Securities Enforcement Alert
The Securities and Exchange Commission’s Division of Enforcement’s Director has reiterated the Division’s plans to pursue robust enforcement, robust compliance, and robust remedies. And, on July 25, the SEC demonstrated what that could mean with the announcement of multiple insider trading cases that were proactively identified through the Division’s Market Abuse Unit’s Analysis and Detection Center.
In this alert, we look at these enforcement priorities, then set out some key takeaways for companies across all industries.
Since joining the SEC, Gurbir S. Grewal, Director of the Securities and Exchange Commission’s Division of Enforcement, has emphasized the Division’s intent to prioritize proactive enforcement efforts. These include emphasizing corporate responsibility; gatekeeper accountability; and appropriate remedies, seeking admissions in certain cases and focusing on prophylactic relief.
Most recently, during his July 21, 2022, testimony on the “Oversight of the SEC’s Division of Enforcement,” before the Investor Protection, Entrepreneurship, and Capital Markets Subcommittee of the United States House of Representatives Committee on Financial Services, Mr. Grewal provided additional details on the Division’s current enforcement priorities. See SEC.gov | Testimony on “Oversight of the SEC’s Division of Enforcement” Before the United States House of Representatives Committee on Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets.
As summarized below, the Director’s Congressional testimony described the Division’s 2021 work (which included filing more cases in 2021 than 2020); made clear that the Division intends to deploy more resources towards pursuing “robust enforcement,” “robust remedies,” and “robust compliance;” and requested a budget that would enable to the Division to hire additional staff.
The Division’s priorities and its request for more resources have considerable implications for companies across all industries.
Summary of 2021 work
The SEC filed 434 new enforcement actions in 2021 (ie, for the year ending September 30, 2021), which represents a 7 percent increase over enforcement actions filed in 2020. Further, the Division remains quite busy, handling approximately 1,500 open investigations at any point in time.
Notwithstanding the increase in cases filed by the SEC in 2021, the Division has described various priorities for 2022 and beyond that if achieved are likely to lead to a further increase in cases filed and subsequent litigations. The Division had approximately 2,000 pending civil litigations and 1,200 pending administrative proceedings in 2021. These numbers could likely increase going forward as the Division seeks, among other things, more robust enforcement, compliance, and remedies than in the past.
Enforcement priority: Robust enforcement
The Director defined “robust enforcement” in two ways.
First, the Director characterized “robust enforcement” as taking proactive enforcement measures. The Division’s proactive enforcement measures will also include a focus on digital asset and cybersecurity-related matters. Indeed, the SEC has previously announced that it would allocate 20 additional positions to the Crypto Assets and Cyber Unit to enable to Division to expend more resources on investigating (and potentially litigating) digital asset-related matters.
The Division will focus not only on digital asset offerings (such as initial coin offerings, or ICOs), but on all manner of adjacent activity, including potential securities laws violations related to exchanges, broker-dealers, lending and staking products, decentralized finance platforms, non-fungible tokens, and stablecoins.
Second, the Director reiterated his SEC Speaks 2021 remarks that “robust enforcement” includes focusing on gatekeeper accountability. Gatekeeper accountability is relevant to various underlying areas of focus by the Division. For example, as noted above, the SEC continues to focus on insider trading across all sectors. The SEC’s view is that all companies have responsibilities to create and maintain controls reasonably designed to prevent the misuse of material, nonpublic information. Regardless of their business, companies should pay particular attention to the SEC’s emphasis here.
The Division’s focus on holding gatekeepers accountable dovetails with a second enforcement priority: “robust compliance.”
Enforcement priority: Robust compliance
The Director testified that “robust compliance is critical to restoring trust.” The Director’s remarks about the need for “robust compliance” and the Division’s emphasis on cybersecurity-related enforcement comes on the heels of the Commission proposing new cybersecurity-related disclosure rules. This enforcement priority and the SEC’s proposed rules reflect the heightened attention that will be placed on compliance going forward. Indeed, the SEC similarly, and also recently, proposed enhanced ESG-related disclosure rules.
And, it is clear that the Division will seek the imposition of “robust remedies” for any alleged violations of the securities laws, including alleged compliance-related violations.
Enforcement priority: Robust remedies
The Division’s third enforcement priority is “robust remedies.” During his testimony, the Director emphasized the need for (a) significant remedies designed to generally deter other market participants from engaging in the same or similar misconduct (to that end, the Director also reiterated his SEC Speaks 2021 comments about the Division’s intent to seek admissions from wrongdoers in certain cases); and (b) prophylactic relief, such as bars, conduct-based injunctions (i.e., bars from engaging in certain conduct), and undertakings.
The Division is increasing the stakes for those whom it perceives to have violated the federal securities laws and may be returning to a broken-windows model of enforcement. Companies across all industries should focus on the Division’s priorities and take action to review existing compliance programs and evaluate whether any updates are necessary to reduce the risk of potential SEC enforcement scrutiny and actions.
Particular areas of focus include:
- Digital assets
- Insider trading and the protection of material, non-public information
- Gatekeepers and whether effective gatekeeping systems, policies and procedures are in place