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SEC Commissioner Hester Peirce On “Reasonableness Pants” And “Secret Law”


This site is a big fan of SEC Commissioner Hester Peirce and this post highlights two recent speeches she delivered. Neither of the speeches are FCPA specific, but both are indeed FCPA relevant.

In this speech, titled “Reasonableness Pants,” Peirce stated: “A strong enforcement program requires us—to draw from the admonition a judge recently gave to us in a matter before her—to “put on [our] reasonableness pants.” The SEC ought always to wear reasonableness pants, and I would like to talk today about what those reasonableness pants look like on a regulator.”

Peirce further stated:

“In outlining my views on enforcement in a speech a year ago, I explained that the SEC is not an enforcement agency, but rather a regulatory agency that uses enforcement as one tool. Appropriate enforcement of the rules we have on our books protects investors and the integrity of our capital markets. Most enforcement recommendations the Commission receives from the staff are legally straightforward and not controversial, but a small subset causes me to ask whether we are wearing our reasonableness pants. In particular, I am not a fan of the so-called “broken windows” philosophy, a more-is-always-better, punish-the-small-violations approach to enforcement. Instead, I assess, when reviewing an enforcement recommendation from our staff, whether the recommendation is using our enforcement resources wisely. I ask, was there a meaningful violation? Is this a matter that could have been handled by our exam program? Are there other appropriate responses in lieu of an enforcement action, such as a rulemaking, interpretative guidance, or an educational bulletin for investors? Additionally, I consider due process principles when assessing our enforcement actions, for example by asking whether an action would constitute rulemaking by enforcement, push the bounds of the SEC’s authority, punish unduly aged conduct, or be based on an inappropriately induced waiver of attorney-client privilege. I also try to think about potential unintended consequences of our actions, such as whether they would inadvertently undermine the good faith efforts of chief compliance officers or impose costs on shareholders who already have suffered because of the securities law violations of company executives. These are some of the common considerations that drive my approach to enforcement ….”


Reasonableness pants should not only be threaded with due process, but they also should fit properly. In other words, the SEC ought to take care in how it exercises its authority. The goal should not be for us to stretch our authority to its limits and beyond but instead to act carefully and cautiously.”

Regarding the “r” word, “reasonable” is the most prominent word in the FCPA’s books and records and internal controls provisions.

In this speech, Peirce talked about “secret law” as follows.

In an ideal world, we might hope for a radical simplification of our statutes and rules. We could revisit eighty-some years of legislative, regulatory, and even judicial precedent. We could identify what is essential and what is not. We could make the necessary revisions and amendments to update the language and concepts of the mid-twentieth century for the markets of the mid-twenty-first century. That hope, alas, is unlikely to become reality any time soon.

In our less-than-ideal world, however, the Commission and its staff have some tools at their disposal that, if used correctly, can help provide clarity, certainty, and workability to the people who operate within our regulatory framework. Commission and staff guidance can help practitioners and market participants navigate the complexity of the federal securities laws and understand how to apply provisions enacted and promulgated decades ago to novel developments that, even a few years ago, none of us in this room—much less the drafters of these laws so many years ago—could have imagined.

For significant matters that may have programmatic effects, the Commission itself occasionally provides guidance or relief. As you all know, Commission-level processes can be unwieldy, dreadfully slow, and impracticable in many situations where interpretative questions arise.


However—and you must have known there would be a “however”—in my conversations with market participants since joining the Commission fifteen months ago, I have grown increasingly concerned that this necessary guidance—due to a lack of transparency and accountability—may have turned into a body of secret law. This secret law, as a practical matter, binds market participants like law does but is immune from judicial—and even Commission—review. We have our own secret garden—a tangle of staff pronouncements hidden beyond a wall without a readily accessible entrance.”

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