Presented by the Practising Law Institute in conjunction with the U.S. Securities and Exchange Commission, SEC Speaks 2024 provided insights and updates on the agency’s current priorities and initiatives from Chair Gary Gensler, Commissioners, and senior staff from divisions across the agency.
Insight from the Division of Examinations
“We live in a world of constantly changing risk and opportunity. As a result, compliance officers and their staff must remain vigilant and scan the horizon for new and emerging risks to ensure their compliance programs continue to offer appropriate assistance and guidance to their firms, and strong protection to investors.”
—Richard Best, Director, SEC Division of Examinations
Best reminded attendees that CCO’s and their staff must invest in order to remain current, nimble, resilient and adaptable.
Compliance departments need the proper resources and support to meet regulatory obligations. Compliance technology is a key part of that equation. Investing in compliance technology can help firms survey the industry landscape, identify and mitigate risk and ensure that firms are meeting their regulatory responsibilities.
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How are penalties for off-channel communication and record keeping violations assessed?
Sanjay Wadhwa, Deputy Director, Division of Enforcement, addressed the almost 60 high-profile violations for record-keeping deficiencies—and the wide range of penalties from $2.5 million to $125 million that critics have described as random in determination.
Wadhwa affirmed that the agency made an individualized assessment of the circumstances of each firm when determining penalties. According to Wadhwa, the criteria that the agency looks at includes:
Firm size, including revenues from the regulated part of a firms business and the number of employees to ensure that the penalties are adequate to serve as a deterrent.
The scope of the violations, including the number of individuals involved or the amount of off-channel communications. Wadhwa cautioned however that there’s not necessarily a strict correlation between the numbers and the penalties and other considerations are weighed as well.
Consideration of the firm’s efforts to comply with requirements, for example the timely adoption of compliance technology solutions.
Precedent set by previously settled orders.
Self-reporting by the firm. Wadhwa notes “This is, in fact, the most significant factor in terms of moving the needle on penalties. From our prior actions, you can see how much we have credited those firms which have chosen to self-report.”
Cooperation—firms that do not self-report can still receive credit based on their cooperation the investigation.
Cryptocurrency and the Howey Test
When asked about the SEC’s focus on crypto by CNBC’s Andrew Ross Sorkin on “Squawk Box”, Gensler answered, “Crypto is a small piece of our overall markets. -- But it’s an outsized piece of the scams and frauds and problems in our markets because without prejudging any one token, much of this field is noncompliant with the protections of our securities laws.”
In opening remarks to the Division of Enforcement panel at the SEC Speaks event, Gurbir S. Grewal, Director, Division of Enforcement said that the agency will continue to use the Howey Test to determine if a digital asset is an investment contract. The Howey Test was established by the US Supreme Court in the case of the SEC vs. WJ Howey Corporation in 1946, providing a standard to determine whether or not a transaction qualifies as an investment contract—and therefore a security—under federal securities laws. The Howey Test criteria are:
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The Investment of Money
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In a Common Enterprise
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With Reasonable Expectations of Profits Derived from Efforts of Others
Grewal noted, “The analytical framework—the test—for whether something is an “investment contract” is the same whether we’re dealing with transactions involving crypto products or with transactions involving the many other kinds of offerings that courts have analyzed under Howey.”
Disclosing potential risk remains key
Disclosure of new and emerging risks will continue to be a SEC priority. Risks related to AI are of special note. In remarks at the Corporate Compliance and Enforcement Spring Conference 2024, Grewal puts the industry “on notice” that disclosures regarding the use of AI should be truthful, reasonable and in good faith—not misleading or aspirational.
Expect continued enforcement
There were 784 enforcement actions in 2023—an increase of 3% over 2022. Deficiencies spanned a wide range of concerns including compliance programs, disclosures, conflicts of interest, investment recommendations, market and credit risks, derivatives and leverage, environmental, social, and governance (ESG) factors, and new technologies.
With the agency’s 2022-2026 Strategic Plan promising a continued focus on investor protection, firms of all types and sizes should be ready for continued action and enforcement. Read how SEC Enforcement and Priorities Set Compliance Expectations for 2024.
Is your compliance roadmap for 2024 in place?
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