 17(a)(1) of the Securities Act.  See Aaron v. SEC, 446 U.S. 680, 697 (1980) (stating that “It is our view, in sum, that the language of §17 (a) requires scienter under § 17 (a)(1), but not under § 17 (a)(2) or § 17 (a)(3).”).  For examples of accountants found to have negligently violated the federal securities laws and charged with violations of Securities Act Sections 17(a)(2) and (3), see e.g., In the Matter of Fifth Third Bank and Daniel Poston, Securities Act Release No. 9490 (Dec. 4, 2013) (Misclassification of loans; imposing a Rule 102(e) suspension on a CFO in a matter in which the individual was charged with violations of Sections 17(a)(2) and (3) of the Securities Act), available athttp://www.sec.gov/litigation/admin/2013/33-9490.pdf; In the Matter of Craig On (CPA), Exchange Act Release No. 66051 (Dec. 23, 2011) (Understated loan losses; imposing a Rule 102(e) suspension on a CFO in a matter in which the individual was charged with, among other things, violations of Sections 17(a)(2) and (3) of the Securities Act), available athttp://www.sec.gov/litigation/admin/2011/34-66051.pdf; In the Matter of Larry E. Hulse, CPA, Exchange Act Release No. 62589 (July 29, 2010) (Improper reserve adjustments; imposing a Rule 102(e) suspension on Sunrise Senior Living, Inc.’s CFO in a matter in which the individual was charged with violations of Sections 17(a)(2) and (3) of the Securities Act),available at http://www.sec.gov/litigation/admin/2010/34-62589.pdf; In the Matter of Lawrence Collins, CPA, Exchange Act Release No. 64808 (July 5, 2011) (Improper revenue reporting; imposing a Rule 102(e) suspension in a matter in which a finance division employee was charged with violations of Sections 17(a)(2) and (3) of the Securities Act),available at http://www.sec.gov/litigation/admin/2011/34-64808.pdf; In the Matter of Gregory Pasko, CPA, Exchange Act Release No. 61149 (Dec. 10, 2009) (Earnings management; imposing a Rule 102(e) suspension on the Director of External Reporting at SafeNet, Inc. after he was charged with non-scienter-based violations of the antifraud (Sections 17(a)(2) and (3) of the Securities Act), books and records and internal controls violations of the federal securities laws), available at http://www.sec.gov/litigation/admin/2009/34-61149.pdf.

[16] Id.   Indeed, in the last five years, there is only one case where the Commission did not obtain a suspension against a CPA/CFO who was subject to an antifraud injunction.  See SEC v. John Michael Kelly et al., Lit. Rel. No. 22109 (Sept. 29, 2011), available athttp://www.sec.gov/litigation/litreleases/2011/lr22109.htm.  In that matter, the Commission agreed to a settlement with Mr. Kelly permanently enjoining him from violations of the non-scienter antifraud provisions of the federal securities laws (Securities Act Sections 17(a)(2) and (3)), but did not impose a Rule 102(e) suspension against him.  In my view, agreeing to that settlement was an abdication of the Commission’s responsibility to police the financial reporting system and maintain the integrity of the securities markets.  Thus, I dissented in that case.

[17] Select SEC and Market Data, Fiscal 2010, at 11, available athttp://www.sec.gov/about/secstats2010.pdf.

[18] Select SEC and Market Data, Fiscal 2011, at 16, available athttp://www.sec.gov/about/secstats2011.pdf.

[19] Select SEC and Market Data, Fiscal 2012, at 14, available athttp://www.sec.gov/about/secstats2012.pdf.

[20] Select SEC and Market Data, Fiscal 2013, at 13, available athttp://www.sec.gov/about/secstats2013.pdf.

[21] See, Jayne W. Barnard, When Is a Corporate Executive “Substantially Unfit to Serve?" 70 N.C.L. Rev. 1489, 1522 (1992).

[22] For the same reasons, defendants who are accountants have also been known to object to charges under Exchange Act Section 13(b)(5) (knowingly circumventing or failing to implement internal controls or knowingly falsifying records) and/or Exchange Act Rule 13b2-2 (lying to auditors).

[23] Facts and information discovered by the investigative staff in the course of an investigation that are not described in a Commission Order or other public document are deemed confidential and, therefore, SEC representatives are prohibited from revealing to the public such non-public information that are not made a matter of the public record.  See, e.g., 17 C.F.R. Section 230.122, which provides that “[e]xcept as provided by 17 C.F.R. 203.2, officers and employees are hereby prohibited from making … confidential [examination and investigation] information or documents or any other non-public records of the Commission available to anyone other than a member, officer or employee of the Commission, unless the Commission or the General Counsel, pursuant to delegated authority, authorizes the disclosure of such information or the production of such documents as not being contrary to the public interest.”

