On November 4, 2021, SEC Chair Gary Gensler delivered remarks at a Securities Enforcement Forum and explained why enforcement is a “fundamental pillar in achieving the SEC’s mission” of investor protection, capital formation, and efficient and orderly markets. Chair Gensler’s remarks came one-week after Deputy Attorney General Lisa Monaco delivered the keynote address at the ABA’s 36th Annual Institute on White Collar Crime on October 28th, in which she outlined the DOJ’s priorities to prevent corporate crime. Chair Gensler’s speech highlighted the following:
The SEC Will Focus on Economic Realities, Not Form. The SEC will look at the economic substance of products, transactions and services instead of the form to determine if the securities laws apply. Chair Gensler explained that some market participants get “close to the line” and seek cover from their lawyers, accountants, or advisers. He advised in those instances “maybe it’s time to step back from the line.” In sum, the Staff expects market participants to abide by the letter and spirit of the law.
Accountability is the Touchtone of the SEC’s Enforcement Program. The SEC’s enforcement program is focused on individual and institutional accountability. The Staff is prepared to litigate cases to hold bad actors accountable at trial or in administrative proceedings. Chair Gensler said “[t]the public benefits, and justice benefits, from the robust finding of facts” because it “instills confidence in our financial markets when bad actors are held accountable.” He further explained that “[w]hen appropriate, and when the conduct warrants it, we may seek admissions in certain cases where heightened accountability and acceptance of responsibility are in the public interest.” The remark on admissions is consistent with earlier statements that Gurbir Grewal, the SEC’s Enforcement Director, made on October 13, 2021, at the Practicing Law Institute’s SEC Speaks. Grewal said that the Staff plans to return to a policy requiring companies to admit wrongdoing to settle certain (not all) enforcement actions “where heightened accountability and acceptance of responsibility are in the public interest.”
Under previous administrations, the SEC avoided seeking admissions in favor of allowing a defendant found guilty of criminal conduct to settle civil charges while neither admitting nor denying civil liability. The Staff argued that the “no admit, no deny” approach was more efficient and quickly returned funds to defrauded investors. However, requiring defendants to admit wrongdoing to settle may have additional consequences for the SEC’s enforcement program. Some companies and individuals elect to fight the SEC rather than admit wrongdoing since admissions may have collateral consequences, such as loss of seasoned issuer status for purposes of securities offerings, inability to conduct certain exempt offerings, disqualification from serving as an investment adviser to a registered investment company, and inability to serve on public company boards. Also, an admission may strengthen claims made by a plaintiff in civil litigation.
The Staff Will Bring High-Impact Cases to Deter Bad Behavior. The SEC will pursue misconduct wherever located, regardless of whether the case is hard, novel, or unique. The Staff is also agnostic regarding whether the case involves SPACs, digital assets, private funds, accounting fraud, insider trading or simple books and records violations. The Staff’s goal is to change corporate behavior and create a culture of compliance.
The SEC is Focused on Speed and Cooperation. The Enforcement Staff is encouraged to move quickly to resolve cases. The Staff will limit meetings with defendants and when meetings occur, they must be targeted. The SEC also expects prompt compliance with requests for documents during investigations and examinations. Chair Gensler said that entities could avoid enforcement actions by timely responding to issues raised in examinations and curing any deficiencies.
Additionally, the SEC will collaborate with other federal, state, and international regulators. Chair Gensler effectively adopted the DOJ’s approach to recidivist behavior (including whether corporate recidivists are eligible to participate in non-prosecution and deferred prosecution agreement) and cooperation credit (corporations must provide all relevant facts relating to all individuals, including lower-level employees, responsible for misconduct to receive cooperation credit) (See our prior Alert regarding DOJ Priorities). To receive cooperation credit, a corporation must meaningfully enhance the Staff’s investigation, including identifying all responsible parties to the misconduct and enabling the Staff to move quickly toward a resolution.
Finally, the Staff will source cases based on observations from the enforcement attorneys and examination personnel, and tips, complaints, and referrals from the SEC’s whistleblower program. Self-reporting is viewed favorably because Chair Gensler realizes that “people mess up sometimes.” Implicitly, however, the Staff will deal more harshly with corporations that discover misconduct and attempt to cover it up.
Key takeaways:
- Review and timely update compliance program and ensure that your program matches the organization’s risk profile.
- Conduct periodic risk assessments to identify gaps, evaluate emerging risks, and map them to internal controls.
- Audit internal controls regularly and address weaknesses immediately.
- Monitor government pronouncements and be keenly aware of lessons learned from competitors in similar businesses.
- Embrace data analytics to help identify risks (e.g., frequency of reports, violations, or internal control breakdowns).
- Establish a “tone at the top” that sets and reinforces a culture of compliance, one that disincentivizes misconduct and incentivizes compliance.
