The SEC (U.S. Securities and Exchange Commission) recently hosted the 2024 SEC Speaks conference in Washington, DC. During the event, SEC leaders, including the Chair, commissioners, and senior staffers, shared their views about key priorities and trends in the enforcement space. Senior leaders of the Enforcement Division emphasized the SEC’s enforcement results for 2023 — a year in which the SEC instituted a record number of enforcement actions and obtained almost $5 billion in financial remedies — and shared their perspectives on the year ahead.
This alert summarizes key enforcement takeaways from the event.
Overarching Enforcement Environment
Gurbir Grewal, Director of the Enforcement Division, kicked off the conference with a keynote speech addressing the overarching enforcement landscape. He described the SEC as facing “significant headwinds” in enforcement efforts, including questions about the Commission’s authority and criticisms of its jurisdictional reach. Grewal responded to these criticisms with assurances that the SEC’s approach has been consistent, principled, and tethered to federal securities laws. Grewal specifically addressed criticism that the SEC has exceeded its authority in bringing actions against crypto companies and what he deemed “crypto asset securities,” maintaining that while crypto assets may be new, the challenged transactions fall within the framework that courts have used for more than 80 years.
Commissioner Hester Peirce also focused on efforts to protect investors but noted the need for greater public engagement. She described a cultural change “at the top” that has focused less on engaging directly with the public, and she suggested that the rulemaking process should be an opportunity to gain public trust, not “the opening offer in a negotiation.” Peirce recommended that the SEC engage more directly with reporting companies and pare back rulemaking, making more use of concept releases, public roundtables, and workshops to identify issues in the market and provide more tailored solutions.
Cooperation Framework
Enforcement leaders emphasized the importance of cooperation in the context of investigations. For instance, Samuel Waldon, Chief Counsel of the Enforcement Division, stressed the SEC’s efforts to encourage and reward meaningful cooperation, including through the formal Cooperation Program and “informal” cooperation in SEC investigations. At the end of an enforcement investigation, the SEC will evaluate the quality of the cooperation when determining remedies and sanctions. Timing is essential for cooperating with the SEC, although the Chief Counsel made it clear that an individual or entity may still receive cooperation credit even if they do not cooperate at the outset of an investigation.
Waldon was clear that complying with subpoenas and providing truthful testimony are expected and are not considered cooperation for purposes of credit. In other words, complying with legal obligations does not merit cooperation credit. Instead, examples of cooperation that the SEC may credit in resolutions include providing the SEC with documents it could not otherwise compel, waiving certain privileges to allow the SEC to develop its case more fully, and providing helpful financial analysis or compilations of key documents, including translating documents into English when necessary. We note that it is not necessary to waive a privilege to achieve cooperation credit, although this was not addressed during the talk.
Whistleblower Considerations
SEC leaders emphasized the continued importance of whistleblowers in protecting investors. In 2023, the Whistleblower Program issued awards totaling nearly $600 million, the highest number on record, with the SEC receiving more than 18,000 whistleblower tips. Nicole Creola Kelly, Chief of the SEC’s Office of the Whistleblower, cautioned companies to ensure they are not restricting the ability of whistleblowers to report to the SEC or otherwise retaliating against employees who blow the whistle. She also offered best practices for companies’ whistleblower policies and procedures. Specifically, employment agreements should include clear “carve-outs” to confidentiality provisions for communications with regulatory agencies. They also should not require that individuals inform their employer if and when the SEC contacts them in connection with a report and should not require individuals to forgo financial recovery in connection with a whistleblower award.
Individual Accountability
The SEC continues to focus on holding individuals accountable, which Stacy Bogert, Associate Director of the Enforcement Division, addressed. Bogert noted that two-thirds of the actions brought by the SEC in 2023 included charges against individuals, including company executives and board members. Additionally, in 2023, the SEC obtained more than 130 orders barring individuals from serving as directors or officers of public companies (one of the highest totals on record).
