United States: Rocky Mountain Securities Conference: A Review Of Enforcement

The SEC, in conjunction with the Colorado Bar Association and Colorado Society of Certified Public Accountants, recently sponsored the 51st Annual Rocky Mountain Securities Conference featuring SEC officials and corporate experts from across the nation. Sam Waldon, partner at Proskauer and former Assistant Chief Counsel in the SEC's Division of Enforcement, moderated a panel of expert practitioners on developments in securities enforcement and white collar defense. The following topics were discussed:

1. Current Commission and Division of Enforcement

The Panel generally agreed that commentators have largely overstated the extent to which the current Enforcement program has changed under the current administration. However, they agreed that the types of cases being brought today, and the current case mix, is somewhat different than the immediately preceding Enforcement program, with a greater emphasis on cases involving retail investor harm. And the Panel agreed that the single biggest factor impacting the Enforcement program today has been the prolonged hiring freeze.

2. Sharing results of internal investigations

The Panel discussed recent experiences with having to decide whether and how to share the results of an internal investigation with staff, highlighting the challenge of balancing the desire to gain meaningful cooperation credit, against the value of preserving privilege. The speakers also discussed how it can often be prudent to share with staff the findings of an investigation generally, but not share memoranda memorializing witness interviews. Such an approach reduces the risk of waiver of the attorney-client privilege and/or attorney work product immunity covering the internal investigation as a result of disclosure to the SEC.

3. Corporate penalties

With the current construct of the Commission – three Commissioners appointed by Republicans and only one appointed by Democrats – we should expect to see more settled actions with corporations with no penalties. Most Republican Commissioners have historically embraced the 2008 Commission's Statement on Corporate Penalties, and in particular, the idea that corporate penalties should only be imposed when a corporation has obtained a benefit from the charged misconduct and any penalty should be capped at the amount of the benefit.

4. Specialized Units

Rather than shrink the number of units, the SEC has added a new Unit, the Cyber Unit, which is the first new unit since the concept of specialized units was introduced in 2009. The Panel discussed how the Asset Management Unit has been very active, bringing a tremendous number of Enforcement actions, most of which came out of the 12b-1 Share Class Initiative. This lead to a discussion of the D.C. Circuit's decision in Robare, where the court held that a finding of a willful violation is inconsistent with a finding of negligence. This could impact future settlements generally, but in particular those that are part of the Initiative; in early settlements under the Initiative, the Commission has insisted upon willful violations (necessary to obtain a censure) and negligence charges (Section 206(2) of the Advisers Act).

5. Impact of Lucia

In Lucia, the Court held that the SEC's administrative law judges were inferior officers who had been hired in violation of the Appointments Clause of the Constitution. The Panel observed that while the Court's decision answered some important questions about the SEC's ALJs, a number of questions remain unanswered – including whether the SEC's ratification of prior cases decided by ALJs will be effective and whether limitations on removal of ALJs remain a Constitutional flaw. Perhaps because of these open issues, the SEC has not been litigating as many cases in administrative proceedings as it had been three or four years ago.

6. Impact of Kokesh

In Kokesh, the Court held that the SEC claims for disgorgement are penal in nature and thus subject to the five-year statute of limitations. The Panel focused its discussion on the recently proposed legislation that would allow the SEC to obtain restitution (measured by the harm to investors, as opposed to disgorgement, which is measured as the amount of the respondent's ill-gotten gains) and would have a ten-year statute of limitations to seek restitution. The Panel noted the potential challenges that this could present for the SEC – while having more time to bring cases may seem beneficial, the SEC has often had difficulty prosecuting cases successfully when cases involve conduct that is over five years old.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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