Comments at SEC Speaks Signal Significant Policy Changes

Adam Hakki, Mark Lanpher, and Philip Urofsky are partners at Shearman & Sterling LLP. This post is based on a Shearman memorandum by Mr. Hakki, Mr. Lanpher, Mr. Urofsky, and Adam Schwartz.

On October 13, 2021, SEC Enforcement Director Gurbir Grewal and Deputy Enforcement Director Sanjay Wadhwa appeared at the Practicing Law Institute’s “The SEC Speaks” conference, an annual conference where Commission leaders provide updates on current initiatives and priorities of the Commission for the coming year. Director Grewal and Deputy Director Wadhwa’s remarks signaled some potentially significant policy changes, particularly in terms of how they will measure corporate compliance programs and cooperation levels, when the SEC will allow settling defendants to “neither admit nor deny” the allegations brought by the SEC, and the overall autonomy granted to the front-line enforcement staff. While the impact of any such policy change is uncertain, and will need to be assessed over time, it is an unmistakable shift in tone from the prior administration.

First, in addressing areas of corporate responsibility, Director Grewal stressed the need for companies to maintain and enforce robust compliance controls in the area of required disclosures, use of nonpublic information, record-keeping obligations, and transparency with Commission staff and other government agencies. While none of this is “new,” Director Grewal signaled that the Enforcement Division would increase activity in this area to ensure compliance. As just one example, he noted that “if we learn that, while litigation is anticipated or pending, corporations or individuals have not followed the rules and maintained required communications, have ignored subpoenas or litigation hold notices, or have deliberately used the sort of ephemeral technology that allows messages to disappear, we may well conclude that spoliation of evidence has occurred and ask the court for adverse inferences or other appropriate relief.”

These statements build upon a speech Director Grewal gave two weeks ago highlighting the need for broker-dealers to engage in “proactive compliance” and focusing again on the need to maintain business records even when held on personal devices, and also on a widely-reported industry sweep that the SEC’s Enforcement Division has launched into the manner in which banks have complied with such obligations. In that speech, Director Grewal referenced an enforcement action brought last year against a California broker-dealer for failing to preserve business-related text messages and stated that: “These messages were potentially responsive to a records request SEC staff made to the firm in an unrelated investigation and the firm’s failure to retain and produce them directly impacted that investigation.” He explained his view that “[Broker-dealers] need to be actively thinking about and addressing the many compliance issues raised by the increased use of personal devices, new communications channels, and other technological developments like ephemeral apps.” And since it was reported this week that the SEC contacted several banks to conduct an industry “sweep” into how banks keep track of their employees’ digital communications and, in particular, whether they have been adequately documenting employees’ work-related communications, it is evident that the Enforcement Division is not going to be passive in this area—it will itself proactively investigate to ensure compliance.

Second, Director Grewal and Deputy Director Wadhwa both signaled that the Commission intends to revert to its former practice of requiring defendants to admit wrongdoing in certain cases, a practice that seemed to have fallen out of favor in recent years, though the precise manner in which this policy will be applied remains to be seen. Director Grewal said that “[w]hen 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.” At the same time, neither he nor Deputy Director Wadhwa articulated clear guidelines as to what those “appropriate circumstances” will be, suggesting that the policy may incorporate significant subjectivity.

For decades, the SEC has incentivized companies and individuals to settle civil enforcement actions by allowing them to enter into consent agreements on a “neither admit nor deny” basis. In 2013, when Mary Jo White was Chair of the SEC during the Obama Administration, the SEC announced that, contrary to this long-standing practice, it would require defendants to admit to facts in appropriate cases. In most cases, though, defendants were only required to admit facts where they had already done so in DOJ criminal enforcement cases (the DOJ has always required an admission of facts as part of plea agreements and alternative resolutions such as deferred and non-prosecution agreements). Thus, the 2013 policy had little practical effect and was effectively abandoned in the Trump Administration under Chair Jay Clayton.

But Deputy Director Wadhwa explained that the SEC will now focus on three specific factors, (1) whether the wrongdoing was “egregious,” (2) whether the company obstructed the SEC probe, and (3) whether admission would greatly amplify the deterrent effect of the SEC’s enforcement action. Of course, this begs the question of how these standards will be applied, and perhaps most significantly, Wadhwa indicated that the decision of whether to require an admission would be primarily vested in line attorneys rather than the front office of the Enforcement Division, at least in the first instance. To be sure, we expect that the front office would seek to ensure some degree of consistency across matters, but going forward, the Division Staff most invested in the case will be tasked first with determining whether the violation is “egregious,” whether a company’s cooperation was sufficient or “obstructive,” and whether admission would further deterrence (something that would likely often be the case).

Third, and somewhat relatedly, Director Grewal signaled that in an effort to “empower SEC Staff,” the front-line enforcement staff will take on a more significant role in the Wells meetings, potentially lessening the significance of those meetings. He explained that while the Enforcement Director or Deputy Director will still directly participate in cases that present novel legal or factual questions or raise significant programmatic issues, they will no longer participate by default. In cases that do not present such issues, the Associate Director or Unit Chief will conduct the meetings. Of course, this begs the question of what cases will be deemed to present “novel legal or factual questions” and who will make that determination. Presumably, it will be the front-line staff, meaning that it may become harder to challenge determinations made by line attorneys and their immediate supervisors through the Wells process.

It is too soon to tell how any of these new policies will be applied. It is clear, however, that the new SEC Enforcement leads are trying to push for ever-greater cooperation and ever-greater accountability, and that this administration is going to be far more aggressive than the last.

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