The SEC’s Division of Enforcement: An Update on Inner Workings and Recent Cases and News

Understanding how the SEC’s Division of Enforcement operates and knowing what is on its agenda is important for anyone involved in public companies or our capital markets. In this presentation, Rebecca Fike shared her insights gleaned over her decade in the Division of Enforcement into the SEC’s structure and inner workings. She highlighted the most recent Commission activity, everything from the fiscal results of the Division of Enforcement to the Commissioner’s remarks, and the implications for corporate clients and those who advise them.

More than 400 guests registered to hear Rebecca speak. As a lawyer who spent ten years in the Division before returning as a partner at V&E, Rebecca is eminently qualified to cover the topic. Moreover, with both law firm experience and her work at the SEC, she is well-equipped to lend her perspective on what corporate clients need to know.

Rebecca opened the session by discussing the intricacies of the SEC, including its 25 offices, 11 regional offices and six divisions, and their role within the Commission. She kicked off the discussion by discussing the Division of Corporate Finance, whose mission in part is to ensure that investors are provided with material information to make informed investment decisions, and the Division of Economic Risk Analysis, which integrates data analytics into the core of the SEC.

She then discussed how the Division of Enforcement receives its cases and how an action begins. According to Rebecca, there are a number of ways that a matter is brought forward.

The TCR system, which stands for Tips, Complaints and Referrals, is one route. Today, there is a portal and questionnaire on the SEC’s webpage where anyone in the community who suspects wrongdoing can submit a tip, whether an investor or a company employee.

The SEC’s Office of the Whistleblower is a separate entity where individuals or groups can make submissions through the whistleblower office. These can be made anonymously, though often individuals retain counsel to represent them for the purpose of making a whistleblower submission. The office has grown in importance as the number of high-quality complaints they receive has increased.

There are also referrals to the SEC that are made by other administrative agencies. Often the Department of Justice will refer something they believe should be an SEC matter even though it may have started with the IRS or with an SRO, such as FINRA.

Enforcement staff can also open an inquiry if they spot suspicious activity, such as news of a company’s precipitous stock drop.

Once the case becomes an investigation, the process becomes more formal. The staff will determine if they recommend bringing an enforcement action and will present it to the Commissioners. If a decision is made to pursue the case, issuing a Wells Notice is often the first step.

Rebecca pointed out that there are two main modes of regulation in the area: rules-based and principles-based.

Rules-based regulation seeks to dictate a more significant aspect of corporate behavior. A particular advantage is that the regulation is better suited to high-risk areas where bad actors have the potential to cause widespread damage or where the government doesn’t want to leave much discretion in how a rule can be applied.

Rebecca says, “This was born in the aftermath of the 1929 crash, when the American public lost a lot of trust in the markets and in institutions. The SEC originally saw its mission of stringent regulation as clear towards increasing trust in those markets, and that remains true today.”

The other approach is principles-based regulation, which sets broad regulatory goals and permits the industry to decide how to achieve them. The advantage is that this may reduce the volume of regulation and potentially be more efficient, though critics say the tactic has not prevented various financial crises and scandals from happening.

The SEC continues to test its boundaries, and Rebecca offered several examples. “They are still following the ’33 and ’34 rules, but they are looking at new technology and products,” Rebecca points out. Rebecca stated that the total enforcement actions in the fiscal year 2022 were up 9% over the prior year, and the dollar amount seized showed a 67% increase.

Rebecca went on to discuss some of the recent cases she is watching closely that include when:

• A company makes public statements that they are controlling various issues, but then lacks the internal processes and controls to do so.
• A company doesn’t use the proper language or guidance for their employees to deter shadow trading, a novel variant of insider trading.
• A company uses non-GAAP measures without properly disclosing the details fully and fairly and without procedures in place to ensure their accuracy year over year.

Her takeaways for the audience included:

• Check insider trading policies to ensure they reflect potential implications of shadow trading theory.
• Assess any ongoing or threatened administrative enforcement to determine whether an Axon- or Jarkesy-type collateral federal action is appropriate.
• Ensure that all business-related electronic communications are subject to a retention policy.
• Confirm whether policies and protocols associated with ESG products are as rigorous as those associated with other products.
• Implement policies and protocols associated with non-GAAP reporting that are as rigorous as those associated with GAAP reporting.

If you are interested in watching the program and are a member of PLI,  it can be viewed here.