SEC COMMISSIONER AGUILAR'S SPEECH AT LATINOS ON FAST TRACK SYMPOSIUM

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Making A Difference Through Public Service
 Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
Latinos on Fast Track (LOFT) Symposium Hispanic Heritage Foundation Washington, DC

Jan. 15, 2014

Thank you for that kind introduction.  I am honored to be here today.  I have had the privilege of speaking at prior Latinos on Fast Track events and I’m always impressed by the quality of the participants.  Today is no exception.  Before I begin my remarks, let me issue the standard disclaimer that the views I express today are my own, and do not necessarily reflect the views of the U.S. Securities and Exchange Commission (“SEC”), my fellow Commissioners, or members of the staff.

I understand that many of you are currently working in a government position, and I want to commend you for having chosen to serve the American public.  There is no nobler cause, and I know that you are already making a positive difference in other people’s lives.  I am truly inspired to see so many bright and dedicated young professionals who are committed to making a difference.  As I look around, I see the future of our country, and it is a bright one.

Today, I would like to spend my time with you discussing:

The important roles that Hispanics and Latinos play in our country’s prosperity; and
The importance of giving back to our communities and country through government service.
The Contributions of Hispanics and Latinos to U.S. Prosperity

Latinos are a heterogeneous and growing group originating from many different parts of the world.  Some of us may be recent immigrants, while others may have had ancestors who lived on American soil even before the founding of the United States.  But all of us share the same strong belief in the “American Dream” and its promise of a better life.

Latinos have a deep appreciation for the freedom, values, and opportunities offered by this great country.  These opportunities are available and they are underscored by data showing that Hispanics have made significant contributions to our economy, among other things, by starting new businesses, creating jobs, and utilizing their purchasing power as consumers.  For example: ­

Nationally, there are over three million Hispanic-owned companies with over $500 billion in revenue;[1]
New Latino entrepreneurs nearly doubled, from 10.5% to 19.5%, between 1996 and 2012;[2]
The numbers of Hispanic firms are growing more than four times faster than the overall number of U.S. firms;[3] and
If it were a nation in itself, the U.S. Hispanic market would be one of the top ten economies in the world.[4]
Clearly, Hispanic and Latino Americans have made significant progress in our country; nonetheless, there are still challenges.  I would like to highlight just a few of these challenges, as well as the progress that has been made.

Challenges Facing Hispanics and Latinos

Hispanics and Latinos continue to bear a disproportionate share of the economic hardships that sometimes destroy the fabric of our daily lives.  While I continue to be optimistic, I remain concerned that more needs to be done to address these challenges.

For example, the recent poverty data released by the U.S. Census Bureau shows that the largest group of poor children in this country are Hispanic, almost six million children in total.[5]  Similarly, last year, the Urban Institute released a report entitled, “Less than Equal: Racial Disparities in Wealth Accumulation”[6] that focused on the wide racial wealth gap between Whites and communities of color—a gap made wider by the impact of the Great Recession.

First, we need to examine the growing racial wealth gap and fully understand why it matters.  The authors of the report described wealth this way:  “Wealth isn’t just money in the bank, it’s insurance against tough times, tuition to get a better education and a better job, savings to retire on, and a springboard into the middle class.  In short, wealth translates into opportunity.”[7]

Regrettably, there is a significant wealth gap between the races.  By 2010, the average wealth of White families was roughly over a half-million dollars higher than the average wealth of Black and Hispanic families.[8]  It is particularly important to note that Blacks and Hispanics are less likely to own homes and have retirement accounts than Whites, so they miss out on these traditionally powerful wealth-building vehicles.

While the recent Great Recession had a devastating impact on all communities, the impacts were much more devastating on communities of color.  Between 2007 and 2010, Hispanic families lost 44% of their average wealth, while African-American families lost 31%, and White families lost 11% of their average wealth.[9]

Lower home values contributed considerably to significant wealth loss among Hispanics.[10]  As described by the Urban Institute:

“[M]any Hispanic families bought homes just before the recession.  Because they started with higher debt-to-asset values, the sharp decline in housing prices meant an even sharper cut in Hispanics’ wealth.  As a result, they were also more likely to end up underwater or with negative home equity.  Between 2007 and 2010, Hispanics saw their home equity cut in half…”[11]

While the Great Recession did not cause the wealth disparities between Whites and minorities, it did exacerbate them.[12]  It is clear that more needs to be done to facilitate basic wealth accumulation in communities of color, especially within the Hispanic community.  This is important because more wealth translates into greater opportunities.

Progress Made by Hispanics

Despite these challenges, however, Hispanics and Latinos have made tremendous progress in this country.  As a group, we may be a minority in this country, but we have made major contributions.  Hispanic and Latino Americans have been leaders of our nation for a very long time.  We take pride in Sonia Sotomayor, the first Latina Supreme Court Justice; Nobel Prize winner Luis Alvarez; and civil rights activist César Chávez;  just to name a few.[13]  During the National Hispanic Heritage Month in 2012, President Barack Obama had this to say about the progress made by Hispanics:

“Hispanics have helped shape our communities and expand our country, from laboratories and industry to board rooms and classrooms.  They have led movements that pushed our country closer to realizing the democratic ideals of America’s founding documents, and they have served courageously as members of our Armed Forces to defend those ideals at home and abroad.  Hispanics also serve as leaders throughout the public sector, working at the highest levels of our government and serving on our highest courts.”[14]

We have indeed served our Nation well.  We must continue this good work and prepare the next generation to do the same.

