Last Friday, the U.S. Securities and Exchange Commission held its annual “SEC Speaks” conference, which offers a glimpse into the prevailing trends and priorities at the Commission.  As always, the Commission devoted a significant amount of time to exploring and explaining the undertakings of its Division of Enforcement.  During the conference, some noteworthy themes and trends emerged with regard to the SEC’s enforcement priorities, which we address below.

SEC Chairman Mary Schapiro set the tone during her opening remarks at  the conference, which emphasized the Commission’s ability to “aggressively and effectively” fulfill its mandate to “protect investors and ensure the integrity of [the US] markets.”  Schapiro explained that the SEC’s Division of Enforcement has “revamped its operations, putting additional talented attorneys back on the front lines, creating specialized units, and streamlining procedures.”  According to Schapiro, “last year the SEC brought a record 735 enforcement actions” and “obtained $2.8 billion in penalties and disgorgements.”  Schapiro insisted that “there are more actions to come.” 

The SEC Whistleblower Program

Chairman Schapiro highlighted the efforts of the SEC’s new Office of the Whistleblower, noting that in 2011 the Commission “established a whistleblower program that is already providing the agency with hundreds of higher-quality tips, helping us to avoid investigatory dead-ends and – and the same time – prodding companies to enhance their internal compliance programs.” 

Sean McKessy, Chief of the SEC’s Office of the Whistleblower, offered additional insight.  He explained that the Whistleblower Office’s “number one priority” is acting as liaison between whistleblowers and the Division of Enforcement.  Other priorities for McKessy’s office include:

  • Communicating with whistleblowers and their counsel, including responding to inquires about the process for submitting tips and/or claiming an award.
  • Triaging tips, complaints and referrals received from whistleblowers, which the office is receiving at a rate of approximately seven per day.
  • Tracking the SEC’s growing inventory of settled cases to indentify matters that might have arisen from a whistleblower complaint.
  • Processing claims for awards based on settled cases.

With respect to the oft-repeated complaint that the SEC’s whistleblower rules do not require whistleblowers to report internally before submitting a tip to the Commission, McKessy underscored the Commission’s stance that the rules strike an appropriate balance between incentivizing whistleblower reports and showing consideration for corporate compliance programs.  According to McKessy, the SEC’s balanced approach is working.  In the “significant majority” of the whistleblower reports he has personally reviewed, McKessy insisted, the whistleblower did, in fact, report the potential violation internally before coming to the Commission.  In fact, he recalls only one instance in which a “serious” tip was not first reported internally. 

Enforcement Cooperation Program

David Bergers, Director of the SEC’s Boston Regional Office, highlighted several noteworthy aspects of the Commission’s Enforcement Cooperation Program.  The program, Bergers explained, is designed to encourage individuals with knowledge of wrongdoing to cooperate with the Commission early in its investigation.  Since the cooperation program was announced in January 2010, the SEC has entered into cooperation agreements with 37 individuals.  Under its cooperation agreements, the SEC often agrees to “toll prosecution” – or offers lesser sanctions – in exchange for cooperation in ongoing investigations and enforcement actions.  According to Bergers, in determining whether a cooperation agreement is appropriate, the SEC will consider the following factors: (1) the assistance provided by the individual, particularly the timing, nature, and voluntariness of the assistance; (2) the “importance” of the underlying enforcement matter; (3) the “social interest” in holding a particular individual accountable; and (4) the appropriateness of giving “cooperation credit” in light of the individual’s “profile” (e.g. whether the person is a recidivist or has accepted responsibility).

As part of the cooperation initiative, the SEC has also entered into several agreements with corporations, including one deferred prosecution agreement (DPA) and three non-prosecution agreements (NPA).  Like the agreements with individuals, the availability of DPAs and NPAs is designed to encourage corporations to cooperate in SEC investigations and enforcement actions.  While the Commission will consider a number of factors in deciding whether to enter into an agreement with a corporation, Bergers highlighted its agreements with Tenaris S.A. (a DPA) and Carter’s Inc. (an NPA) as examples of the nature and quality of cooperation the SEC expects. 

