On Oct. 13, 2021, senior officials from the U.S. Securities and Exchange Commission’s Division of Enforcement* convened for a panel discussion at the annual SEC Speaks conference, held virtually for the second consecutive year. In his first appearance at SEC Speaks, newly appointed Enforcement Director Gurbir Grewal opened the Enforcement discussion by describing what he believes to be a decline in public trust in the financial markets. He attributed this, in part, to corporate and other market participants’ failures to play by the rules, and the perception that the SEC is failing to hold them appropriately accountable, or worse, the belief that there are more lenient consequences for misconduct by big and powerful market participants. Director Grewal pledged to try to restore that trust by sharpening the Division’s enforcement efforts in the areas of corporate responsibility, gatekeeper accountability, and aggressive use of prophylactic remedies, including requiring admissions in settlements.
Consistent with Director Grewal’s theme of trust, he and Deputy Director Sanjay Wadhwa announced their intent to empower Enforcement Staff with greater influence in certain important decisions within the enforcement process. Enforcement Staff will have greater influence in deciding whether defense counsel will be permitted to submit white papers in advance of Wells Notices or meet with Director Grewal or Deputy Director Wadhwa as part of the Wells process, deciding whether admissions are appropriate in certain settlements, and determining what constitutes credit-worthy cooperation in an investigation.
Finally, the other panelists rounded out the discussion by highlighting some of the Division’s priority areas. These priorities include investigations and cases involving cybersecurity, advisers to private funds and separately managed accounts, and environmental, social, and governance (ESG) matters, signaling the Division’s intent to extend its aggressive approach into this new and developing area.
Restoring Trust in the Financial Markets
Director Grewal pledged to restore the public’s trust in the financial markets, which he described as near “historic lows,” by focusing enforcement efforts on corporate responsibility, gatekeeper accountability, and the aggressive use of prophylactic remedies to hold wrongdoers accountable and deter future misconduct.
Director Grewal emphasized that corporate responsibility requires companies to follow the rules governing marketplace conduct and to have in place sufficient controls and procedures to ensure compliance with these rules. He stressed that the Division will focus on whether companies are making timely and accurate required disclosures, particularly in the area of cybersecurity; appropriately controlling for the potential misuse of material nonpublic information; adhering to record-keeping obligations; and complying with legal process obligations, such as appropriately responding to subpoenas and preserving documents and information under legal hold obligations; and not deliberately communicating in ways to evade future regulatory scrutiny.
Director Grewal also stressed that gatekeepers, such as attorneys and auditors, serve as an important first line of defense and that public trust suffers when gatekeepers encourage clients to “play in the grey areas.” He admonished gatekeepers not to walk their clients up to the line. The Division will continue to focus on gatekeepers, as evidenced by recent enforcement actions against an attorney who facilitated the unregistered sale of securities by groups engaged in securities fraud, against audit partners for significant misconduct, and against an accountant who failed to register his firm with the Public Company Accounting Oversight Board.
Director Grewal further stated that the Division would use its full kit of prophylactic remedies to restore public trust, emphasizing the strong deterrent effect of requiring wrongdoers to admit they broke the law. Thus, the Division will seek admissions in appropriate cases where heightened accountability and acceptance of responsibility are in the public interest. Director Grewal also noted that admissions serve to influence other market participants to eliminate and self-report misconduct. Deputy Director Sanjay Wadhwa elaborated that admissions likely will be sought in settlements where there is egregious misconduct, where the market or a large number of investors is harmed or placed at risk, where the target engaged in conduct that obstructed the SEC’s processes, and/or where a public admission would greatly increase the deterrent effect of the enforcement action. Deputy Director Wadhwa also made clear that front-line Enforcement Staff will play a central role in deciding whether the Division will seek admissions in settlements.
Signaling a new approach, Director Grewal stated that not only will the Staff continue to seek officer and director bars in settlements, but that the Staff might also seek a bar against a person who was not serving as an officer or director at the time of the conduct or was not even an employee of a public company. If there is egregious conduct, Director Grewal stated an officer or director bar could be appropriate if there is a chance the individual might have the opportunity to serve as an officer or director of a public company in the future.
