SEC Head Details Tough Enforcement Line on Big Firms, Offering Lessons for Sophisticated Businesses of all Types

In a November 2, 2022 speech to the Practising Law Institute, a provider of legal educational programs, Gary Gensler, Chairman of the U.S. Securities and Exhange Commission (“SEC”), detailed his agency’s record of vigorous oversight and regulatory measures targeting a number of boldface corporate names.

As the SEC executes on its mission of overseeing markets, registering entities, enacting rules, examining for compliance and enforcing its regulations, such agency, Gensler contended, is mindful that the securities laws “are steps in a program to restore some old-fashioned standards of rectitude”.

In the realm of enforcement, the SEC filed more than 700 actions during the year ending on September 30, 2022, obtaining judgments and orders totaling $6.4 billion, including $4 billion in civil penalties.

In the speech, entitled “’This Law and Its Effective Administration’:  Remarks Before the Practicing Law Institute’s 54th Annual Institute on Securities Regulation”, Gensler took note of the SEC’s enforcement imperatives:  economic realities, accountability, high-impact cases, process and positions of trust.

Focus 1:  Economic Realities

As Gensler asserted, a business entity will not escape SEC scrutiny by simply not describing the products it offers to investors as securities.

Rather, the SEC looks “to [the] underlying economic realities [of an investment transaction] regardless of the ‘form’ or ‘name’ of the securities, funds or investors involved”.

In the wake of a corporation’s failure to register the offers and sales of a digital asset lending product and its making of materially false and misleading statements about them, the SEC responded with charges against it.

When a former crypto company manager and others allegedly misappropriated confidential information to purchase securities, the SEC contested such actions.

Similarly, if investment firms offer complex investment products and use such offerings to defraud investors, the SEC will take issue with that.

As Gensler noted in his address, “[i[f you defraud any investor—retail or institutional, sophisticated or not—you will be held accountable”.

Focus 2:  Accountability

In his speech, Gensler also highlighted the importance of corporate accountability.  The SEC possesses a variety of “tools to hold violators accountable—including bars and suspensions, penalties and disgorgements, injunctions and cease-and-desist orders, undertakings, admissions, criminal referrals and allegations or findings of fact”.

When corporate managers are responsible for wrongdoing, they can be penalized individually.  In a recent episode, the SEC “charged three senior executives of one firm, imposing injunctions on two and continuing to litigate against one.”  Meanwhile, their business entity was hit with a $1 billion fine.

The SEC, Gensler asserted, targets companies and executives who misstate or omit information material to securities investors, “whether in an earnings call, on social media or in a press release”.

Focus 3:  High-Impact Cases

With high-impact cases likely to send clear messages to the markets, they may play a decisive role in deterring market participants from engaging in securities law-related misconduct.

Recently, the SEC took action against a prominent banking institution for failing to maintain proper books and records, imposing a $125 million penalty against it.

Such record-keeping oversights and inattention proved to be widespread throughout the entire securities industry.  In connection therewith, the SEC “charged 16 additional financial entities for similar recordkeeping failures, all of whom admitted their misconduct, in a combined settlement of $1.1 billion”.

Focus 4:  Process

As it operates, the SEC is concerned about how it achieves its objectives, exhibiting fairness “to the market, to the public, to those who are investigated and to those who are wronged”.

Recent SEC initiatives, Gensler noted, have been assisted by the US Justice Department as well as various securities regulators at the state level.

Focus 5:  Positions of Trust

Professionals like securities attorneys and accounting professionals “play an essential role” in helping securities markets function properly.  When gatekeepers like these “breach their positions of trust and violate the securities laws,” the SEC will not hesitate to take action.

If a securities client is considering a course of action that might them too close to the line between what is and what is not permissible, it is the obligation of the professional advisor, Gensler noted, to keep them “back from the line.”