ENFORCEMENT—SEC signals tougher approach to investigations, enforcement remedies - 18 October 2021

The Enforcement Division will be resurrecting the policy of requiring admissions in the most egregious cases.

At this years Practising Law Institute’s SEC Speaks, top officials in the Division of Enforcement indicated that the staff will be taking a harder line in its approach to investigations and remedies sought. In addition to placing some restrictions on the Wells process such as the submission of white papers, the staff will also be seeking admissions in settlements for some of the more egregious cases, a policy which fell out of favor under the last chairman.

New era for remedies. Enforcement Director Gurbir S. Grewal, former New Jersey Attorney General who was appointed to the position in June, outlined a series of changes that the Division is implementing for the better protection of investors. One of the most significant changes is embracing the policy of requiring admissions from respondents in the most egregious cases, a policy which had fallen by the wayside under Chair Gary Gensler’s predecessor Jay Clayton.

Deputy Director Sanjay Wadhwa said that it is true that “neither-admit-nor-deny” settlements allow the Division to use its resources more effectively, including returning funds to harmed investors more quickly. However, obtaining admissions serves as an important tool in punishing and deterring certain forms of misconduct, he added. Among the circumstances that might lead the staff to seek admissions include cases involving egregious misconduct where the markets or large number of investors were harmed, where the bad actor engaged in behavior that obstructed the Commission’s processes, and in cases where admissions would greatly amplify the deterrent effect of the action, Wadhwa said. He advised that the front-line staff that is best positioned to determine whether a settlement should include admissions.

Grewal spoke of other remedies the staff will seek against wrongdoers. Officer-and-director bars may be imposed for the protection of investors. A respondent may be subject to such a bar even if he or she has never before served in those positions, he said. Instead, this decision will depend on whether the individual is likely to serve as an officer or director of a public company in the future, he explained.

In addition, the Commission may seek conduct-based injunctions, he said. These injunctions, which enjoin the defendant from engaging from specific conduct in the future, can encompass a wide variety of activities, including restrictions on stock trading, participating in securities offerings, and restricting the ability of lawyers to draft opinion letters. Requiring respondents to commit to specific undertakings will also continue, Grewal advised. In certain cases, the staff will require undertakings tailored to address the underlying violation and to effect future compliance, including limiting the functions or operations of the company or requiring the company to hire an independent compliance consultant that will make recommended changes to the company’s policies and procedures intended to avoid the charged misconduct in the future, according to Grewal.

Wells meetings. Grewal said that defendants can also expect some changes to the Wells process with a view towards making it more streamlined. For example, the deputy director will be present for Wells meetings that involve novel cases; however, more routine cases will involve the presence of front-line staff such as unit chiefs, he explained. While he and Deputy Director Wadhwa will still sit in on some Wells meetings, it should not be expected of every Wells meeting.

Wadhwa also discussed the Wells process, in particular the use of “white papers.” According to the deputy director, these papers have “taken on a life of their own” and sometimes defendants only make their Wells submission after finding that the staff was not moved by the arguments presented in these white papers. When counsel submits multiple and duplicative white papers, it wastes the staff’s time and resources, he admonished. Nearly all arguments made in the white papers also appear in the Wells submission, Wadhwa said, and do little to help advance the dialogue between the staff and counsel while taking up valuable time and resources and delay the staff’s recommendation to the Commission.

While in some cases, white papers may be valuable, but in most instances, this has not been the case. Instead, they have become the vehicle of choice for counsel to make their arguments to the staff while avoiding making a Wells notice, which may be a disclosable event to a client, Wadhwa noted. As part of drive to empower front-line staff to advance an investigation more swiftly, the senior staff will defer to the considered judgment of the front-line staff as to whether they want to issue a Wells notice or accept a white paper.

Wadhwa declared that when a Wells meeting is granted, the staff will want it to take place two weeks or less from the date of the Wells submission. Wadhwa acknowledged that it is a recurring problem where both sides encounter scheduling conflicts that invariably arise. According to Wadhwa, this involves an “easy fix” – if a Wells meeting is warranted, then counsel will be expected to agree to a date and time at such meeting at the time of the Wells decision. When the meeting does take place, he expects counsel to present arguments why an SEC enforcement action not justified. However, he warned that the staff will have already read counsel’s submissions closely. The staff will have questions, so be prepared for rigorous debate on the facts and violations at issue. In addition to telling the staff about what counsel perceives as litigation risks to the SEC at trial, counsel must also be familiar with factors that favor the SEC, he advised.

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