There is some great news on this front.  The recent data on college enrollment and unemployment rates of Hispanics looks promising.  For example, in 2012, and for the first time, the number of 18- to 24-year-old Hispanics enrolled in college exceeded two million, reaching a record 16.5% share of all college enrollments.[15]  This milestone represents not just population growth, but also increasing high school graduation rates, which this year hit a record 76.3%.[16]  Moreover, a report by the Pew Research Center found that a record 69% of all Hispanic-American high school graduates in the class of 2012 enrolled in a two-year or four-year college that fall.[17]  That is a college enrollment rate higher than that of White high school graduates.[18]  A recent report from the Department of Labor added more good news: the unemployment rate for Hispanics and Latino men and women age 20 years and older has improved since 2012, from 8.1% to 7.9% for men in 2013, and from 10.3% to 8.7% for women.[19]

These achievements represent individual talent, hard work, and determination.  But I also know that, for every young person who worked hard and achieved success, there are many proud parents, brothers and sisters, teachers, and community mentors who offered support, encouragement, and served as positive role models.  Because of this, it is important for all us to give back to our families, communities, and country.  As our country’s next generation of Americans, our Nation’s future is in your hands.  I urge you to continue to contribute to the success of our Nation, as it forges ahead into the future to face the challenges and demands of the 21st Century.[20]

Government Service

Obviously, one way to give back to our country is through government service, and it is encouraging to see so many of you here today who have made that choice.  Indeed, I have made that choice three times—once right after law school, once when President George W. Bush asked me to serve as an SEC Commissioner, and again when President Barack Obama asked me to serve another term as an SEC Commissioner.

My desire to enter public service started a long time ago with my arrival to the United States.  As some of you may know, I was born in Cuba.  I came to this country with my nine-year-old brother when I was only six years old.  Our parents sent us here because they feared for our safety when Fidel Castro seized control of the Cuban government.  Like thousands of Cuban children who arrived in the United States as refugees, we did not have any means of financial support.  I arrived in America with little more than the clothes I was wearing and did not speak a word of English.  But through the generosity that is one of the hallmarks of the American public, and our own determination to meet our challenges, my brother and I not only survived—we thrived.

In my case, I was able to pay my way through college and law school by taking on jobs ranging from being a stock boy in a yarn store to loading baggage and cargo into airplanes at the Miami International Airport.  It is a long way from the hot tarmac of the airport in Miami to the halls of our Nation’s capital, but I carry those experiences with me.  I know how hard Americans work just to survive in this country.

I have now been a lawyer for over 30 years, starting out as a staff attorney at the SEC, later working as a law firm partner in various international law firms, and then as general counsel and executive of one of the world’s largest global asset managers.

However, it’s not just about having a career and making money.  Even when I was focused on building my professional career, I also found it important to give back to my community by becoming involved in many community organizations.  I have found it particularly rewarding to become active with organizations that worked to improve the lives of minorities and the underserved.[21]  I encourage you do to the same.  Giving time and effort to your communities can bring a great deal of personal satisfaction.

It was my need to give back that led me to say “yes” to serving as a Commissioner at the SEC.  Moreover, my professional career had given me a deep respect and admiration for the importance of the SEC.  As many of you know, the SEC is an independent federal agency that oversees our Nation’s capital markets—the world’s largest and most complex market for stocks, bonds, and other types of investment securities.  I expect that most of you, and many people you know, in one way or another, benefit from the work of the SEC.  The SEC’s work is vital because many Americans invest directly in publicly traded companies or put their hard-earned money into pension funds, mutual funds, college savings plans, and 401(k)s.  They do this to support their families, pay for their children’s education, and plan for their retirement.  Because of the importance of the capital markets to the prosperity and security of American families, the SEC’s role as the markets’ “watchdog” is vital to our country’s future.  I have found my work at the SEC to be both rewarding and meaningful.

I expect that many of you feel the same way about your jobs.  No matter what you do in government, I hope that you have a long, proud, and rewarding career.  Let me read you a quote from our late President John F. Kennedy about government service:

“Let every public servant know, whether his post is high or low, that a man’s rank and reputation … will be determined by the size of the job he does, and not by the size of his staff, his office or his budget.  Let it be clear that [we] recognize[] the value of dissent and daring -- that we greet healthy controversy as the hallmark of healthy change.  Let the public service be a proud and lively career.  And let every man and woman who works in any area of our national government, in any branch, at any level, be able to say with pride and with honor in future years: ‘I served the United States Government in that hour of our nation’s need.’”[22]

Conclusion

There’s very little that I can say to top that—so I will end my remarks where I began.  I am delighted to be here.  Organizations like the Hispanic Heritage Foundation—and the LOFT programs—help support and produce the next generation of Hispanic and Latino leaders, and this, in turn, strengthens our families, our communities, and our country.

