Dealmakers should be braced for a more aggressive stance under Chair Gary Gensler
The appointment of Gary Gensler to Chair of the Securities and Exchange Commission (SEC) signaled a break from the Trump administration, when enforcement actions reduced overall. Since taking office, his speeches have outlined his priorities and his intention to take a tougher stance on enforcement. The fact that full-year figures published by the SEC in November show a 7 percent rise on 2020 demonstrates a more aggressive approach.
Based on his recent pronouncements, Gensler is making his mark on enforcement processes in a number of ways. One is a pivoting back toward admissions of misconduct. During the Trump years, settlements with the SEC on a "neither admit nor deny" basis were prevalent, offering defendants some protection in areas such as private litigation. However, the SEC looks likely to seek more admissions of misconduct to increase accountability, where there is a public interest for this to happen.
Another is pursuing novel or high-impact cases, with Gensler indicating he will not shy away from accusations of regulation through enforcement. An insider trading case brought in the summer of 2021, for example, expanded the misappropriation theory in a way not seen before. Under Gensler, the SEC is also seeking to shorten investigations by cutting back on Wells meetings (in which defendants can discuss their case with SEC staff) and instead focus on bringing enforcement actions. This may mean a reduction in the number of settlements reached or that defendants will need to settle on more onerous terms.
And finally, indications are that the SEC will seek much more detailed information for entities to qualify for co-operation credit. The result could be that entities and, potentially, C-suite executives shoulder responsibility for misconduct as well as the individuals investigated.
New frontiers
Gensler has also recently reiterated particular areas of focus for the SEC. One of these is SPACs, where he has outlined concerns around lower disclosure requirements than in IPOs and a lack of gatekeepers looking out for investor interests. He has also expressed concerns about the conflict of interest between, on one side, investors that do not redeem before the de-SPAC merger, and on the other, sponsors and investors who cash out or invest through the PIPE transaction. The SEC is clearly looking at the potential for misleading statements in the market as well. Those involved in SPACs will therefore need to focus heavily on disclosures and ensure that any potential conflicts of interest are transparent to investors.
ESG has also moved up on the SEC's agenda. The creation of an ESG taskforce and the announcement that the SEC will deploy data analytics to identify material gaps or misleading statements, in particular around climate disclosures, clearly illustrate the direction of travel. This will raise the due diligence bar for dealmakers looking at M&A involving a company with potential climate risks or social risks.
Crytocurrencies are also high on the SEC enforcement agenda, with concerns raised around the decentralized and anonymous nature of these digital assets. The SEC is taking the view that these fall under securities laws and it has announced a number of cases involving lending platforms and cryptocurrency exchanges in addition to those already recently investigated. Dealmakers will need to consider carefully during due diligence whether any of the target's digital assets could be deemed securities.
Lastly, while there has been a lot of press around SEC enforcement targeting private equity, the signs are that there is no significant shift away from the approach of the past few years, with potential conflicts of interest the main area for investigations.
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