SEC Acting Enforcement Chief Speaks on Protecting Investors and Promoting Compliance

I’d like to take the opportunity today to reflect on some of the goals and intentions that then-Director Gurbir Grewal and I, as his deputy, discussed when we assumed leadership of this remarkable Division three-plus years ago, and what I hope to see for the Division and its dedicated personnel going forward. As is customary, my remarks are in my official capacity as Acting Director of the SEC’s Division of Enforcement, and do not necessarily reflect the views of the Commission, the Commissioners, or other members of the staff.

Since 2021, Gurbir and I frequently discussed, including at conferences like this one, that we would prioritize restoring investor trust and confidence in the financial markets by emphasizing robust enforcement that works to promote a culture of compliance among market participants.[1]

We explained that this included empowering frontline Enforcement staff by largely deferring to their judgment on various issues in our investigations and our recommendations to the Commission.[2] We explained that we would do this because Enforcement staff (i) are immensely talented and possess great experience and judgment and (ii) are in the best position to know the ins-and-outs of their investigations, the quality of their evidence, and the tenor and substance of interactions with defense counsel.

We have done that. And I think the work of the Division over the past three-plus years has shown that our confidence in our Enforcement colleagues was well-placed. Enforcement staff have used their judgment wisely and appropriately, conducting investigations diligently, but with urgency, and without fear or favor, following the facts where they may lead, to protect investors across the industry. That is, after all, our mission, and this Commission and its Enforcement staff have endeavored to fulfill it on a daily basis.

This has resulted in consequential enforcement actions addressing material misstatements by public companies,[3] wholesale failures by gatekeepers to comply with their professional obligations,[4] and failures by advisory firms to disclose and guard against conflicts of interest.[5]It has resulted in actions alleging that insiders abused their position for personal gain.[6] And, of course, it has resulted in actions alleging massive frauds by various types of market participants.[7]

Those enforcement actions have protected innumerable investors, both by putting an end to the specific conduct at issue, but also by deterring other market participants who saw the Commission act forcefully and, in response, remediated their own violations or redoubled their efforts at compliance.

Now, when Gurbir and I discussed our efforts to empower frontline Enforcement staff, there were some concerns in the defense bar that this would result in staff adopting unreasonable stances, or that good-faith efforts by market participants to comply would be disregarded.

From my perspective, those concerns were misplaced.

For one, Enforcement attorneys understand and appreciate the tremendous impact that an SEC investigation can have on parties that may find themselves in our crosshairs. Accordingly, giving process is part of the DNA of the Enforcement Division. For example, the Wells process remains a meaningful process for parties to make their arguments to the Enforcement Division, even without the Front Office participating in every meeting. As defense counsel that work with us regularly can attest, these meetings at times result in staff recommending reduced charges or even declining to recommend charges at all.

The empowerment of Enforcement staff involved both carrots and sticks. Not only did we say we would largely defer to their judgment on charges, but more importantly, we told them to use their judgment in recommending that the Commission reward parties that self-policed, self-reported, remediated, or otherwise meaningfully cooperated with our investigations.

Time and again, staff embraced our call on this point and asked Gurbir and me to consider those efforts by prospective defendants and respondents, and we, in turn, agreed to recommend resolutions to the Commission that imposed reduced penalties or even zero penalties.[8] Or, where parties have remediated the violations, we have taken that into account in determining what, if any, undertakings or other remedies to recommend.

This has even included actions involving recidivists and major firms.[9] And it illustrates exactly what we mean by emphasizing robust enforcement while working to create or promote a culture of compliance among market participants. Because only by working together can we – that is, the regulator and the regulated – maintain investors’ trust in the markets.

Now, you may ask yourself, given the proactive remediation I just mentioned, why then do we need an Enforcement Division? Let me be clear. In my view, this is – indeed, it has to be – a joint undertaking where internal or in-house compliance complements the Commission’s enforcement efforts.

This is because self-regulation is not a substitute for regulatory enforcement. No matter how much we promote a culture of compliance; or message the benefits of self-policing, self-reporting, and proactive remediation; or even appeal to market participants’ better nature, there will always be those who cut corners, those who choose non-compliance, either deliberately or by underinvesting in their compliance functions. The incentives are simply too great without a strong Enforcement Division holding such parties in check.

After all, compliance has costs. There are the actual resources needed to implement effective compliance functions. And there are also the opportunity costs that may come from accurate disclosures, for example when disappointing financial figures drive investors elsewhere.

But one need only look at the state of the securities market before the enactment of the Securities Act of 1933 and the Securities Exchange Act of 1934 for a sense of what happens when market participants are restrained only by their own judgment.[10]

The marketplace therefore needs an Enforcement Division that is strong and that brings meaningful enforcement actions, actions that correct misbehavior before it spirals out of control and destroys investor wealth and investor confidence in the markets.

In fact, we have telegraphed in clear terms that one of the ways we achieve compliance is by reversing the incentives, by imposing penalties and other remedies that make it clear to market participants that complying with the securities laws is cheaper than violating those laws.[11] Certainly, I am sure that it is not lost on anyone that the increased self-reporting and other cooperation that we have been highlighting has come during a time of record civil penalties. Those record penalties help incentivize companies to adequately invest in their compliance departments and empower their compliance personnel, which in turn protects investors and the markets.

Ultimately, of course, protecting investors and promoting the integrity of the markets is what drives us all in the Division of Enforcement, and that should be a shared goal among all of us here. Securities law violations, whether they involve negligence, so-called “technical violations,” or deliberate intent to defraud, erode the integrity of the markets and undermine investor trust in our capital markets.

It is therefore crucial that the Division of Enforcement have the ability to enforce compliance across the industry, addressing investor risk wherever and in whatever context it arises. Whether involving major global companies, small firms, or executive or senior officers.

It is my hope that, going forward, we will continue to see respect for the investigative process and for the judgment of the professionals in the Division of Enforcement; that the Division will continue to operate as an effective watchman, ensuring that all market participants, across the industry, comply with their legal and regulatory obligations.

The stakes are just too high for it to be otherwise. The continued success of our capital markets, which are the envy of the world and the engine of economic activity, depends on it. And, the trust of the average investor turns on it.

Over the last three-plus years, the work of the Division, its staff, and the many market participants that have heeded our call to embrace our shared mission of protecting investors, has been a great source of pride for me, and I hope we can continue to build on that effort going forward.

ENDNOTES

[1] See, e.g., Gurbir S. Grewal, Dir., Div. of Enforcement, U.S. Sec. & Exch. Comm’n, Remarks at SEC Speaks 2021 (Oct. 13, 2021), available at https://www.sec.gov/newsroom/speeches-statements/grewal-sec-speaks-101321; Gurbir S. Grewal, Dir., Div. of Enforcement, U.S. Sec. & Exch. Comm’n, Remarks at PLI Broker/Dealer Regulation and Enforcement 2021 (Oct. 6, 2021), available at https://www.sec.gov/newsroom/speeches-statements/grewal-pli-broker-dealer-regulation-enforcement-100621; Gurbir S. Grewal, Dir., Div. of Enforcement, U.S. Sec. & Exch. Comm’n, Remarks at Securities Enforcement Forum West 2022 (May 12, 2022), available at https://www.sec.gov/newsroom/speeches-statements/grewal-remarks-securities-enforcement-forum-west-051222.