A new presidential administration and the change of party affiliation in the White House portend a shift in leadership at the Securities and Exchange Commission—and careful consideration as to what new tone, direction, and priorities the SEC’s Division of Enforcement will take in 2021 and beyond can help you reduce compliance risk.
The first big change will come with replacing current SEC Chairman Jay Clayton, who will step down at the end of 2020. Because the agency’s direction is driven in no small part by the chair, motivations and initiatives can change dramatically with any new administration. “Selection of the new SEC chair, whether from inside the agency or outside, will signal much in terms of the likely approach,” says Ashley Ebersole, a partner at law firm Bryan Cave Leighton Paisner and a former SEC attorney.
“Compliance officers at financial entities should be prepared for a continued SEC enforcement focus on pursuing fraud involving Main Street investors, but also a likely redoubling of efforts to sanction conduct by financial institutions.”
Ashley Ebersole, partner at Bryan Cave Leighton Paisner and former SEC attorney
Equally important for compliance and legal professionals to watch closely is who comes on board as the new head of the Enforcement Division itself, whether current Director Stephanie Avakian steps down or a new codirector steps in. “That can be just as telling as who the new chair is,” says John Berry, a partner at the law firm Munger, Tolles & Olson.
Focus on Main Street investors
Several former SEC attorneys tell Compliance Week what is not likely to change is the agency’s enforcement focus on protecting “Main Street” retail investors, which has been a priority championed by Clayton since the start of his tenure. A key part of that initiative has been the Retail Strategy Task Force (RSTF), established in September 2017.
One primary objective of the RSTF, the SEC has stated, is “to develop data-driven, analytical strategies for identifying practices in the securities markets that harm retail investors and generating enforcement matters in these areas.” SEC enforcement activity supports that: In fiscal year 2018, over half of the 490 standalone enforcement actions brought by the SEC involved wrongdoing against retail investors. That pace continued in FY2019, with enforcement actions against registered investment advisors and investment companies making up the biggest chunk (36 percent) of the 526 standalone actions that year.
The latest enforcement numbers are just as telling. According to the Enforcement Division’s 2020 annual report, released Nov. 2, three areas drove most of the agency’s 405 standalone actions in FY2020: securities offerings (32 percent); investment advisory issues (21 percent); and issuer reporting/accounting and auditing matters (15 percent).
Another key aspect of the SEC’s laser-like focus on Main Street investors that’s likely to stay, at least over the next year or two, is the Regulation Best Interest (Reg BI) rule. Intended to enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers, Reg BI at its core requires broker-dealers “to act in the best interest of a retail customer” when making a recommendation of any securities transaction or investment strategy. “We may see more active enforcement of investor protections of that type in the investment advisor context,” Ebersole says.
Renewed enforcement areas
Aside from the SEC’s focus on schemes targeting Main Street investors, a resurgence in inspections and enforcement activity in areas that took a back seat under the Trump administration is also likely. “Under the Obama administration, there was an emphasis on investigating publicly traded companies and large Wall Street firms. There was a move away from that under the Trump administration,” says Michael Himmel, a partner at law firm Lowenstein Sandler. “I suspect under [President-Elect Joe Biden] there will be a move back toward that.”
“Compliance officers at financial entities should be prepared for a continued SEC enforcement focus on pursuing fraud involving Main Street investors, but also a likely redoubling of efforts to sanction conduct by financial institutions,” Ebersole says.
At a high level, many legal experts foresee a return to the “Broken Windows” enforcement strategy that was championed under Clayton’s predecessor, Mary Jo White, who believed in pursuing even the most minor cases to send a message that no securities violations will tolerated.
Under a Biden administration, “that means more cases involving insider trading, more cases against regulated entities such as brokers and asset managers, higher penalties against public companies and others, and a willingness to bring cases in which the evidence is less compelling,” says Nick Morgan, a partner with Paul Hastings.
