New SEC Enforcement Division Director Signals Policy Shifts, Including Potential Emphasis on Admissions of Wrongdoing

In a recent speech at the Practising Law Institute’s annual SEC Speaks conference, Gurbir Grewal, the new director of the Division of Enforcement for the Securities and Exchange Commission (SEC or Commission), signaled several potential changes in the SEC’s enforcement priorities under his new leadership. Of particular interest, Grewal stated that his division would “recommend aggressive use” of various remedies, most notably by seeking admissions of wrongdoing as a condition of settlement in certain instances.

Grewal comes to the SEC after a long career primarily as a state and federal prosecutor. He worked as an assistant U.S. attorney from 2004 to 2007 in the Eastern District of New York and again from 2010 to 2016 in the District of New Jersey, where he was the chief of the Economic Crimes Unit from 2014 to 2016. He then served as Bergen County prosecutor before he was appointed the 61^st attorney general of New Jersey.^[1]

In his SEC Speaks remarks, Grewal stressed the need to adjust enforcement policies to combat the American public’s “historic[ally] low[]” confidence in “banks, technology companies, [and] big business.”^[2] He partially attributed the public’s mistrust to “repeated lapses by large businesses, gatekeepers, and other market participants, coupled with the perception that we — the regulators — are failing to hold them appropriately accountable, or worse still, the belief by some that there are two sets of rules: one for the big and powerful and another for everyone else.”

Aggressive Use of Prophylactic Remedies Including Admissions of Wrongdoing

The longest and most detailed portion of Grewal’s remarks was his announcement that the Enforcement Division will “recommend aggressive use” of “prophylactic” remedies, particularly for “recidivist” violators of the securities laws. These remedies include:

• Barring individual violators from serving as officers or directors of public companies in the future, even when they have not previously served in those roles
• Conduct-based injunctions, such as restrictions on stock trading or participating in securities offerings
• Imposing “undertakings” on corporate defendants to prevent future violations, including forcing companies to hire independent compliance consultants^[3]

Perhaps most notably, however, Grewal also signaled that the Enforcement Division may be more aggressive in seeking admissions of wrongdoing from persons who settle with the SEC. Though he did not spell out a new policy in detail, Grewal remarked that “few things rival the magnitude of wrongdoers admitting that they broke the law,” and thus his division “will, in appropriate circumstances, be requiring admissions in cases where heightened accountability and acceptance of responsibility are in the public interest.” He further explained that such admissions “serve as a clarion call to other market participants to stamp out and self-report the misconduct to the extent it is occurring in their firm.”^[4] Deputy Director Sanjay Wadhwa later explained that the Enforcement Division would seek admissions of wrongdoing in cases involving egregious misconduct and where a large number of investors were harmed or defendants obstructed the SEC’s investigation.^[5]

For 50 years, the SEC has generally allowed individuals and corporations to settle civil enforcement actions without admitting wrongdoing, so long as they do not deny it.^[6] This policy has occasionally faced criticism, most notably from Southern District of New York Judge Jed S. Rakoff.^[7] Moreover, Grewal’s announcement comes in the wake of several recent challenges (none successful) to the constitutionality of requiring defendants who settle not to deny the SEC’s allegations of wrongdoing against them.^[8] Nevertheless, the vast majority of SEC settlements still result in “no-admit, no-deny” agreements.^[9]

Requiring more defendants to admit wrongdoing as a condition of settlement has several potential consequences. Admissions of wrongdoing in an SEC action may be used against a corporation and its employees in parallel criminal actions for the same conduct. Moreover, injured investors may utilize such admissions as a basis for their own civil suits. And because defendants in SEC enforcement actions may hesitate to render themselves more vulnerable to criminal and civil liability, the SEC may find it more difficult to settle actions when it insists on admissions of wrongdoing.

This is not the first time the SEC has suggested a move away from its no-admit, no-deny policy. However, on previous occasions, the change has not been as dramatic as might have been expected. In 2013, then-SEC Chair Mary Jo White announced that the Commission would begin seeking admissions of wrongdoing in certain types of cases where, for example, conduct was “egregious” or a large number of investors were harmed.^[10] In the years that followed, although settlements containing admissions of wrongdoing increased, they never represented more than 15% of all resolutions, and were less than 10% of resolutions in all but two years.^[11] During the Trump administration and under SEC Chair Jay Clayton’s leadership, the use of settlements with admissions of wrongdoing decreased as the Enforcement Division moved away from seeking such admissions.^[12]

Thus, it may be too early to tell the extent to which Grewal’s announcement portends a greater emphasis on admissions of wrongdoing than in the past.