Hispanic and Latino Americans have faced great challenges living in this great country, but the progress made shows that we have the resolve to achieve the American Dream.  Although I know that it will take a lot of hard work and perseverance, my faith in the American Dream and the boundless opportunities offered by this country make me optimistic that your future—and our future—is bright.

Thank you for everything that you do, and thank you for having me here today.


[1] “The Latino Coalition 2013 Small Business Summit Reaches New Heights and Showcases the Impact of Small Business to the U.S. Economy,” The Wall Street Journal (May 6, 2013), available at  http://online.wsj.com/article/PR-CO-20130506-902461.html?mod=googlenews_wsj .

[2] Robert W. Fairlie, “Kauffman Index of Entrepreneurial Activity 1996-2012,” Ewing Marion Kauffman Foundation (April 2013), p. 9, available at h http://www.kauffman.org/~/media/kauffman_org/research%20reports%20and%20covers/2013/04/kiea_2013_report.pdf .

[3] Id.

[4] The Nielsen Company, “State of the Hispanic Consumer:  The Hispanic Market Imperative” (Quarter 2, 2012), http://es.nielsen.com/site/documents/State_of_Hispanic_Consumer_Report_4-16-FINAL.pdf .

[5] Children’s Defense Fund, Child Poverty in America 2012:  National Analysis (Sept. 17, 2013), available at http://www.childrensdefense.org/child-research-data-publications/data/child-poverty-in-america-2012.pdf .

[6] “Less than Equal: Racial Disparities in Wealth Accumulation,” by Signe-Mary Mckernan, Caroline Ratcliffe. Eugene Steuerle, and Sisi Zhang, Urban Institute (April 2013), available at http://www.urban.org/UploadedPDF/412802-Less-Than-Equal-Racial-Disparities-in-Wealth-Accumulation.pdf . (hereinafter, “Racial Disparities in Wealth Accumulation”).

[7] Id at 1.

[8] Id.

[9] Id.

[10] Hispanic Household Wealth Fell by 66% from 2005 to 2009, The Toll of the Great Recession. Pew Research Hispanic Trends Project (July 26, 2011).

[11] Supra note 6 at 2-3.

[12] Id. at 2.

[13] Hispanic Heritage month, available at  http://hispanicheritagemonth.gov/index.html (last visited Nov. 20, 2013); The Official Web Site of the Nobel Prize, The Nobel Prize in Physics 1968: Luis Alvarez, available at  http://www.nobelprize.org/nobel_prizes/physics/laureates/1968/alvarez-bio.html (last visited Nov. 20, 2013); Cesar Chavez Foundation. About Cesar, available at  http://www.chavezfoundation.org/_page.php?code=001001000000000&page_ttl=About+Cesar&kind=1 (last visited Nov. 20, 2013).

[14] The White House, Office of the Press Secretary, Presidential Proclamation – National Hispanic Heritage Month, 2012 (Sept. 14, 2012), available at http://www.whitehouse.gov/the-press-office/2012/09/14/presidential-proclamation-national-hispanic-heritage-month-2012.

[15] Richard Fry and Mark Hugo Lopez, Hispanic Student Enrollments Reach New Highs in 2011, Pew Hispanic Center (Aug. 20, 2012), p.4, available at http://www.pewhispanic.org/files/2012/08/Hispanic-Student-Enrollments-Reach-New-Highs-in-2011_FINAL.pdf .

[16] Id., p.5 (represents percentage of Hispanic youths, ages 18-24, with a high school diploma or GED).  From 1970 to 2010, high school graduation rates for Hispanic Americans almost doubled (from 32.1% to 62.9%), and four-year college graduation rates more than tripled (from 4.5% to 13.9%). U.S. Census Bureau, Statistical Abstract of the United States: 2012, Table 229 Educational Attainment by Race and Hispanic Origin: 1970 to 2010, available at http://www.census.gov/compendia/statab/2012/tables/12s0229.pdf.

[17] Richard Fry and Paul Taylor, “High School Drop-out Rate at Record Low, Hispanic High School Graduates Pass Whites in Rate of College Enrollment,” PewResearch Hispanic Center (May 9, 2013),  http://www.pewhispanic.org/2013/05/09/hispanic-high-school-graduates-pass-whites-in-rate-of-college-enrollment/ .

[18] Id.

[19] U.S. Department of Labor Bureau of Labor Statistics, Economic News Release:  Table A-3. Employment status of the Hispanic or Latino population by sex and age (Sept. 6, 2013) (last visited Nov. 20, 2013), available at http://www.bls.gov/news.release/empsit.t03.htm.