The SEC is also continuing its practice of seeking Sarbanes-Oxley Act Section 304 “clawbacks,” under which the SEC can seek clawbacks of executive compensation, including bonuses and incentive-based compensation or profit from sales of securities. Bogert made clear that the clawbacks can be required regardless of whether a CEO or CFO engaged in the alleged misconduct themselves, because the goal is to encourage strong internal controls and oversight at the top.
Recordkeeping and Off-Channel Communications Violations
Deputy Director of Enforcement Sanjay Wadhwa discussed the Enforcement Division’s continued commitment to enforcing recordkeeping violations and addressed criticism from the defense bar regarding what it perceives as a wide range of penalties imposed at random. Wadhwa made clear that the division makes individualized assessments of each case to determine the penalty to recommend to the SEC. The various factors taken into consideration include:
- The size of the firm: To ensure the penalty is a deterrent against future violations, the SEC considers the firm’s revenue from the regulated parts of its business and the number of professionals at the firm.
- The scope of the violations: The SEC also considers how many individuals communicated off channel and how many off-channel communications there were. However, Wadhwa clarified that there is not a strict correlation between these numbers and the penalty.
- Self-reporting: Whether a firm self-reported is “the most significant factor” in determining the penalties, and the SEC has credited firms that have chosen to self-report.
- Compliance: The SEC considers the firm’s efforts to comply with its recordkeeping obligations and to prevent off-channel communications, such as ensuring meaningful technological solutions.
- Cooperation: Firms that do not self-report can still receive cooperation credit with Enforcement Division staff during the investigation, as described above.
The SEC has issued 40 settled orders since December 2021, and these precedents serve as a guide in making an individualized determination.
Gatekeeper Liability
The Enforcement Division addressed recent challenges to the SEC’s ability to hold gatekeepers accountable before administrative law judges1 but stated that the current uncertainty does not mean the SEC would “draw back” on its attempts to hold gatekeepers liable. Ryan Wolfe, Enforcement Chief Accountant, reaffirmed the Division’s commitment, asserting that the SEC’s ability to enforce regulations and professional standards among gatekeepers was critical to the capital markets. Wolfe indicated that the SEC was litigating administrative proceedings against engagement partners at firms of all size, for public companies and broker-dealers. Wolfe remarked that strong corporate governance, including a well-functioning board of directors and audit committee, are integral to protecting investors and can have a positive impact when they hold management accountable and respond to issues as they arise.
Disgorgement
In discussing remedies for securities violations, Olivia Choe, Chief Litigation Counsel, made clear that the SEC will continue to “deploy disgorgement aggressively” in 2024, citing recent court decisions that have confirmed the SEC’s authority to seek disgorgement of ill-gotten gains. For example, in Liu v. SEC,2 the Supreme Court held that a disgorgement award that does not exceed a wrongdoer’s net profit and is awarded for victims is a lawful form of equitable remedy. While some circuit courts have adopted different approaches for awarding “equitable” disgorgement,3 the practical outcome is that courts have confirmed that the SEC’s burden in seeking disgorgement is to provide a reasonable approximation of ill-gotten gains attributable to the defendant’s misconduct, which the defendant can rebut.
Key Takeaways
Remarks by SEC leaders reflect a focus on fostering trust and credibility, including through increased public engagement and by rewarding self-reporting and cooperation with the Commission. However, the SEC continues to pursue an aggressive enforcement program including through the scope of what and who the SEC investigates and the use of strong remedies.
[1] Securities and Exchange Commission v. Jarkesy, No. 22-859, Oral Argument (Nov. 29, 2023).
[2] Liu v. Securities and Exchange Commission, 140 S. Ct. 1936, 207 L. Ed.2d 401 (2020).
[3] See, e.g., Securities and Exchange Commission v. Govil, 86 F.4th 89 (2d Cir. 2023); Securities and Exchange Commission v. Hallam, 42 F.4th 316 (5th Cir. 2022).
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