Acting SEC Chair Issues Two Pronouncements About Enforcement Policy Changes
The Biden Administration is likely to increase enforcement efforts in a number of areas, including securities enforcement. Although President Biden's nominee to head the SEC, Gary Gensler, still awaits confirmation by the US Senate, the agency has moved forward with pronouncements by its Acting Chair, Allison Herren Lee, that may signal the start of this shift.
February 9, 2021 Pronouncement: Empowering Enforcement to Better Protect Investors
In her first pronouncement, Acting Chair Lee reestablished the ability of senior officers in the SEC's Division of Enforcement to approve the issuance of Formal Orders of Investigation, without requiring approval by the Commission. The restoration of this "vital tool" empowers Enforcement Division leadership to authorize their staff to subpoena documents and take sworn testimony, which will enable them "to act more swiftly to detect and stop ongoing frauds, preserve assets, and protect vulnerable investors."
The SEC's position on delegating the authority to issue Formal Orders has ebbed and flowed in recent years. Prior to 2009, Commission approval was needed. Then, during the first year of the Obama Administration, the Commission delegated its authority to the Director of the Enforcement Division who, in turn, could sub-delegate this authority to other senior officers. In 2017, during the first year of the Trump Administration, then-Acting Chair Michael Piwowar revoked the delegated authority so that Commission approval was once again required.
Acting Chair Lee's pronouncement thus returns the agency to its pre-2017 policy, authorized by 17 CFR § 200.30-4(a)(13), to enable senior officers of the Enforcement Division to initiate formal investigations. This approach should have the effect of decentralizing and accelerating the approval process for investigations as well as restoring investigative autonomy to the Enforcement Division.
February 11, 2021 Pronouncement: Contingent Settlement Offers
In her second pronouncement, Acting Chair Lee outlined a change in the SEC's approach to settling enforcement actions by decoupling the negotiation of such settlements from the consideration of requests for waivers from automatic disqualifications arising from certain violations or related sanctions. These disqualifications include the inability to exercise various privileges under the federal securities laws, such as being considered a Well-Known Seasoned Issuer, engaging in private securities offerings under Rule 506 of Regulation D, and serving investment companies in certain capacities. Under Acting Chair Lee's pronouncement, the Enforcement Division "will no longer recommend to the Commission a settlement offer that is conditioned on granting a waiver."
As with the delegation of authority for issuing Formal Orders, the SEC's position on contingent settlement offers has changed over the years. In the past, the SEC permitted settlement offers to be contingent upon the receipt of a specified waiver. During the Obama Administration, however, this practice changed. As noted in a February 2015 statement by then-Commissioner Daniel Gallagher, the Enforcement Division had shifted to following an "informal" practice of "not allowing respondents to condition settlements on the granting of waivers." In July 2019, under the Trump Administration, then-Chairman Jay Clayton issued a statement allowing parties to negotiate settlement offers and waiver requests with "all relevant divisions," including the Enforcement Division, so that "an offer of settlement that includes a simultaneous waiver request . . . will be presented to, and considered by, the Commission as a single recommendation from the staff." The rationale for this change was to reduce complexity in the settlement negotiation process and to add certainty to settlements by providing "a full and final resolution of a matter."
Acting Chair Lee's pronouncement reverses this policy. As the pronouncement makes clear, requests for waivers "are received and reviewed by the Divisions of Corporation Finance and Investment Management using standards that are separate and distinct from our law enforcement mandate." This reinstitutes a bifurcated process "to eliminate the potential for any structural conflicts or pressures" and to avoid using waivers as "bargaining chips in settlement negotiations."
Notably, this policy change does not have full support within the Commission. On February 12, 2021, the day after Acting Chair Lee issued her pronouncement, Commissioners Hester Peirce and Elad Roisman issued a statement that was critical of the policy change. In their statement, the two Commissioners rejected the notion that any structural conflicts or pressures exist and reaffirmed their support for considering and accepting contingent settlement offers.
Despite the dissenting views of two Commissioners, the recent pronouncements by Acting Chair Lee signal the start of a tonal shift at the SEC toward a more aggressive stance on enforcement. The process for initiating investigations has been streamlined, while the process to reach settlements on terms acceptable to settling parties has been complicated. Although SEC Nominee Gensler, upon confirmation, will ultimately determine the extent of this shift, it is widely anticipated that there will be additional changes with respect to how the SEC approaches enforcement. We will be covering these issues as they develop, so stay tuned.
*Matthew Bemis contributed to this blog post. Mr. Bemis is a graduate of Syracuse University College of Law and is employed at Arnold & Porter's New York office. He is not admitted to the practice of law in New York.
© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.