Compliance officers and in-house counsel should also be prepared for an uptick in Foreign Corrupt Practices Act (FCPA) enforcement activity, which represented just 2 percent of cases in FY2020. “I expect under the Biden administration there will be more robust enforcement of FCPA violations and probably a resurgence in the number of newly instituted FCPA cases,” says Ann Kim, a former assistant U.S. attorney and now a partner at Hogan Lovells.
The coronavirus pandemic also will continue to have an impact on enforcement. Bill Martin, former senior counsel in the SEC’s Market Abuse Unit and now counsel at O’Melveny, says he expects to see “aggressive investigations into alleged market manipulation and insider trading, especially where the SEC believes such conduct may have contributed to market volatility during the pandemic.”
The SEC has made this priority clear. “In March and April alone, the Commission suspended trading in the securities of two dozen issuers where there were questions regarding the accuracy and adequacy of information related to COVID-19 that those issuers injected into the marketplace, including claims about potential COVID-19 treatments, the manufacture and sale of personal protection equipment, and disaster-response capabilities,” Avakian said in the annual enforcement report.
If numbers are any indication, more COVID-19-related actions are in the pipeline. “From mid-March through the end of the fiscal year, the Division’s Office of Market Intelligence triaged approximately 16,000 tips, complaints, and referrals—a roughly 71 percent increase over the same time period last year—and the Division opened more than 150 COVID-related inquiries and investigations and recommended several COVID-related fraud actions to the Commission,” according to the report.
While the Enforcement Division’s priorities may change, enforcement numbers alone likely will remain steady. “It’s not as if there was a fundamental shift going from a Democratic administration to a Republican administration when President Trump took over from Obama in terms of SEC enforcement,” Berry says. “Because Clayton didn’t shy away from enforcement, I don’t think you’re going to see that much of a difference in terms of enforcement activity under a Biden administration.”
It’s also notable how much the Enforcement Division has achieved even amid the sudden and unanticipated challenges of a pandemic. “COVID-19 made Fiscal Year 2020 the most challenging year in recent memory,” Avakian said. “But the Division demonstrated its agility and its commitment to the SEC’s mission as it moved quickly to address the ongoing crisis.”
Summing up 2020 as “a year of contrasts,” Avakian said, “while the number of cases the Commission filed was down as compared to last year, the financial remedies ordered set a new high.” Specifically, the Commission obtained judgments and orders totaling $4.6 billion—$1 billion in penalties and $3.6 billion in disgorgement.
Record whistleblower awards
In addition, FY2020 was a banner year for the SEC’s Whistleblower Program, which issued a record $175 million in awards to 39 individuals, accounting for roughly 37 percent of the total number of awards over the life of the program. “I think the public announcements about the dollar figure of the awards will continue to … incentivize those who have inside information to come forward and make reports to the SEC,” Kim says.
Most of the 23,650 tips, complaints, and referrals (TCRs) the Commission received in FY2020 came at the height of the pandemic and marked a substantial increase over the 16,850 TCRs received in FY2019. This also led to 1,181 new inquiries and investigations in FY2020, compared to 1,082 in FY2019. “We believe this work has created a strong pipeline for future enforcement actions,” Avakian said.
In practice, this means it’s more important than ever for compliance officers to “mak[e] sure they stay on top of whistleblower complaints,” and that “individuals feel they’re being heard when making internal complaints, which may make it less likely that they report externally to the SEC,” says Jina Choi, a partner at Morrison & Foerster.
There are many uncertainties that still need to be ironed out. “The possibility of a Senate not controlled by the president-elect’s party may delay the confirmation of a new SEC chair and create increased oversight over the eventual chair,” says Stephen Cohen, former associate director in the Enforcement Division and now a partner at Sidley Austin. “Further, budget uncertainty heading into 2021 may also affect the SEC’s enforcement program. In short, a new SEC enforcement agenda may not come fully into focus until months after the new administration begins.”
Editor’s note: This story was updated Nov. 16 to reflect the announcement SEC Chairman Jay Clayton will step down at the end of 2020.