In the last two weeks, Steven Peikin and Stephanie Avakian, the co-directors of the SEC’s Enforcement Division, have discussed the direction of the SEC’s enforcement program under Jay Clayton, the new Chair of the Commission. On October 26, 2017, Avakian discussed two priority areas that Chair Clayton had previously identified: retail investors and cyber-security. Avakian cautioned that the focus on retail investors did not mean that the Enforcement Division would go easy on Wall Street. “The premise that there is a trade-off between ‘Wall Street’ and ‘Main Street’ enforcement is a false one,” she said.
Comments from her co-head of the Enforcement Division, Peikin, signaled that resource constraints might affect the Commission’s enforcement efforts and its interactions with the subjects of its investigations. Specifically, Peikin’s statements indicate that the Enforcement staff will no longer be following the “broken windows” approach espoused by former Chair Mary Jo White, will not aggressively seek admissions of wrongdoing, and will welcome dialogue and cooperation from parties to resolve investigations more quickly and efficiently.
“Broken Windows” Apparently Will Not Be a Priority of the Enforcement Division Under Chair Clayton
Former Chair White espoused a view that Enforcement should be “everywhere, pursuing all types of violations of our federal securities laws, big and small.”1 However, since taking office, Chair Clayton’s comments have been widely interpreted as raising questions about whether the Commission should continue following this “broken windows” approach. Peikin’s recent comments leave no doubt that the Enforcement staff will abandon the “broken windows” approach, at least for now.
In Los Angeles on October 20 and in D.C. on October 26, Peikin has emphasized that because the SEC’s 2018 budget is flat and there are mandated salary increases, the Commission will be unable to hire attorneys to replace those who leave. Peikin reportedly stated that the Enforcement staff, which has about 1,400 employees, will likely shrink by about 100 attorneys because of the budget. As a result, Peikin stated, “It may be the case that we have to be selective and bring a few cases to send a broader message rather than sweep the entire field.”2
Admissions of Wrongdoing Apparently Will No Longer Be a Key Component of the Enforcement Program
Another component of former Chair White’s enforcement program was the potential to require certain defendants or respondents to admit wrongdoing as part of a settlement. Although few Commission-settled cases included such an admission, it was part of the arsenal used by the Enforcement staff in negotiating settlements. As recently as early September, at an event hosted by the New York University School of Law, Peikin stated that Enforcement would continue its approach to admission initiated during Chair White’s administration.
In the last few weeks, however, Peikin appears to have changed his view: “When I heard about the admissions policy, it didn’t really knock me down.”3 In Los Angeles, Peikin stated that the Enforcement staff is focused on cutting down the time spent on its investigations. Deemphasizing the need for obtaining admissions would be consistent with resolving an investigation in a more efficient manner.
The Enforcement Division May Be More Open to Crediting Cooperation and Engaging Counsel Early To Increase Efficiency
Peikin also discussed two other practices that could assist the staff in making more efficient and effective use of the resources at their disposal. At both the Los Angeles and D.C. events, Peikin acknowledged that the Commission could do a better job of clarifying and explaining the benefits of cooperation for both companies and individuals. The Commission has described in multiple statements the factors that it will consider in providing credit for cooperation, including a 2001 report of investigation, referred to as the Seaboard report. But most attorneys who practice before the Enforcement Division perceive an inconsistent and unclear application of these factors by the staff. More transparency in how the staff will credit cooperation could result in an increase in cooperation and more efficient investigations.
According to Peikin, he is encouraging the Enforcement staff to be more transparent in investigations and more open to dialogue with opposing counsel. He signaled that the staff will be open to efforts by counsel and their clients to assist the Enforcement staff in “get[ting] to the bottom of” investigations so that the Division can conduct investigations more quickly and efficiently.
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The recent comments from the co-directors of Enforcement signal that the Commission and its staff will be taking a much more moderated approach to enforcement, and will focus on fraud and egregious conduct. The current emphasis on making efficient and effective use of the Commission’s resources also provides an opening for companies and individuals who are interested in assisting the Enforcement staff to conclude an investigation more quickly, especially in those instances where the conduct is not intentional and has not significantly harmed investors.