Corporate Responsibility and Gatekeeper Accountability

Grewal’s remarks also highlighted various aspects of “corporate responsibility” as enforcement priorities for his division. Grewal stated he would emphasize “robust enforcement of laws and rules concerning required disclosures, misuse of nonpublic information, violation of record-keeping obligations, and obfuscation of evidence from the SEC or other government agencies,” in an effort to curb corporate practices that “practically invit[e] fraud” or even “cover[] it up or minimiz[e] it.” In particular, he indicated that defendants who have failed to “maintain[] required communications,” “ignored subpoenas or litigation hold notices,” or deliberately used “ephemeral technology that allows messages to disappear,” may face adverse consequences for spoliating evidence. Moreover, Grewal warned that the SEC may charge companies for inadequate disclosures of material events, particularly cybersecurity incidents.^[13]

Grewal also stated that “gatekeepers,” including attorneys and accountants, will “remain a significant focus for the Enforcement Division.” He cited the division’s recent charges against an attorney who played “a critical role” in fraudulently selling unregistered securities, as well as against an accountant who failed to register his firm with the Public Company Accounting Oversight Board and comply with that organization’s auditing standards.^[14]

Reduced Director Participation in Wells Meetings

Finally, Grewal indicated that he and Deputy Director Wadhwa likely will not participate in the majority of Wells meetings.

When the Enforcement staff plans to recommend an enforcement action to the full Commission, it generally sends the prospective defendant a “Wells notice” explaining the proposed charges and giving the defendant an opportunity to respond to the allegations and try to convince the Commission not to bring the charges. The SEC staff then often meets with the defendant in furtherance of this process. At the conclusion of the Wells process, the Enforcement Division decides whether to seek the Commission’s authorization to bring the enforcement action, and the Commission decides whether to authorize it.^[15]

In Grewal’s remarks, he stated that neither he nor Wadhwa intend to participate in Wells meetings unless the enforcement action at issue “present[s] novel legal or factual questions, or raise[s] significant programmatic issues.” He indicated that for cases that do not present these issues, the associate director or unit chief, as well as staff, would handle Wells meetings going forward, in an effort to make the process “more streamlined and efficient” and to “empower” the Enforcement Division’s staff. The director and deputy director will, however, continue to review Wells submissions and be involved in recommending to the Commission whether charges should ultimately be brought.^[16]

^[1] _{Meet Attorney General Grewal, State of N.J. Dep’t of L. & Pub. Safety, https://www.njoag.gov/about/meet-ag-grewal/ (last visited Oct. 21, 2021).}

[2] _{Gurbir Grewal, Remarks at SEC Speaks 2021, Securities & Exchange Comm’n (Oct. 13, 2021), https://www.sec.gov/news/speech/grewal-sec-speaks-101321#_ftnref18.}

^[3] _Id.

^[4] _Id.

^[5] _{Dave Michaels, Wall Street, Companies May Have to Give Up More to Settle with SEC, Wall Street Journal (Oct. 13, 2021, 2:48 pm), https://www.wsj.com/articles/sec-to-seek-admissions-of-wrongdoing-in-some-enforcement-actions-11634139229.}

^[6] _{Second Circuit Declines to Strike Down No-Deny Provision of Executive’s SEC Consent Agreement, Kramer Levin Naftalis & Frankel, LLP Client Alerts, https://www.kramerlevin.com/en/perspectives-search/second-circuit-declines-to-strike-down-no-deny-provision-of-executives-sec-consent-agreement.html (last visited Oct. 21, 2021).}

^[7] _{S.E.C. v. Citigroup Global Mkts. Inc., 827 F. Supp. 2d 328, 333 n.5 (S.D.N.Y. 2011) vacated and remanded by 752 F.3d 285 (2d Cir. 2014).}

^[8] _{See Kramer Levin, supra n.6.}

^[9] _{Giovanni Patti & Peter Robau, Admissions of Guilt to the SEC under Chair Jay Clayton, Program on Corporate Compliance and Enforcement at New York University School of Law (Jan. 19, 2021), https://wp.nyu.edu/compliance_enforcement/2021/01/19/admissions-of-guilt-to-the-sec-under-chair-jay-clayton/.}

^[10] _{Mary Jo White, Deploying the Full Enforcement Arsenal, Council of Institutional Investors Fall Conference in Chicago, IL (Sept. 26, 2013), https://www.sec.gov/news/speech/spch092613mjw.}

^[11] _{See Patti & Robau, supra n.9.}

^[12] _{See id.}

^[13] _{Grewal, supra n.2.}

^[14] _{See id.}

^[15] _{Investor Bulletin: SEC Investigations, Securities & Exchange Comm’n (Oct. 22, 2014), https://www.sec.gov/oiea/investor-alerts-bulletins/ib_investigations.html.}

^[16] _{Grewal, supra n.2.}