Securities Enforcement Forum West: Remarks by Gurbir S. Grewal

In late May 2023, SEC enforcement personnel, securities lawyers, in-house counsel, compliance executives, and vendors gathered at the Securities Enforcement Forum West, a one-day conference in San Francisco that featured panels and Q&A sessions with SEC Division of Enforcement Director, Gurbir Grewal, SEC Regional Directors, including Michele Wein Layne and Monique Winkler, and other SEC staff.

The audience eagerly awaited Mr. Grewal’s lunchtime Q&A discussion, especially in light of his remarks last year at the Securities Enforcement Forum West 2022, during which he admonished defense counsel for various tactics that he claimed had eroded trust between the SEC and defense lawyers. Tactics he highlighted in his speech included document production delays (whether by disregarding production deadlines, slow rolling documents, or dumping terabytes of irrelevant information), lodging inapplicable objections (like hearsay) during SEC witness interviews, overtly coaching witnesses, or improperly asserting privilege as a form of gamesmanship.

His opening message this year: the SEC observes improvement, but defendants and defense counsel should remember that good faith cooperation on both sides—whether through self-reporting or reverse proffers—helps all. Dilatory tactics do not.

Overall Enforcement Priorities

The SEC is currently focused on restoring public trust in the markets, particularly after recent, earthshattering events in the cryptocurrency realm and banking sector. As we have previously reported and as mentioned at other conferences, both the SEC and the Department of Justice (“DOJ”) continue to tout the three R’s: “robust enforcement, robust remedies, and robust compliance.”

Most relevant to companies and defense counsel is Mr. Grewal’s message on robust compliance. For the SEC, this means “proactive” compliance: early self-disclosure of wrongdoing by compliance professionals and gatekeepers (such as attorneys and accountants), along with full cooperation throughout the SEC’s investigation and demonstrated remediation. Defense counsel should look to the 2001 Seaboard Report, the SEC’s 2010 Policy Statement Concerning Cooperation by Individuals, the SEC’s Enforcement Manual, and recent orders for additional guidance on proactive compliance measures.

Mr. Grewal also reminded listeners that robust enforcement means moving matters with urgency, noting that the SEC has brought more enforcement actions this fiscal year than last. Per Mr. Grewal, swift and efficient action helps build public trust. In terms of robust remedies, the SEC broke records this year by collecting over $6 billion in total remedies, including $4.3 billion in civil monetary penalties. The SEC’s stated goal in seeking remedies is to deter misconduct, which in turn, demonstrates accountability to the public.

Substantive Areas of Concern: Off-Channel Communications and Private Funds

Building on his robust enforcement comments, Mr. Grewal highlighted a recent enforcement sweep by the SEC’s resulting in charges against 16 wall street firms for widespread recordkeeping failures based on pervasive off-channel communications. Mr. Grewal stated that the market should expect more enforcement sweeps for these same violations. From the SEC’s perspective, enforcement sweeps are more efficient than serial enforcement actions, as they sound a louder alarm to other potential defendants.

Enforcement sweeps also present opportunities for companies. For example, in early May 2023, the SEC awarded penalty reductions to HSBC Securities (“HSBC”) and Scotia Capital, two registered broker dealers, for recordkeeping violations that they detected and self-reported after the SEC’s sweep. Both firms admitted that employees, from supervisors to senior executives, often communicated off-channel about securities business matters from personal devices, using platforms such as WhatsApp. Neither firm maintained or preserved the substantial majority of these communications. HSBC and Scotia Capital cooperated with the SEC’s investigation by, among other things, self-reporting the recordkeeping failures after gathering communications from the personal devices of a sample of the firms’ personnel.

In addition to off-channel messaging, Mr. Grewal also noted that substantive enforcement priority areas will center on cryptocurrency, investigating intermediaries in the private funds space (e.g., for conflicts of interest), reinforcing gatekeeper accountability, and cracking down on insider trading—especially Rule 10b5-1 trading plan abuse.

Takeaways:

Given Mr. Grewal’s remarks and the SEC’s recent activity, compliance leaders and in-house counsel should consider the integrating the following tips:

• Exercise caution when relying on SEC precedent during proffers and in white papers. Mr. Grewal noted that precedent is most helpful in cases with novel legal issues and/or programmatic implications. He simultaneously warned that relying on precedent to argue for lower monetary penalties in cases involving run-of-the-mill issues, such as books and records violations, can backfire.
• Follow recent SEC and DOJ settlements to understand how both agencies are rewarding and punishing companies for specific facets of compliance programs.
• Demonstrate proactive compliance by tailoring and regularly reviewing policies and procedures in response to SEC enforcement press releases that touch upon your industry or business concerns.
• Consider prompt self-disclosure of misconduct that directly relates issues featured in recent enforcement actions, as shown by defendants in the HSBC and Scotia Capital actions.
• While engaging with the SEC, demonstrate proactive cooperation and good faith efforts to move the investigation along. Exchange information regularly with the SEC and implement strategies that do not “hide the ball.” Proactively communicate about discovery deadlines and extensions.