On November 15, 2022, SEC Enforcement Director Gurbir Grewal delivered a keynote address at the Securities Enforcement Forum in Washington, D.C. reflecting on the Commission’s priorities in the last fiscal year. Director Grewal’s remarks focused on two areas in particular: the Commission’s (1) approach to deterring future violations of the federal securities laws; and (2) public acknowledgement of the benefits associated with cooperation. The Director’s remarks serve as a reminder of both the more aggressive nature of enforcement action by the Commission under the Biden Administration and the potential strategic benefits of getting ahead of an SEC investigation by identifying—and reporting—misconduct early.
Deterring Future Violations of the Federal Securities Laws
It is no surprise that one of the underlying goals of SEC enforcement action is to deter companies and individual from engaging in future violations of the federal securities laws. To that end, Director Grewal highlighted two aspects of the Commission’s enforcement practice aimed at deterrence: (1) the imposition of increased penalties and other remedies and (2) a more coordinated approach to the Commission’s investigation and charging of cases.
1. Pursing Significant Penalties and Other Remedies to Deter Misconduct
In the fiscal year that just ended, Director Grewal noted that the Commission imposed a record-breaking $4.2 billion in civil penalties for violations of the federal securities laws. Director Grewal remarked that the prospect of a penalty must be viewed by companies as more than the “cost of doing business,” but rather as a significant deterrent that incentivizes companies to recalibrate their policies and procedures to ensure compliance with the securities laws.
Increased penalties levied against individuals has also been a focus of the Commission. In addition to penalties, however, the Commission this year has invoked Section 304 of the Sarbanes Oxley Act (SOX) to “clawback” bonuses executives have received—even where the misconduct at issue is not attributable to the executives. Director Grewal’s remarks are consistent with a Commission press release from earlier this year wherein Grewal emphasized that the SEC is "committed to using SOX §304 as Congress intended: to incentivize a culture of compliance at public companies by ensuring that senior executives are not rewarded when their firms violate core reporting requirements. Executives should be on notice that we view SOX §304 as broad authority in seeking all forms of compensation that should be reimbursed to the company.”
Monetary penalties are not the only deterrent measure the Commission is employing. In numerous settled actions this year, the Commission has required violators of the securities laws to make admissions of wrongdoing, rather than settle on a no admit, no deny basis. Director Grewal stated that requiring admissions is an “incredibly powerful” tool that the Commission has deployed to deter future violations.
2. Proactively Investigating and Charging Cases in a Coordinated Manner to Deter Misconduct
Director Grewal also highlighted the Commission’s more coordinated approach to enforcement action in the last year. According to the Director, actions involving “sweeps” are generally more high profile and, in turn, have a more pronounced deterrent effect. Director Grewal cited the recent sweep of 16 Wall Street banks for recordkeeping failures that resulted in over $1.1 billion in penalties and the simultaneous actions brought against nine advisory firms for custody rule and Form ADV violations with combined penalties over $1 million as examples of this coordinated approach.
The Beneficial Effect of Proactive and Robust Cooperation
While Director Grewal touted the Commission’s enforcement efforts both in terms of record penalties and coordinated sweeps, the Director also made clear that companies that cooperate with the Commission can face reduced—or in some cases no—civil penalties resulting from an enforcement action. In his remarks, Director Grewal encouraged companies to self-police, self-report where misconduct is uncovered, cooperate and remediate, citing three examples where the Commission publicly credited cooperation efforts:
- SEC v. HeadSpin, Litigation Release No. 25320 (January 2022 settled fraud case resulting in no civil penalty where the Director noted in a press release that the company’s “remediation and cooperation included not just its internal investigation and revised valuation, but also repaying harmed investors and improving its governance—all of which were factors that counseled against the imposition of a penalty in this case.”)
- Matter of ProPetro Holding Corp., File No. 3-20661 (November 2021 settled fraud case resulting in no civil penalty where company’s “significant cooperation with the agency’s investigation as well as its extensive remedial efforts, which included hiring an entirely new management team with significant public company experience, hiring additional finance department personnel, installing several new directors, and developing new controls, policies, and procedures concerning perks” factored against the imposition of a penalty)
- Matter of Baxter International Inc., File No. 3-20781 (February 2022 settled fraud case involving substantial misreporting of net income over multi-year period. Though $18 million civil penalty imposed, the company’s “self-reporting and substantial cooperation in working with the staff in this complex investigation was an important consideration in assessing the appropriate sanctions for this case.").
Companies and individuals subject to regulatory oversight by the SEC must be mindful that the Commission’s more recent enforcement actions demonstrate a more aggressive posture both on the civil penalty front and the pursuit of other punitive remedies. Securing experienced outside counsel in the early stages of these investigations is crucial – not only to assist in the presentation of defense and narrowing of issues, but to negotiate the most favorable resolution as possible to minimize any penalties or other sanctions imposed.
The prophylactic hiring of counsel can serve companies well where misconduct is discovered before the SEC surfaces. In these instances, counsel can advise on an investigative plan and weigh whether a proactive approach with the SEC makes sense, potentially paving a path forward where the penalty for any misconduct uncovered is minimal—or avoided altogether.
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