SEC cases rise again in fiscal 2023

Penalties top $5bn, Grewal seeks 'three Es.'

The Securities and Exchange Commission filed more than 780 enforcement actions in fiscal 2023, including more than 500 standalone cases netting $5 billion in judgments and orders, Commission Chairman Gary Gensler said October 25.

“We use all of the tools in our toolkit to hold bad actors accountable – including bars, penalties, injunctions, undertakings and litigating where appropriate,” the chairman told the annual Securities Enforcement Forum in Washington, DC. “Accountability starts with a robust set of allegations or findings of fact. The public benefits and justice benefits. The allegations and findings of fact convey to market participants – many of them, your clients – what about the action crosses the line. While the press often reports on the monetary remedies, accountability also is about the undertakings or the commitments of firms to update their procedures or retain independent compliance officers.”

In fiscal 2022, the SEC brought 760 enforcement actions. That, in turn, was a 9 percent increase over the previous year. As stark as the figures may seem, Gensler said it could be worse for the financial services industry.

“Across numerous actions last fiscal year, the Commission ordered zero or reduced penalties based on the respondents’ co-operation,” he said. “Keep these actions in mind as you in the audience advise clients on the benefits of self-reporting and co-operation.”

‘More than showing up’

It’s not just co-operation, Gensler said. It’s “meaningful co-operation.” “I’m talking about more than showing up for testimony or producing documents under subpoena. It means going above and beyond to self-report, co-operate and remediate.”

Gensler dedicated a fair bit of his speech to condemn crypto, an industry he has repeatedly claimed is rife with fraud.

“As I’ve previously said, without prejudging any one asset, the vast majority of crypto assets likely meet the investment contract test, making them subject to the securities laws,” he said. “Further, it follows that most crypto intermediaries – transacting in these crypto asset securities – are subject to the securities laws as well. With wide-ranging non-compliance, frankly, it’s not surprising that we’ve seen many problems in these markets.”

Books-and-records violations

Gurbir Grewal, SEC

Gensler also defended his agency’s crackdown on books and records violations. Since December 2021, regulators have brought 40 such cases against firms – 23 of them in fiscal 2023 alone – netting more than $1.5 billion in penalties and obtaining “significant undertakings” from firms, Gensler said.

“Since the 1930s, recordkeeping obligations have been vital to market integrity and the SEC’s oversight. At a fundamental level, failures in recordkeeping – like those involving off-channel communications – obstruct such market integrity,” the chairman said. “Our actions uncovered not only the widespread use of personal devices and non-official channels to discuss business, but a complete failure of financial firms to maintain or preserve those off-channel communications.”

The ‘three Es’

Gensler’s speech comes a day after SEC Enforcement Division chief, Gurbir Grewal, told a separate audience of compliance officers that “a culture of proactive compliance” comes down to “three things: education, engagement and execution.”

“First, it requires you to educate yourselves about the law and external developments relevant to your business, particularly emerging and heightened risk areas,” suggested Gensler.

When the Commission recommends a new enforcement action, it puts a lot of thought into making sure that charging documents, whether settled or litigated, clearly telegraph the basis of the misconduct to industry participants, noted Grewal.

Engage with personnel

Engagement, Grewal said, “requires you to really engage with personnel inside your company’s different business units and to learn about their activities, strategies, risks, financial incentives, counterparties, and sources of revenues and profits.”

“You may come across aspects of your firm’s business that you do not completely understand,” Grewal said. “That’s not an excuse to punt. Take whatever steps are necessary to learn and understand the issues. Those of you who work in the compliance function are leaders inside your organization and through proactive internal engagement you will be better prepared to discharge your duties. This understanding is critical to designing and adopting meaningful policies and procedures.”

Enforce P&Ps

Execution also means it’s no longer enough to have well-written policies, Grewal said. Firms must enforce them, too.

“Time and again, we see firms that have good policies, but fall short on implementation,” he said. “Our ongoing off-channel communications sweep to ensure that regulated entities, including broker-dealers and investment advisers, comply with their recordkeeping requirements is a good example.”