[20] National Public Radio program broadcast, “College-Bound Latino Students at New High” (Aug. 22, 2012), transcript available at http://www.npr.org/2012/08/22/159777934/college-bound-latino-students-at-new-high .  (James Montoya, College Board:  “… we cannot underestimate the essential role that Latinos in the U.S. will play in reaching our national goal of 55 to 60 percent of young Americans 25 to 34 having a college degree. … to keep the U.S. as a leader in an increasingly global economy …”

[21] I am also concerned about the overall lack of diversity in federal civilian employment.  As of September 2012, the total number of employees in executive branch agencies was about 2.1 million.  However, minorities represented only 34.1% of the employees, with Hispanics representing only 5.8%.  See Office of Personnel Management, Data, Analysis & Documentation, Federal Employment Reports: Executive Branch Employment by Gender and Race/National Origin (Sept. 2002-Sept. 2012), available at http://www.opm.gov/policy-data-oversight/data-analysis-documentation/federal-employment-reports/reports-publications/executive-branch-employment-by-gender-and-racenational-origin/.  The lack of diversity in the federal workforce is resulting in the exclusion of many qualified Hispanics and Latinos.

[22] Annual Message to the Congress on the State of the Union (11), Public Papers of the President: John F. Kennedy (Jan. 30, 1961), available at  http://www.jfklibrary.org/Research/Research-Aids/Ready-Reference/JFK-Quotations.aspx#P .

REMARKS BY SEC COMMISSIONER AGUILAR ON REGULATION A+

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Remarks at SEC Open Meeting
Promoting Investor Protection in Small Business Capital Formation
 Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
Washington, D.C.

Dec. 18, 2013

Today, the Commission proposes rules to implement Title IV of the JOBS Act.[1]  As mandated by that Act, the proposed rule would allow companies to issue a class of securities that are exempted from the registration and prospectus requirements of the Securities Act, provided that certain conditions are met.[2]  This is the third major rulemaking undertaken by the Commission to comply with the JOBS Act since its adoption last year.[3]

Enhancements to Investor Protection under Regulation A-plus

The proposed rules being considered today enhance an existing exemptive regime known as Regulation A.  Under the current provisions of Regulation A, companies can raise up to $5 million per year without registration, provided that they file an offering statement with the Commission containing certain required information and furnish an offering circular to purchasers, among other conditions.[4]

Today’s proposal, often referred to as “Regulation A-plus,” would extend this exemption to issuances of up to $50 million in any 12-month period, while at the same time increasing investor protection for so-called “Tier 2” offerings[5] in four important ways:

First, by enhancing disclosure requirements, and by requiring companies to include audited financial statements in their offering circulars;
Second, by ensuring that the Commission staff has an opportunity to review and comment on the offering circular before it becomes effective;
Third, by limiting the amount of securities that a potential investor may invest to 10% of the investor’s annual income or net worth, whichever is greater; and
Fourth, by requiring companies that issue a class of securities under Regulation A-plus to file ongoing disclosure reports, so long as the securities are held of record by at least 300 investors.[6]  
Given the $50 million limit on offerings under Regulation A-plus, the offering statement and ongoing disclosure reports required by the proposed rules are focused on the types of information that the staff’s experience suggests are relevant to smaller companies and their investors.  As a result, the required disclosure, while valuable, is less extensive than the disclosure required in a registered offering.  In that regard, I encourage commenters, and in particular investors with experience investing in smaller companies, to comment in detail about the specific disclosures that would be valuable to require in offering circulars and reports under revised Regulation A.

It is my hope that the final disclosure requirements will protect and inform investors, resulting in the investor confidence necessary for the success of Regulation A-plus, while at the same time providing an appropriate alternative to registered offerings for those small and emerging companies that need access to public capital to grow and create jobs.[7]

The Role of the States

Today’s release also addresses the issue of preempting state blue sky review for Regulation A‑plus offerings, as provided for in Section 401(b) of the JOBS Act.[8]  One way the statute enables preemption is by authorizing the Commission to adopt a definition of “qualified purchaser” with respect to such offerings, as offers and sales to qualified purchasers would be exempt from state registration or qualification.[9]  To that end, today’s proposal would define “qualified purchaser” to include all offerees, and all purchasers in “Tier 2” offerings.[10]  In other words, the proposed rule defines “qualified purchaser” in a way that would preempt all Tier 2 offerings from state blue sky requirements—although state securities commissions would nevertheless retain jurisdiction to investigate and bring enforcement actions in the case of any fraud or deceit.

However, as the Commission acknowledges in the proposing release,[11] the North American Securities Administrators Association—known as NASAA—recently proposed a coordinated process to streamline review of Regulation A offerings.[12]  This new streamlined protocol could substantially reduce state securities law compliance hurdles for Regulation A issuers by reducing the cost and time frame associated with state review.[13]  In that regard, the proposing release solicits comments on potential alternative approaches to the definition of “qualified purchaser”[14] that would take into account possible state review.[15]

The Commission is mindful of the important role that state securities administrators play in protecting investors and promoting capital formation, particularly with respect to smaller offerings.[16]  It has long been recognized that the states are on the “front lines” of antifraud enforcement for smaller offerings.[17]  Moreover, the states have a history of working closely with issuers and investors in their jurisdictions, and have extensive experience reviewing small offerings.[18]  This is important expertise and experience to incorporate into the process. Accordingly, I look forward to NASAA and the state regulators completing their work to implement a workable protocol for state review of offerings under Regulation A, and I urge both investors and other interested parties to comment on the pros and cons of incorporating a form of state review into the Regulation A qualification process.

