SEC: Enforcement efforts still extend beyond coronavirus

Steven Peikin, co-director of the SEC’s Enforcement Division, provided a look into the agency’s enforcement priorities during a keynote address at the Securities Enforcement Forum West 2020 on Tuesday. While the bulk of his speech focused on the actions of the SEC’s Coronavirus Steering Committee created in late March, Peikin’s wider message for the ethics and compliance community can be summed up as follows: The Enforcement Division is still continuing full steam ahead with its non-coronavirus enforcement efforts.

“Since the onset of the crisis, Division staff have been engaged in virtually every facet of our work—from opening new cases, to taking remote testimony, to having Wells meetings, to filing litigated and settled actions, and even conducting jury trials,” Peikin said. “… If we in the Division of Enforcement are to continue to fulfill our important responsibilities, we cannot effectively shut down our program by agreeing to a blanket hiatus in investigations or litigation.”

Toward the beginning of the pandemic, when the United States was forced to react to a myriad of issues, including many affecting the public markets, SEC Commissioner Allison Herren Lee suggested that the agency “should proceed with great caution in considering whether to take regulatory action outside of that called for by the current dire and pressing public health crisis.” Around that time, the SEC issued multiple forms of guidance and offered relief in some areas, but at no point has it stopped its usual enforcement duties.

In fact, the Enforcement Division has had to deal with increased volume on the investigative front. Since mid-March, Division staff has triaged more than 4,000 tips, complaints, and referrals, a 35 percent increase over the same period last year, Peikin said. In that same period, it has opened hundreds of new investigations, many related to COVID-19, but many in other traditional areas.

Tasked with addressing pandemic-related coordination is the Coronavirus Steering Committee, which was formed by Peikin and fellow Co-Director Stephanie Avakian and is comprised of approximately two dozen leaders from across the Division. Peikin said the committee’s mandate is to proactively identify and monitor areas of potential misconduct; ensure appropriate allocation of resources; avoid duplication of efforts; coordinate responses as appropriate with other state and federal agencies; and ensure consistency in the manner in which Division staff address coronavirus-related matters.

In his remarks, Peikin discussed a handful of specific areas of coronavirus enforcement focus:

Microcap fraud. The committee is coordinating with the Division’s Microcap Fraud Task Force and Office of Market Intelligence to “rapidly gather and analyze market intelligence in the microcap space and to quickly triage matters for potential trading suspensions or enforcement actions,” Peikin said.

Insider trading and market manipulation. The dynamic and volatile markets caused by COVID-19 “provide increased opportunities for insider trading and market manipulation,” Peikin added. “To detect such misconduct, the Steering Committee is working with the Division’s Market Abuse Unit to monitor trading activity around announcements made by issuers in industries particularly impacted by COVID-19 and to identify other suspicious market movements for possible manipulation.”

Financial statement and issuer disclosure frauds. “Recognizing that the economic impacts of any downturn may vary across different industries and sectors, the Steering Committee has developed a systematic process to review public filings from issuers in highly impacted industries, with a focus on identifying disclosures that appear to be significantly out of step with others in the same industry,” Peikin said. “We are also looking for disclosures, impairments, or valuations that may attempt to disguise previously undisclosed problems or weaknesses as coronavirus-related.”

Misconduct affecting regulated entities and individuals. In conjunction with the Division’s Asset Management Unit, the committee is monitoring the investment adviser and investment company space “for failures to honor redemption requests at both private funds and registered investment companies, which could indicate an underlying issue,” Peikin said. “The Steering Committee is working with our Complex Financial Instruments Unit to monitor the impact of the crisis on the performance of complex structured products and to identify possible improper marketing and sale of such products to retail investors.”

Peikin affirmed coronavirus-related matters remain a “top priority” for the Division and the Commission. He noted staff has been directed to work with counsel and others to reach reasonable accommodations wherever possible. That said, Peikin added, “Our other priorities also remain in place, and our many hundreds of investigations and litigations remain ongoing.”