The Many Recent Signals that Foreshadow a More Aggressive SEC  in Terms of Enforcement Action and Stiffer Penalties for Wrongdoers

The first few months of 2021 have marked a clear shift in how the U.S. Securities and Exchange Commission (SEC) could soon start holding corporations to a much higher standard of accountability for actions that harm investors. A central theme of the SEC’s emerging mindset, as stated in a March 9, 2021, speech by Commissioner Caroline Crenshaw is the belief that corporate culture comes from the top and there is a strong need to incentivize companies to foster a culture of compliance, not misconduct.

Commissioner Crenshaw’s Bold Stance

Crenshaw’s remarks, made during a virtual conference of the Council of Institutional Investors, served as a clarion call for senior management and compliance professionals. She referenced an SEC enforcement policy in place since 2006 that says the agency should be careful not to impose penalties that might unduly burden shareholders of the company in question as “myopic” and “flawed.” Instead, Crenshaw said, any penalties levied by the SEC should be tied to the egregiousness of the offense and that the potential for shareholder harm should not be a threshold issue for assessing a penalty.

“If the penalties are sufficiently high to motivate the company to remediate problems, strengthen internal controls, clarify lines of responsibility, and prioritize individual accountability,” Crenshaw said, “those are all changes that likely lead to better future outcomes, and higher profits for shareholders.”  

A More Active, Robust SEC

Crenshaw’s stated desire to have the SEC levy penalties without the constraint of inflicting potential harm to company shareholders is consistent with language included under a “Miscellaneous” heading in a defense spending bill that became law on January 1, 2021. The National Defense Authorization Act for Fiscal Year 2021 (NDAA) amends the Securities Act of 1934 as it relates to the investigations and prosecution of violations of federal securities laws.

NDAA expressly authorizes the SEC to seek disgorgement in civil enforcement proceedings in federal court, increases the statute of limitations for fraud enforcement actions from 5 to 10 years, and extends the time period for actions brought against defendants located outside the U.S. Although the NDAA maintains the past requirement limiting disgorgement to the defendants’ net profits, Congress removed a prior restriction that required disgorgement to be for the benefit of investors.

An announcement on February 9, 2021, by then-acting SEC chair Allison Herren Lee, broadens the issuance of formal orders of investigation. This is yet another sign of the path the Commission is likely to follow; especially now that the Senate has approved Gary Gensler as SEC chair to oversee President Biden’s stated plan to tighten regulatory oversight.

Lee restored the power and ability of senior officers in the SEC’s Division of Enforcement agency’s enforcement division to approve formal orders of investigation, a move she said, “will enable investigative staff to act more swiftly to detect and stop ongoing frauds, preserve assets, and protect vulnerable investors.” Specifically, a formal order authorizes SEC senior officers to subpoena documents and take sworn testimony, effectively empowering Commission staff to conduct and complete investigations at a faster pace.

Yielding “Better Outcomes”

In her March 9 speech, Crenshaw espoused the view that, “there is a temptation to spend money on operations at the expense of investing in compliance.” She added that, “cooperation credit is not afforded to companies that merely respond to Enforcement Division requests, or to those that offer to conduct a not-so-independent investigation led by corporate counsel. Meaningful cooperation requires a commitment to proactively identifying and remediating wrongdoing, as well as holding accountable those individuals responsible for misconduct. It’s about substantially shortening the staff’s investigation and working with the staff toward an efficient resolution.”

She added, “changing tack now will yield better outcomes.”

It’s unclear whether the SEC will measure “better outcomes” going forward by its number of enforcement actions and bigger fines in a complex financial marketplace that’s increasingly conducive to corporate and individual fraud. It is increasingly clear, however, that the Commission is on the cusp of its biggest enforcement changes in decades.

The specialized professionals at Jacko Law Group your firm navigate these changing regulatory currents. Contact us at (619) 278-0020 or visit us online at to schedule a consultation.

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