Ongoing Reporting and Secondary Trading

Before concluding, it is important to note that, in accordance with the statute, securities issued pursuant to Regulation A-plus will not be restricted securities, and will thus be freely tradeable by security holders who are not affiliates of the issuer.[19]  Accordingly, the ongoing reporting requirements in the proposed rules provide an important protection for investors in securities issued pursuant to Tier 2 of Regulation A.

It cannot yet be known whether a reliable secondary market will develop for Regulation A securities.  However, even with the proposed reporting requirements, the market for such securities will almost certainly be less transparent than the market for listed securities.  In addition, given the smaller offering size and reduced transparency, Regulation A securities may experience wider spreads, lower liquidity, and the potential for significant volatility as compared to registered securities, in any secondary trading markets that may develop.

Although the JOBS Act is silent regarding what actions can be taken to mitigate the risks to investors that may result from such a trading environment, the Commission must be proactive in addressing foreseeable consequences.

In that regard, I expect the staff to actively monitor any secondary trading activity that develops after adoption with respect to Regulation A securities, for any possible indications of fraud, manipulation, or market failure.   The rule changes we propose today will not achieve the hoped for benefits in capital formation, if the end result is that investors are left holding a portfolio of securities that cannot be valued or sold.

Notably, Regulation A-plus is just one of several initiatives under the JOBS Act that raises this issue.  Other JOBS Act provisions may also increase the number of companies that are exempt from the registration and reporting requirements of the Exchange Act, but still have significant security holdings in public hands.  For example, the availability of general solicitation and advertising under Regulation D allows shares to be sold to an unlimited number of accredited investors in transactions that are much more widely dispersed than the traditional private placement.  Although such securities are initially restricted, they may be resold after a one-year holding period pursuant to Rule 144, provided that certain limited information about the issuer is publicly available.  Similarly, as currently proposed, shares issued in crowdfunding transactions would be freely tradable after a one-year holding period.[20]

While there may not be a single, simple solution to this developing problem, it is clear that the Commission needs to take a hard and comprehensive look at Exchange Act Rule 15c2-11, which describes the information required under Rule 144 for non-reporting companies, and provides the conditions pursuant to which broker-dealers may publish quotations in over-the-counter securities.[21]  The problems with Rule 15c2-11 have long been documented,[22] and the likelihood of an exponential growth in companies whose securities trade in reliance on that rule is real.  The Commission needs to get in front of the problem and not wait until investors are harmed.  It is my hope that the staff will complete such a review, together with any recommended ameliorative steps, before the adoption of the rules implementing crowdfunding and Regulation A-plus.

As always, the Commission’s focus must be on the public interest and the interests of investors, who alone supply the capital required for capital formation.

I look forward to comments on today’s proposal and on the issues raised in the release.

Finally, I want to thank the staff for their hard work on this proposal.


[1] Jumpstart Our Business Startups Act, Pub. L. No. 112-106, 126 Stat. 306 (2012) (the “JOBS Act”), §§ 401-402.

[2] Title IV of the JOBS Act amends certain provisions of the Securities Act of 1933, 15 U.S.C. 77c(b) (the “Securities Act”), to provide this mandate.

[3] The JOBS Act was signed into law on April 5, 2012.  Titles I, V, and VI of the Act are self-operating.  Rules to implement Title II of the JOBS Act, which amended Rule 506 of Regulation to remove the ban on general solicitation and general advertising, so long as sales are made only to accredited investors, were proposed August 29, 2012 (Rel. No. 33-9354) and adopted July 10, 2013 (Rel. No. 33-9415).  Rules to implement Title III of the JOBS Act, to provide an exemption for qualifying Internet crowdfunding transactions, were proposed on October 23, 2012 (Rel. No. 33-9470).  In addition, the staff of the Commission published two reports required by the JOBS Act—the “Report on Authority to Enforce Exchange Act Rule 12g5-1 and Subsection (b)(3)” as required by Section 504 of the JOBS Act (October 16, 2012), and the “Report to Congress on Decimalization” as required by Section 106 of the JOBS Act (July 20, 2012)—and hosted a public roundtable on decimalization on February 5, 2013.   I have publicly and privately urged the Commission to complete its important work under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), with all deliberate speed.  Numerous important requirements under the Dodd-Frank Act remain unfulfilled, despite the fact that well over three years have passed since enactment.

[4] See, Regulation A under the Securities Act, 17 C.F.R. §§ 251-263.

