The new head of the Securities and Exchange Commission’s (SEC) Enforcement Division said it will be a priority under his tenure for companies to accept responsibility for wrongdoing in certain cases of public interest.

Gurbir Grewal at the SEC Speaks virtual forum Wednesday said the agency will press more violators of securities laws to own up to their failings. He pledged the SEC will also seek to punish individual officers and executives who either perpetuate violations or seek to cover them up, as well as gatekeepers (lawyers, accountants, and more) who enable such behavior.

Is there any more common boilerplate language in settlements between the SEC and a securities law violator than this phrase: “Without admitting or denying the SEC’s findings, (the company) agreed to cease and desist from violations of (the rule) …”

Grewal said the SEC will re-emphasize corporate accountability by pressing companies to admit guilt as part of settlement actions.

“When it comes to accountability, few things rival the magnitude of wrongdoers admitting that they broke the law, and so, in an era of diminished trust, we will, in appropriate circumstances, be requiring admissions in cases where heightened accountability and acceptance of responsibility are in the public interest,” he said in his remarks. “Admissions, given their attention-getting nature, also serve as a clarion call to other market participants to stamp out and self-report the misconduct to the extent it is occurring in their firm.”

“Encouraging your clients to play in the grey areas or walk right up to the line creates significant risk. It’s when companies start testing those lines that problems emerge and rules are broken.”

Gurbir Grewal, Director, SEC Enforcement Division

David Slovick, partner with law firm Barnes & Thornburg, said nothing in Grewal’s comments strayed too far from the pronouncements of previous SEC enforcement heads. Securities laws haven’t changed, nor have the tools available to punish violators. Most SEC settlements allow firms to deny charges while paying a fine and taking other steps to make investors whole and prevent future transgressions.

“Missing from Mr. Grewal’s remarks is a new plan for discovering and discouraging this behavior,” said Slovick, who laid out two sound reasons why firms are reluctant to admit to violations.

“For one, admissions of liability in SEC enforcement actions raise the likelihood of cascading, follow-on private lawsuits,” he said. “Private litigation is notoriously expensive, and if a company is guaranteed to incur exorbitant litigation costs, they are strongly incentivized not to settle with the SEC.

“Which leads directly to the second reason why, I suspect, the so-called admissions policy petered out the first time the SEC tried it: requiring admissions in SEC settlements inevitably causes more respondents to litigate their liability, which puts an intolerable strain on the SEC’s enforcement resources.”

Ken Herzinger, a former SEC attorney and now a partner at law firm Paul Hastings, agreed the move to demand firms admit guilt as part of settlements could backfire, leading to more trials and fewer successful enforcement actions.

“Such an admission would cause significant reputational damage to companies and individuals and have severe collateral consequences under the SEC’s bad actor rules and in follow-on litigation,” Herzinger said.

Grewal also pledged to bar officers at companies found to have violated securities laws from serving in a similar role with other companies, as well as issuing injunctions that “can apply to a wide variety of areas, including restrictions on stock trading and participating in securities offerings.”

For gatekeepers like lawyers and accountants, Grewal pledged holding them accountable “will remain a significant focus for the Enforcement Division.”

“Encouraging your clients to play in the grey areas or walk right up to the line creates significant risk. It’s when companies start testing those lines that problems emerge and rules are broken,” he said. “And even if that’s not the case, the public loses faith in institutions that appear to be trying to get away with as much as they can.”

One thing that did strike Slovick as new was Grewal’s announcement he and the deputy director of enforcement will no longer sit in on most Wells Notice meetings. Instead, Grewal said he will “trust and empower” SEC staffers like the associate director or unit manager to run those meetings.

“[W]hen we do take a Wells meeting, there are certain things that will make those meetings more productive and efficient for everyone,” Grewal said.

Speaking from experience, Slovick said many Wells meetings “aren’t a good use of anyone’s time,” but that in the marginal case they can make all the difference. Having a senior SEC officer at the meetings serves as a counterbalance to lower-level enforcement staff who may have become emotionally invested in a case, he said.

“Line staff can also fall in love with their investigations and lose sight of the equities of a given dispute,” he said. “Having senior enforcement staff—who have much less invested in the day-to-day conduct of an investigation—present at Wells meetings is a necessary check on the SEC’s considerable power.”