(Article from Registered Funds Regulatory Update, October 2022)
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On July 21, 2022, Gurbir Grewal, Director of the SEC’s Division of Enforcement, provided testimony signaling the Division’s upcoming priorities before the House Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets.
Grewal began by reporting that in fiscal year 2021, the SEC filed 434 enforcement actions, a seven percent increase over the previous year and the SEC’s whistleblower program had a record-breaking year with 108 whistleblowers earning $564 million during the fiscal year, compared to 39 whistleblowers in the previous year. During fiscal year 2021, the Division also had approximately 1,500 open investigations, approximately 2,000 pending civil litigations and approximately 1,200 pending administrative proceedings. Grewal testified that his aim is to restore the public’s trust in the financial markets through robust enforcement, robust remedies and robust compliance.
Robust Enforcement
Grewal testified that the Division is taking proactive steps to police new areas of importance for investors, as well as the “continually evolving risks,” including in crypto assets and cybersecurity, noting that the SEC brought a number of notable new enforcement actions over the past year and announced the addition of 20 new positions to its Crypto Assets and Cyber Unit. The expanded Unit will be responsible for investigating crypto asset offerings, exchanges, broker-dealers and lending and staking products; decentralized finance platforms; non-fungible tokens (NFTs); and stablecoins. He also discussed the focus on gatekeeper accountability, citing recent charges against Ernst & Young LLP alleging that a significant number of its audit professionals cheated on exams required for their accounting licenses.
Robust Remedies
Grewal testified that the Division seeks to impose remedies that deter wrongdoers from violating the securities laws rather than just punishing them. Grewal explained that in making penalty recommendations, the Division assesses whether prior penalties in comparable cases were sufficient to appropriately deter the wrongful activity and where it was not, it will seek heightened penalties both in settlement negotiations and, if necessary, in litigation. The Division will also seek heightened penalties for recidivists where the prior penalties did not have the intended deterrent effect. According to Grewal, prophylactic relief (e.g., officer and director bars) is also an important remedy for the Division because it is designed to prevent a wrongdoer from engaging in future misconduct and serves as a core gatekeeper role in the securities markets. Grewal then confirmed that the
Division will continue to primarily seek no-admit-no-deny settlements but will seek admissions of wrongdoing to provide greater clarity of the particular facts of the violations or send a strong message to the industry.
Robust Compliance
Grewal testified that firms should not rely on “check-the-box” compliance policies but instead should develop bespoke policies and procedures specifically tailored to their individual businesses and the associated risks. Moreover, firms need to ensure that they appropriately address “red flags” and disclosure is accurate and timely.
Gurbir S. Grewal, SEC Division of Enforcement Director, “Testimony on “Oversight of the SEC’s Division of Enforcement” Before the United States House of Representatives Committee on Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets” (July 21, 2022), available at: https://www.sec.gov/news/statement/grewal-statement-house-testimony-071922.