On March 9, 2021, SEC Commissioner Caroline Crenshaw indicated that the SEC should take a tougher stance regarding corporate wrongdoers. In a virtual conference before the Council of Institutional Investors, Crenshaw conveyed her view that the agency’s enforcement program has veered “off course” over the past 15 years and emphasized the need for tougher penalties and greater deterrence. Crenshaw went as far as to call a 2006 SEC Statement that balances penalties with limiting costs on shareholders “fundamentally flawed.” According to the 2006 SEC Statement, “a key question for the Commission is whether the issuer’s violation has provided an improper benefit to the shareholders, or conversely whether the violation has resulted in harm to the shareholders. Where shareholders have been victimized by the violative conduct, or by the resulting negative effect on the entity following its discovery, the Commission is expected to seek penalties from culpable individual offenders acting for a corporation.”
Crenshaw espoused a wide-ranging notion of “fairness” in levying enforcement penalties and urged for the focus to shift to the egregiousness of the corporate wrongdoers’ actions and away from the benefit or harm such conduct had on shareholders. She noted that higher penalties could motivate a company to remediate problems, strengthen internal controls, clarify lines of responsibility, and prioritize individual accountability and such outcomes would better serve investors.
Crenshaw’s statements advance the notion that the SEC’s enforcement posture will be more aggressive and less forgiving under Democratic leadership. With Gary Gensler, the former Commodity Futures Trading Commission Chairman who is known for a more assertive enforcement approach, expected to lead the SEC,[1] stricter penalties for corporate wrongdoers may only be one piece of a more aggressive enforcement agenda this year and to follow.
Crenshaw points to the need for “better outcomes.” Unfortunately for issuers and market participants, there is no offer of any gauge by which to measure what is a good (or better) enforcement outcome. Should one gauge an outcome by a measure of loftier fines? Interestingly, in FY 2020 the SEC imposed over $1.09 billion in penalties and only once in the past 5 years has the amount of penalties imposed in a single year dropped below the billion dollar mark.[2] Would greater numbers of industry bans make these outcomes better? Would fewer corporate “bad boy” waivers be appropriate?[3]
Also missing from Crenshaw’s speech is guidance on how one would determine egregiousness. Common sense would say that duration of a violation is one measure. Another logical measure would be the amount of ill-gotten gains. And most would say that defrauding certain categories of individuals, like vulnerable investors, is particularly egregious. The SEC judges every case on its merits and on the particular facts and circumstances presented—an inherently subjective analysis. But setting subjective analysis points without clear guidance lends itself to inconsistent outcomes—perhaps that’s the point.
Crenshaw also notes her view that “there is a temptation to spend money on operations at the expense of investing in compliance.” One could read this and think that it presupposes that companies view compliance programs as “cost centers.” In reality, many organizations, large and small, view their compliance programs as partners in ensuring compliant operations to minimize risk (i.e., by preventing a violation that ultimately would cost the company more in fines and reputational harm than the cost of investing in strong compliance—the “price” paid by violations, as Crenshaw mentions).
In her remarks, Crenshaw also indicates her view that difficult-to-discover violations should result in higher penalties than those that are easier to detect, opining that “[t]here is a greater need to deter conduct that requires more Commission resources to uncover, investigate and address.” One would be hard pressed to argue this logic in the context of scienter-based fraud, especially if the wrongdoer exhibits any semblance of evasion to cover up the violative activity. But one must also query whether Crenshaw takes this view with respect to non-scienter based violations. To say that many aspects of the investment and securities ecosystem is complex is a huge understatement. Should the fact that one requires advanced mathematics, programming, or economics experience to understand much of what drives the markets ultimately move the needle on the perceived degree of wrongdoing? Should the need for a deep forensics dive by Examinations or Enforcement staff lead to a higher penalty? It seems Commissioner Crenshaw thinks yes.
Crenshaw’s speech also harkens back to familiar sayings like “corporate culture,” “culture of compliance,” and tone “from the top,” noting that the “pervasiveness or complicity within the organization is another relevant consideration” in setting enforcement penalties. She goes on to say that “[i]f companies believe they can profit from violations and are unlikely to be caught, they are more likely to break the rules.” Speaking of tone, one might read these statements and gather that there is a presumption that organizations are hardwired to default to violations, or default to skimping on compliance spending, or to inherently skirt rules in the quest for greater profits. But by and large, based on any measure, most companies and individuals subject to the SEC’s jurisdiction strive for compliance in everything they do, day in and day out.
Crenshaw raises an interesting point around data—in particular, gathering more of it around corporate penalties to better assess considerations in this area. This is essential and hopefully the SEC will carefully review such data before any change in course on corporate penalties. Another helpful point is that Crenshaw acknowledged the importance of self-reported conduct, cooperation with law enforcement investigations, and self-remediation, noting that the SEC takes cooperation and self-reporting seriously. Companies should be mindful that “cooperation credit” can and often does result in less painful sanctions. But one must wonder the extent to which that will continue to be the case if Crenshaw’s views materialize in practice in future enforcement matters.
[1] On March 10, 2021, the U.S. Senate Banking, Housing, and Urban Affairs Committee voted 14-10 in favor of sending Gary Gensler’s nomination to serve as Chairman of the SEC to the Senate Floor for consideration.
[2] 2020 Annual Report, U.S. Securities and Exchange Commission Division of Enforcement, p. 17, available at https://www.sec.gov/files/enforcement-annual-report-2020.pdf. In FY 2019, the SEC imposed $1.101 billion in monetary penalties, $1.439 billion in FY 2018, $832 million in FY 2017, $1.273 billion in FY 2017 and $1.175 billion in FY 2015.
[3] https://www.finregpolicy.com/2021/02/17/sec-enforcement-updates-interim-director-named-staff-investigative-powers-bolstered-bad-boy-waivers-in-doubt/.
