The SEC Continues to Ramp-up Enforcement Activity; Reports Record Penalties in 2022

The SEC’s Director of Enforcement, Gurbir Grewal, explained at the Securities Enforcement Forum that these results marked a notable shift in the way the SEC has pursued violations in the last fiscal year. In particular, in the five years prior to fiscal year 2022, the SEC’s Division of Enforcement (“Enforcement Division”) had sought more than twice as much in disgorgements as it did in penalties. Grewal further noted that the decrease in disgorgement and rise in penalties should be understood to demonstrate that “the potential consequences of violating the law are significantly greater than the potential rewards” and that “the risk-reward calculation is not what it was even a few years ago” because “the Enforcement Division is working with a sense of urgency to protect investors, hold wrongdoers accountable and deter future misconduct in our financial markets.” That said, Grewal also explained that the SEC doesn’t “expect to break these records and set new ones each year because we expect behaviors to change. We expect compliance.”

Relatedly, the SEC announced that its whistleblower award program also received a record of more than 12,300 tips reporting potential wrongdoing for the fiscal year 2022. Tips to the Office of the Whistleblower resulted in the issuance of approximately $229 million in 103 awards, making it the SEC’s second highest year in terms of dollar amounts and number of awards. And, at the Securities Enforcement Forum last week, Office of the Whistleblower Chief Creola Kelly further highlighted the focus and priorities of the Whistleblower Office. In particular, Kelly referenced Rule 21F-17 to the Exchange Act, which is a provision added under Dodd-Frank that prohibits issuers from impeding an individual from communicating directly with the SEC about a possible securities law violation, including by enforcing, or threatening to enforce, a confidentiality agreement. Kelly mentioned that the Enforcement Division had brought several Rule 21F-17 cases in the last year and noted that the SEC has begun taking a broader interpretation of what it means to “impede” a whistleblower, which accords with the SEC’s larger push to strengthen its enforcement activities. The SEC’s press release announcing the yearly numbers specifically called attention to its enforcement actions against The Brink’s Company, in which it alleged the company’s broad use of confidentiality agreements when employees were onboarding and exiting violated Rule 21F.

The SEC’s press release noted a “focused attention on” environmental, social, and governance (“ESG”) issues, pursuing insider trading claims, and a continuing commitment to enforcing the Foreign Corrupt Practices Act. The SEC also highlighted its effort to ensure accountability of executives, noting that, similar to prior years, more than two-thirds of the SEC’s stand-alone enforcement actions involved at least one individual defendant or respondent. Indeed, the SEC charged several executives under Sarbanes-Oxley Act Section 304, and ordered them to return bonuses and compensation following misconduct at their firms, even though the executives were not personally charged with the misconduct.

As explained in prior articles regarding the SEC’s EPS Initiative, the SEC also reported increased use of data analytics tools to assist in its enforcement activity and identify potential enforcement targets.

All told, that the SEC is setting records across the board should come as no surprise as the SEC has focused on strengthening its enforcement activity under the leadership of current Chair Gary Gensler. On November 2, 2022, at the Practising Law Institute’s 54th Annual Institute on Securities Regulation, Gensler explained that the SEC’s crackdown was just getting started and that it would continue to pursue violations wherever and however they occur. “Make no mistake: If a company or executive misstates or omits information material to securities investors, whether in an earnings call, on social media, or in a press release, we will pursue them for violating the securities laws,” Gensler said.

Accordingly, issuers and executives should be mindful of the SEC’s continued focus on rigorous enforcement when considering the scope and breadth of their public disclosures, any potential review of their document retention and other internal policies, as well as how they treat potential whistleblowers, as these are clear areas of focus for a Commission whose flurry of enforcement activity doesn’t show any signs of slowing down soon.