We expect the SEC to continue filing a steady stream of enforcement cases in 2016, and predict the following trends or areas of emphasis:
- Pre-IPO Securities: Pre-IPO securities have been receiving a lot of attention in the media and in the SEC Enforcement Division. The SEC Enforcement Division is scrutinizing the pre-IPO securities market with a focus on not only secondary trading in private company shares, but also on how pre-IPO companies raise capital. Among other issues, the SEC appears to be focused on valuation issues for private company shares, whether investment advisers who purport to have shares are making misrepresentations to potential investors; whether intermediaries who broker shares are properly registered; and whether sales of derivative interests tied to private shares run afoul of new Dodd-Frank rules that strictly regulate securities-based swaps. We expect that the SEC will open multiple investigations and file a number of enforcement actions in 2016 in this space.
- Executive Compensation and Perk Disclosure: The Enforcement Division is closely examining proxy disclosures of executive perks, looking for signs that a company may not be fully disclosing perks; or that perks have not been approved through the appropriate corporate governance channels; or there have been significant changes in the year-over-year disclosures.
- Deeper Dives on Insider Trading: With the Newman decision’s emphasis on the need for the government to show a close relationship between the purported tipper and tippee and an exchange of value, SEC investigators have sharpened their investigative tools and are combing financial records of targets, and even reaching out to speak with work colleagues and friends in search of such evidence.
- Fewer Administrative Filings: In 2015, we saw significant pushback from defense counsel, some federal court judges, and even Congress over the Enforcement Division’s choice to file an increasing number of cases in SEC administrative courts. In addition, constitutional challenges to the way the agency appoints its administrative law judges are currently under appeals court review, with decisions expected this year. As a result of these factors, we are beginning to see fewer contested cases being filed in those courts—a trend that may continue, depending on how the appeals courts rule.
- What is Cooperation?: In November, Enforcement Director Andrew Ceresney announced that, for FCPA violations, companies that do not self-report the misconduct are no longer eligible for a non-prosecution or deferred prosecution agreement. This announcement highlights the SEC’s increasing scrutiny regarding corporate “cooperation.” In addition to the formal cooperation analysis, SEC attorneys often keep an informal “cooperation score card” during an investigation. Corporations that are viewed as assisting the government in completing the investigation may be rewarded, while those who are viewed as intransigent may be penalized. In 2016, corporations should expect the SEC to continue to emphasize self-reporting and to apply enhanced scrutiny to the level of cooperation.