[5] The proposed amendments would create two tiers of offerings:  Tier 1, for offerings of up to $5 million in a twelve-month period, and Tier 2, for offerings from zero to up to $50 million in a twelve-month period.  An issuer seeking to raise $5 million or less could elect to proceed under either Tier.  Both Tiers would be subject to certain basic requirements as to issuer eligibility, disclosure, and other matters.  Tier 2 offerings would also be subject to additional requirements, including audited financial statements, ongoing reporting obligations, and an investment limit of 10% of the investor’s annual income or net worth, whichever is greater.  As proposed, sales pursuant to Tier 2 would be exempted from state registration or qualification pursuant to the preemption provisions under the JOBS Act; sales pursuant to Tier 1would remain subject to blue sky review.  See note 8 below and accompanying text.

[6] The proposed amendments would provide for the filing of an annual report on proposed new Form 1-K, semiannual updates on Form 1-SA, and current event reporting on Form 1-U, so long as the securities are held of record by at least 300 investors.

[7] Recently-established, fast-growing firms, sometimes called “gazelles,” are extremely important to job growth.  One study reported that 43,000 rapidly-expanding businesses between three and five years old—about eight-tenths of 1% of all U.S. businesses—were responsible for about 10% of overall net job creation in the economy.  D.  Stangler, High-Growth Firms and the Future of the American Economy, Ewing Marion Kauffman Foundation, Research Series (March 2010) 7, available at  http://www.kauffman.org/~/media/kauffman_org/research%20reports%20and%20covers/2010/04/highgrowthfirmsstudy.pdf .  Research shows that companies in that category are particularly dependent on outside equity investments for early stage capital.  A.M. Robb and D.T. Robinson, The Capital Structure Decisions of New Firms, Ewing Marion Kauffman Foundation, (November 2008), available at  http://www.kauffman.org/~/media/kauffman_org/research%20reports%20and%20covers/2008/11/capital_structure_decisions_new_firms.pdf .

[8] JOBS Act §401(b).

[9] Securities Act §18(b)(4)(D)(ii), as added by JOBS Act §401(b).

[10] Proposed Rule Amendments for Small and Additional Issues Exemptions Under Section 3(b) of the Securities Act, SEC Release No. 33-XXXX (December 18, 2013) (“Proposing Release”) 183.

[11] Proposing Release 176-77.

[12] See, NASAA Release, dated October 30, 2013, Notice of Request for Public Comment: Proposed Coordinated Review Program for Section 3(b)(2) Offerings, available at:  http://www.nasaa.org/27427/notice-request-public-comment-proposed-coordinated-review-program-section-3b2-offerings/ ; see, also, letter from Andrea Seidt, the President of NASAA, to Chair White of the SEC, dated December 12, 2013.

[13] Proposing Release 185.                          

[14] Proposing Release 185-88, 192-93.

[15] Proposing Release 185-86 (“We will also consult with the states and consider any changes to the states’ processes and requirements for reviewing offerings, before we adopt final amendments.”).

[16] Section 19(d) of the Securities Act establishes a policy of federal and state cooperation in securities matters and authorizes the Commission to cooperate with state securities administrators and any association of their duly constituted representatives.  For three decades, the Commission and NASAA have conducted an annual conference to promote effective regulation, uniformity in federal and state regulatory standards, capital formation, and administrative efficiency.

[17] In 2012, NASAA members initiated 2,496 enforcement actions, resulting in $694 million in awards to investors and 1,361 years of incarceration sentenced upon violators.  NASAA Enforcement Report (October 2013), available at  http://www.nasaa.org/wp-content/uploads/2013/10/2013-Enforcement-Report-on-2012-data.pdf .

[18] All states currently conduct disclosure review of Regulation A securities offerings, and a majority of the states also conduct merit reviews, based on the terms of the offering.  See, e.g., U.S. Gov’t Accountability Office, Factors That May Affect Trends In Regulation A Offerings (July 2012) 13.

[19] Securities Act §3(b)((2)(C), as added by JOBS Act §401(a).  See, Rule 144 under the Securities Act.

[20] The effect is compounded by other provisions of the JOBS Act, which substantially raised the number of holders a company may have before it is required to register as a reporting company under the Exchange Act.  This loosening of the reporting threshold is exacerbated by the fact that reporting triggers continue to be based on the number of “record holders,” which may fail to count large numbers of beneficial owners for securities held in “street name.”

[21] Exchange Act Rule 15c2-11 requires, among other things, that a broker-dealer have in its records certain information specified in paragraph (a) of the rule before it publishes any quotation for an issuer’s security in any quotation medium other than a national securities exchange.  In addition, the broker-dealer must, based on a review of that information together with any other documents and information required by subsection (b) of the rule, have a reasonable basis under the circumstances for believing that the paragraph (a) information is accurate in all material respects, and that the sources of the paragraph (a) information are reliable.  Certain information required by paragraph (a) must be made reasonably available upon request to any person expressing an interest in a proposed transaction in the security with such broker-dealer.  However, under the so-called piggyback exception of Rule 15c2-11(f)(3), a broker-dealer may publish quotations on a security in an interdealer quotation system, without complying with such information gathering requirements, if the security has been quoted in the same system on at least 12 of the previous 30 calendar days, with no more than four business days in succession without a quotation.  A broker-dealer can "piggyback" on either its own or other broker-dealers’ previously published quotations.  17 C.F.R. §240.15c2-11.

