SEC enforcement activity already has been active under Chair Gary Gensler, and the request for an increased budget is a clear sign that it will continue. Given the increased regulatory activity on the horizon, it’s a good time for financial advisers, broker-dealers, private funds and publicly-traded companies to examine their risk and compliance functions and prepare for increased scrutiny.
The Securities and Exchange Commission on March 28, 2022, released its annual Congressional Budget Justification. The agency is seeking a budget of $2.15 billion for FY 2023 which is almost $240 million more than it sought in FY 2022. The SEC seeks to add 400 staff positions with 120 additional positions in the Division of Enforcement and 90 more in the Division of Examination.
The SEC justified the additional funding on the grounds that “[a]s more Americans are accessing the capital markets, we need to be sure that the Commission has the resources to protect them.” The agency said the new enforcement personal is needed to “strengthen [enforcement] capabilities to investigate new and emerging issues, including Crypto-Asset markets, cyber-related risks, and the environmental, social, and governance space.” Importantly, the SEC also said that it “expected that the number of litigated cases will continue to rise. . . .”
In support of its budget request, the SEC identified several “key priority areas.” Issuers and other market participants likely can expect a combination of increased regulation, regulatory scrutiny through examinations, or enforcement activities directed to each of the priorities. The key areas in which it will apply the increased funding include Initial Public Offerings, Special Purpose Acquisition Companies, Private Funds, Crypto-Assets, Cybersecurity, Use of Data Analytics, and Financial Technology.
The agency has identified several focal points within each of these key areas including: (1) staffing for increased IPO activities; (2) disclosures and conflicts of interest for private funds; (3) fraud prevention concerning Crypto-Assets; (4) ensuring Crypto-Assets are, where appropriate, registered and otherwise in compliance with the securities laws; (5) increased use of data analytics and machine learning to enhance enforcement; and (6) regulatory and enforcement activity involving fintech start-ups.
These stated priorities reflect the enforcement actions the SEC has recently initiated. The SEC’s crypto-related enforcement actions have mushroomed. Earlier this month, for example, the SEC filed an action in the Southern District of New York against two individuals in a $124 million Crypto-Asset fraud enforcement action.1 The SEC alleges that the individuals defrauded thousands of retail investors through two unregistered and fraudulent offerings on crypto trading platforms, involving a digital asset named Ormeus Coin. As another example of recent enforcement actions in these key areas, in August 2021, the SEC brought an enforcement action against Blockchain Credit Partners, finding that the company offered and sold securities worth more than $30 million in unregistered offerings through decentralized finance technology.2 And in June 2021, the SEC filed an action in the District of Colorado against two investment advisers and associated individuals, alleging that they engaged in transactions in private funds that significantly benefitted themselves, yet failed to provide adequate disclosure.3 The SEC also alleged that the investment advisers made false and misleading statements regarding the existence of the conflicts of interest and the fund’s review of those conflicts.
In addition to recent enforcement actions in these areas, on March 9, the SEC proposed mandatory cybersecurity disclosure rules that would “standardize disclosures regarding cybersecurity risk management, strategy, governance, and incident reporting by public companies.”1 The proposed disclosure rules would require reporting on a number of areas, including current and past cybersecurity incidents, registrant policies and procedures to identify cybersecurity risks, and the role/expertise of management and directors in assessing and managing cybersecurity risk.
The SEC’s budget requests suggests that the SEC’s Division of Enforcement intends to remain active. Given the increased regulatory activity expected in the next year, it’s a good time for financial advisers, broker-dealers, private funds and publicly-traded companies to examine their risk and compliance functions and prepare for increased scrutiny.
1. Complaint, SEC v. John Barksdale, et al., Case No. 1:22-cv-1933 (S.D.N.Y. Mar. 8, 2022).
2. Order Instituting Cease and Desist, In the Matter of Blockchain Credit Partners, et al., Administrative Proceeding File No. 3-20453 (August 6, 2021).
3. Complaint, SEC v. SkiHawk Capital Partners, LLC, et al., Case No. 21-cv-1776 (D. Colo. June 29, 2021).
