Securities Regulation Daily Wrap Up, SEC NEWS AND SPEECHES—Gensler: Focus on economic realities, not labels, (Nov 8, 2021)
Gensler’s remarks discussed an enhanced focus on high-profile cases and how the Enforcement Division will use all the tools in its toolbox to bring violators to justice, including requiring admissions in settlements.
At this year’s Securities Docket Enforcement Forum, SEC Chair Gary Gensler reiterated his vision for the Enforcement Division’s new focus on remedies, including seeking admissions for misconduct in some of the more egregious cases. He also stated that the staff will not be moved by what a particular transaction is labeled, advising that Enforcement will being pursuing misconduct that harms investors, no matter what it is labeled.
Economic realities. Citing the old saying, “if it walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck,” Gensler stressed that that the Commission will continue to look at the economic realities of a transaction or a product, rather than what it has been labeled. It can be easy to take some words at face value, he said, such as “decentralized finance” (DeFi), “currency,” or “peer-to-peer lending.” However, regardless of the label or purported mission, Gensler stressed that the SEC staff will be examining the economic realities of a given product or arrangement to determine if it complies with federal securities laws.
Lawyers, accountants, advisers, and other gatekeepers must keep this in mind as well, he warned. Reiterating remarks made by new enforcement chief Gurbir Grewal, Gensler said the SEC’s Enforcement Division remains committed to holding bad actors accountable by using all the available tools in the SEC’s toolbox, including requiring admissions for the most egregious cases. “Remember,” he said, “going right up to the edge of a rule or searching for some ambiguity in the text or a footnote may not be consistent with the law or purpose.”
Gensler also addressed how the SEC will continue to focus on “high-impact” cases. These include cases involving SPACs, cyber, crypto, private funds, accounting fraud, insider trading, and recordkeeping violations. Pursuing these high-impact cases, he said, can pull many bad actors back from the line and both help change behavior and send a message to the rest of the market that this kind of misconduct will not be permitted.
In saying so, he scoffed at those that call legal alerts, client letters, and bulletins issued by the SEC as “regulation by enforcement.” “Some market participants may call this ‘regulation by enforcement,’” he said. “I just call it ‘enforcement.’”
Wells meetings. At the same conference, previous Enforcement directors indicated a pushback against recent comments by Grewal about speeding up the Wells process. Quoting the old saying, “Justice delayed is justice denied,” Gensler voiced his support for the Division’s new policy, stating that “the defense bar often makes a strategic decision to burn clock.” As such, he proclaimed that he has asked the staff to cut back on meetings with entities that want to discuss arguments in their Wells submissions. For Wells meetings, he urged the defense bar members who request a meeting to make it targeted and not to expect multiple, repetitive meetings on the same issues. The SEC has “precious resources, we need to move the docket, and we will be bringing cases expeditiously,” he warned.
Agency referrals and self-reporting. Gensler praised the work of other offices and agencies in making referrals to the SEC regarding wrongdoing, including the SEC’s Division of Examinations and the Department of Justice. Law enforcement agencies at the state level, international regulators, and self-regulatory organizations have also played a vital role in catching wrongdoers, he said.
Gensler also offered praise for the Division of Enforcement staff itself, calling it “the real cops on the beat” who, as those closest to the market, might read a news story leading to opening up a case. The work of the staff in the SEC’s Office of the Whistleblower, who monitor tips, complaints, and referrals, has also been invaluable, he said, noting that the program just this year exceeded $1 billion in payouts since the passage of the Dodd-Frank Act in 2010.
Self-reporting is also important, Gensler advised, and can lead to cooperation credit if an enforcement action is brought by the SEC. However, he stressed that in order to get cooperation credit, a defendant or respondent must do more than just meet legal requirements such as responding to a lawful subpoena or making a witness available for lawfully-compelled testimony. To obtain cooperation credit, it means “taking steps that enhance [the SEC’s] investigation,” and not conducting a “self-serving investigation,” Gensler advised. The type of cooperation that will earn credit means doing more than the bare minimum, he stated.
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