Finally, Director Grewal promised to utilize conduct-based injunctions and undertakings in settlements. Conduct-based injunctions prohibit a defendant or respondent from engaging in specific conduct that, while otherwise legal, presents a risk of investor harm in the future. Undertakings, such as requiring the settling party to hire an independent consultant, likewise are tailored to prevent future misconduct by addressing underlying violations and ensuring future compliance. Director Grewal made clear that the Division of Enforcement intends to aggressively use these prophylactic remedies, particularly in matters involving repeat offenders, to confront the perception of different rules and consequences for different market participants depending on their size and power.
Empowering the Front-Line Enforcement Staff
Director Grewal and Deputy Director Wadhwa discussed what market participants can expect going forward with respect to the Wells process. Noting his trust in the experience and judgment of front-line Enforcement Staff, Director Grewal warned the audience not to expect his or Deputy Director Wadhwa’s presence at Wells meetings except in cases that present novel legal or factual questions. Under this framework, Director Grewal and Deputy Director Wadhwa will defer to the Associate Director or Unit Chief and the front-line Enforcement Staff to handle more routine matters. Further, whether a Wells meeting will occur at all will be subject to the input of the front-line Enforcement Staff. These comments are a sharp contrast to the practice of his immediate predecessor Enforcement Co-Directors, who viewed Wells meetings as among the most important parts of their jobs and devoted substantial time and care to preparing for them. (See, for example, then-Co-Director Steven Peikin’s May 9, 2018, keynote address at the New York City Bar Association’s 7th Annual White Collar Crime Institute.)
Deputy Director Wadhwa also said the Enforcement Staff will be more discerning regarding whether to permit the submission of a white paper in advance of a formal Wells Notice. He noted that the practice of submitting white papers has strayed far from its intended purpose of addressing significant factual or legal issues and instead are simply duplicative of later Wells submissions.
Deputy Director Wadhwa reiterated the Enforcement Division’s position that credit-worthy cooperation entails more than compliance with legal obligations in investigations. When assessing whether a company’s behavior could merit cooperation credit, the Enforcement Staff will consider whether a firm’s cooperation conserved Commission resources and substantially advanced the quality and efficiency of the investigation. Here, too, Deputy Director Wadhwa noted that front-line Enforcement Staff will be best positioned to determine a company’s level of engagement and cooperation in investigations and thus will have considerable input in determining whether cooperation credit is warranted.
Enforcement Focus on Controls, Disclosures, and Conflicts
The panelists concluded the discussion panel by highlighting some of the Division’s enforcement priorities. These priorities focus on, among other issues, adequate and timely required disclosures and/or the adequacy of controls and procedures.
For example, Cyber Unit Chief Kristina Littman discussed the Division’s enforcement efforts involving cybersecurity. Ms. Littman advised that regulated entities should have sufficient controls to detect and prevent cyber breaches and should be able to implement those controls to ensure that such events are timely, fully, and accurately disclosed to investors.
Asset Management Unit Chief Dabney O’Riordan conveyed a similar message with respect to advisers to private funds and separately managed accounts, and ESG. Regarding private fund and separately managed account advisers, Ms. O’Riordan noted several areas of enforcement interest, including failure to adequately disclose conflicts of interest, failure to have adequate policies and procedures detailing valuation methodology, and violations of the duty of care to investors.
Ms. O’Riordan noted that ESG investment is a specific area of concern and that companies need to have policies and procedures to ensure products are sold as marketed and investments are appropriately monitored to confirm they remain consistent with ESG promises.
What Does This Mean
Market participants and their counsel should anticipate aggressive enforcement all around. Director Grewal did not mince words; he has resolved to confront perceptions regarding an unlevel playing field through a strong enforcement program. This resolve, coupled with the newly enhanced influence he and Deputy Director Wadhwa are entrusting to the front-line Enforcement Staff in critical aspects of the Enforcement process, such as the use of white papers and Wells meetings, and in critical components of settlements, such as requiring admissions, expansive use of officer and director bars, and determining what constitutes credit -worthy cooperation, will present new challenges for companies and their counsel in dealing with the Enforcement Staff and negotiating potential resolutions of enforcement actions
* Panelists from the Division of Enforcement included Director Gurbir S. Grewal, Deputy Director Sanjay Wadhwa, Chief Litigation Counsel Bridget Fitzpatrick, acting Co-Chief Counsel Jonathan H. Hecht, Cyber Unit Chief Kristina K. Littman, Asset Management Unit Chief C. Dabney O’Riordan and Atlanta Regional Office Director Nekia Hackworth Jones.