Pursuit of New Legal Theories

Mary Jo Gillette, Director of the SEC’s Chicago Regional Office, discussed several expanded legal theories the SEC is pursuing in enforcement matters, as well as new remedies available.  First, Gillette explained that the Dodd-Frank Act expanded the scope of aiding and abetting liability in SEC actions.  As a result of Dodd-Frank, the SEC is now authorized to assert aiding and abetting claims in new areas, including claims under the Securities Act of 1933 and the Investment Advisers Act of 1940.  Dodd-Frank also expanded the “state of mind” element required for aiding and abetting liability to include not only knowing participation, but also reckless assistance. 

Second, Gillette explained that Dodd-Frank made clear certain remedies available in control person liability cases.  Importantly, Dodd-Frank authorizes the SEC to seek injunctive relief in actions brought under Section 20(a) of the Securities Exchange Act.  The federal courts were previously split on the availability of injunctive relief in 20(a) actions; the standard for obtaining injunctive relief, however, varies among the courts. 

Gillette noted that Dodd-Frank also provides an affirmative defense to control person claims.  To wit, injunctive relief is not available against control persons who “acted in good faith and did not induce the [wrongful] conduct.  Compliance with internal controls, she says, will likely be a key consideration in relying the affirmative defense.   

Finally, Gillette emphasized that Dodd-Frank enables the Commission to seek “enhanced penalties” in cease and desist (C&D) proceedings.  The SEC is now authorized to ask for monetary penalties in C&D matters, where it was previously limited to seeking only disgorgement of ill-gotten gains.  The SEC is also empowered under Dodd-Frank to penalize secondary actors in C&D cases who caused violations of the federal securities laws, in addition to primary actors. 

Anticorruption Enforcement

The Commission now has a “cross-border group” charged with ferreting out corruption in corporations that trade on US exchanges, but are headquartered abroad.  The group is particularly interested in the accounting policies and financial disclosures of cross-border companies, many of which rely on “small US audit firms.”  As a result, the SEC is leaning on audit firms, which the SEC regards as “gatekeepers.”  To that end, the SEC issued guidance in 2010 and again in 2012, advising that they conduct risk-based analyses of their overseas clients.  According to Kara Brockmeyer, head of the SEC’s FCPA Unit, the SEC has seen a spike in Form 8-K reports of accounting irregularities, as well as a jump in Rule 10A reports.  She expects additional 10A reports to flow in through the Office of the Whistleblower. 

Brockmeyer noted that the SEC is also devoting significant resources to Foreign Corrupt Practices Act (FCPA) enforcement.  The SEC’s FCPA Unit is focusing heavily on international cooperation, teaming with regulators around the world.  She highlights the FCPA Unit’s cooperation with Switzerland, Russia, and China, each of which recently enacted anticorruption laws.  The FCPA Unit brought 20 FCPA enforcement cases 2011, including 19 against companies and one against an individual.  Brockmeyer cautioned, however, that the 2011 numbers should not be seen as a model.  Indeed, in 2012 the SEC has already charged 14 individuals with FCPA violations, compared with only five companies charged. 

Change to the SEC’s Settlement Policies

The SEC’s Chief Litigation Counsel, Matthew Martens, spoke briefly about the SEC’s settlement practices.  When the Commission elects to settle a case, he said, its policy is to accept only settlements that reflect what the Commission believes it could reasonably expect to obtain in a successful trial.  If the terms of the settlement reflect what the SEC might achieve at trial, Martens said, there is no reason to forego settlement simply because a defendant does not admit liability. 

In defense of SEC settlements, Martens noted that the agreements include great detail of the violations alleged – more information, in fact, than other agencies provide.  And importantly, while the SEC may not require an admission of guilt, it does not allow settling parties to deny guilt.  The SEC has settled more than 2,000 cases in the past three years, and the judges presiding over those matters requested additional information about the settlement less than 10 times. 

Nevertheless, Martens insisted that the SEC is committed to trying cases in appropriate circumstances, noting that the SEC has an “impressive record” in litigated matters.  The SEC has prevailed in 80% of its trials since October 2010, he says. 

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For those that follow the ebbs and flows of SEC enforcement matters, some of these themes and trends may come as little surprise.  It is important, however, for regulated entities to track – or periodically remind themselves of – the SEC’s enforcement priorities.