The Securities and Exchange Commission still has a long way to go in its quest to understand the causes of the financial crisis and from deterring those who commit wrongdoing.

The SEC’s current way of doing things is not tough enough, SEC Commissioner Louis Aguilar told an audience of compliance and risk officers during Compliance Week’s annual conference in Washington D.C. this week. While problems in the market are “seamlessly connected, regulatory oversight is piecemeal,” he said.

Aguilar stressed that the May 6 “flash crash” is an example of the SEC’s piecemeal efforts. “We still do not know why the markets malfunctioned as they did,” he said. “If we truly seek to understand what happened on May 6 and how to prevent it from happening again, our inquiry cannot focus solely on the exchange-listed markets.”

Part of the reason is that the SEC doesn’t have the tools, resources, and information needed to fully understand the correlation between such things as securities, futures, options, and over-the-counter derivatives markets. He expressed hope that the Commission’s funding shortfall will be fixed in the Senate bill. “Without the funding, we will continue to have one arm tied behind our backs,” he said.

The SEC-CFTC joint advisory committee is holding its first meeting today, seeking to better understand what caused the flash crash. Aguilar stressed that the SEC cannot come to this conclusion on its own, with the Commission greatly depending on exchanges, FINRA, broker-dealers, and other market participants for the basic information needed to figure out a cause and solution.

He added that serious questions also exist—both from market participants and regulators—regarding the algorithms used by investors. “When not even the regulators understand how the markets are regulated, something is seriously wrong with the regulatory scheme.”

One solution, he said, is that the SEC must have the ability to conduct surveillance in real time. “Real-time market participation is necessary for effective, regulatory fact-finding oversight and enforcement,” he said.

Aguilar also stressed that the concept of sophisticated investors, “which underlies many regulatory gaps,” must also be reexamined. That institutional investors don’t need oversight, transparency, or other protection is a faulty assumption. In truth, pension funds, mutual finds, and other like entities need “complete and honest disclosure,” he stressed.

“The more we try to slice and dice which investors receive what protections, the more all investors, the integrity of the capital markets, and all the American public will bare the costs,” Aguilar added.

Lastly, he stressed the “crucial rule” of SEC enforcement. “I believe that a robust and successful enforcement program must focus on effective deterrence,” he said. This means that enforcement sanctions should hurt enough that they serve as examples to other companies.

Corporate penalties shouldn’t just come out of shareholder pockets, as many have argued. This philosophy neglects to see that management controls how money is spent. “For money to come out of shareholders’ pockets, it first has to be in shareholders’ pockets,” said Aguilar. Instead, he said, budget and bonuses of wrongdoers should be reduced by the amount of the penalty.

Neither is punishing the wrongdoer, alone, a wise decision. After a committed wrongdoing, an individual often gets the blame, while the company goes on like nothing happened. “We need to actively sanction both corporations and individuals,” he said.

Sanctions also need to be made stronger. “I think that we, too often, have been willing to be compromised under medial sanctions.” Often, in fact, remedial sanctions have become the major sticking point in several negotiations, he said.

Concluded Aguilar: “I’ll be fighting for these things today on a daily basis.”

—Jaclyn Jaeger