[22] See, Publication or Submission of Quotations Without Specified Information, SEC Release No. 34-41110 (February 25, 1999), available at http://www.sec.gov/rules/proposed/34-41110.htm (reproposing amendments to Rule 15c2-11 originally proposed in response to “concerns about increased incidents of fraud and manipulation in over-the-counter (OTC) securities…”); Publication or Submission of Quotations Without Specified Information, SEC Release No. 34-39670 (February 17, 1998), available at http://www.sec.gov/rules/proposed/34-39670.txt (the requirement to make information available to investors on request “may have little practical effect because only the first broker-dealer to publish quotations must have the information, and an investor might find it difficult to identify that broker-dealer”);  See, also, Michael Molitor, Will More Sunlight Fade the Pink Sheets? Increasing Public Information About Non-Reporting Issuers with Quoted Securities, 39 Ind. L. Rev. 309 (2006) (due to Rule 15c2-11’s “piggyback” provision “it may be difficult for an investor actually to get the information [required by paragraph (a)].”  And, Rule 15c2-11 “is badly flawed because neither the investor nor the registered representative of the broker-dealer will possess the required information in most instances.  Moreover, even if the piggyback exception does not apply, the investor will receive the information only if he or she asks for it.”  Also, “[j]ust as the content of paragraph (a) information is paltry compared to the information required of Exchange Act reporters, its timeliness could lag far behind that required of Exchange Act reporters ….”).

OPEN MEETING STATEMENT BY SEC COMMISSIONER AGUILAR

Statement at Open Meeting
by
Commissioner Luis A. Aguilar

FROM:  U.S. SECURITIES AND EXCHANG COMMISSION  
U.S. Securities and Exchange Commission
Open Meeting
Washington, D.C.
July 10, 2013

Today the Commission votes on a proposal (the “Proposing Release”) that contains a number of changes which would help protect investors and provide the Commission with information it needs to advance its regulatory, oversight, and enforcement functions.

More specifically, the Proposing Release would amend Regulation D to improve the content and timeliness of the Form D notice filing and to require legends and other disclosures in written materials disseminated in offerings utilizing general solicitation. The proposal would also amend Rule 156 to extend certain antifraud guidance to the sales literature of private funds, and would add new Rule 510T to require, on a temporary basis, the submission of written general solicitation materials to the Commission no later than the date of first use of such materials.

The Proposing Release follows the Commission’s adoption of rule amendments to implement Section 201 of the JOBS Act by removing the prohibition on general solicitation in certain exempt offerings (the “General Solicitation Rule”).1

The Proposing Release is intended to address some of the concerns that many commenters have raised regarding general solicitation, including concerns regarding an increase in fraudulent activity, as well as to improve the Commission’s ability to evaluate the development of market practices in Rule 506 offerings.

Although I support the Proposing Release, I would like to emphasize that this proposal is not a “quick fix” to the problems associated with the way the majority of the Commission has decided to implement general solicitation. Nor does this proposal rectify the Commission’s failure to consider commenters’ recommendations in connection with the original proposal of the General Solicitation Rule, or its failure to repropose that rule, so that such recommendations could be taken into account concurrently with the rule’s adoption. As I have said before, I’m afraid that any protections resulting from today’s proposal will come too late, if they come at all, for many investors.

It is ironic that the Proposing Release describes a work plan developed by the Commission staff to monitor, review, and analyze the use of Rule 506(c), including monitoring the Rule 506(c) market for indications of fraud. While I appreciate any effort by the staff to better inform our rulemaking and enforcement efforts, I am struck by the fact that the need for such a work plan is simply further confirmation that the General Solicitation Rule adopted today fails to address the risks to investors arising from the faulty process followed in implementing Section 201 of the JOBS Act.

I hope that the Regulation D enhancements we propose today — as well as needed improvements to the definition of accredited investor — will be adopted promptly. Investors should not be at risk any longer than is necessary.

Before I conclude, I would like to thank the staff who worked on the Proposing Release. I appreciate your efforts.

1 Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Release No. 33-[XXXX] (July 10, 2013). See, Luis A. Aguilar, “Facilitating General Solicitation at the Expense of Investors,” Statement at SEC Open Meeting (July 10, 2013). I also recognize the Commission action today to adopt rule amendments to implement Section 926 of the Dodd-Frank Act by disqualifying certain felons and “bad actors” from offerings under Rule 506, Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings, Release No. 33-[XXXX] (July 10, 2013). See, Luis A. Aguilar, “Limiting — But Not Eliminating — Bad Actors from Certain Offerings,” Statement at SEC Open Meeting (July 10, 2013).