October 11, 2021

SEC Enforcement Director Urges Market Participants to Practice "Proactive Compliance"

New SEC Division of Enforcement Director Gurbir Grewal urged firms to focus on "proactive compliance" to ensure that they are continually tailoring their compliance strategies to evolving technologies and regulations.

In his first speech as Director, Mr. Grewal cautioned firms against the assumption that if "regulators are particularly focused on issues 'X' or 'Y' in a given area, that means you or your clients may be able to push the envelope on issue 'Z' - or the grey areas around X or Y." Mr. Grewal said that market participants should "not wait for an enforcement action to put in place appropriate policies and procedures . . . and anticipate these emerging challenges," highlighting as an example, recordkeeping of off-channel communications, such as those on personal devices and ephemeral apps.

Mr. Grewal asserted that "proactive enforcement" includes firms' cooperation in investigations and voluntary self-reporting after the occurrence of misconduct. To receive credit for cooperation, he explained, a firm must, at a minimum, take "significant, tangible steps" that (i) contribute to the improvement of the SEC's investigation, (ii) enable the SEC to manage resources and bring charges more efficiently and (iii) aid the SEC in finding additional activity or perpetrators in connection with the wrongdoing. Mr. Grewal asserted that he will defer to the judgment of frontline SEC staff when assessing the value of a firm's cooperation.

Mr. Grewal said that monetary penalties are calculated to punish the wrongdoer and deter future misconduct by the wrongdoer and other market participants, emphasizing that "central to deterrence is proportionality." He observed that to avoid market participants from deciding to "price in" the potential costs of a violation, the SEC might consider increasing the penalty amounts for similar misconduct repeated over time, whether by:

  • more harshly penalizing a repeat offender when compared to penalizing a first-time offender; or

  • increasing penalties across the board (regardless of prior offenses) for violations that the SEC has "previously and publicly charged" when the SEC has not observed the penalties to have created a deterrence.

Commentary

The new Director's comments on cooperation with an enforcement investigation may prove to be his most important. Time will tell whether they represent simply his interpretation of the Seaboard release or, perhaps, a more expansive set of expectations he's expressed internally to the rank and file in the Division of Enforcement.

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