A change of leadership often leaves an organization with two choices – double down and ensure consistency, ‘more of the same,’ or utilize it as a springboard for radical change. A recent speech from Sanjay Wadhwa, acting director, division of enforcement for the Securities and Exchange Commission (SEC) has indicated that, despite the departure of previous director Gurbir Grewal, firms can expect ‘business as usual’ from SEC enforcers.
Down to a fine art
Delivered on 6 November 2024 to the Securities and Enforcement Forum, Wadhwa’s speech acts as a prelude to upcoming annual enforcement totals from the regulator. Wadhwa asserted that:
“Numbers … only tell one part of the story. They don’t capture the full impact of the enforcement actions filed or the remedies obtained, either individually or cumulatively, in terms of investor protection or changing industry behavior.”
Arguably the regulator’s most impactful initiative in terms of protecting investors and changing industry behavior has been its ongoing enforcement crusade against off-channel communications, which Wadhwa highlighted:
“Perhaps no recent Enforcement initiative has gotten more attention than our ongoing off-channel communications initiative, colloquially known as the WhatsApp initiative, to ensure that regulated entities, including broker-dealers, investment advisers, and credit ratings agencies, comply with the recordkeeping requirements of the federal securities laws.”
Without sharing a spoiler alert for the upcoming enforcement figures, Wadhwa revealed that throughout fiscal year 2024 “the Commission brought recordkeeping cases resulting in over $600 million in civil penalties against more than 70 firms.” Since the series of enforcements began back in 2021, “the initiative has resulted in charges against more than 100 firms and over $2 billion in penalties.”
Wadhwa also highlighted some of the factors the SEC considers when taking into account whether to fine firms, and how much to fine them. This includes looking at “the scope and scale of violations,” how many off-channel messages were sent, and how many employees were involved in sending them. The regulator takes into account the size of the firm and precedent (of which there is no shortage) in order to establish the size of a penalty that will “serve as a deterrent against future violations.” However, the regulator offsets this against compliance and remediation efforts that might mitigate a fine:
“We consider a firm’s efforts to comply with its recordkeeping obligations and to prevent off-channel communications, focusing, for example, on timely adoption of meaningful technological or other solutions. We also consider whether a firm self-policed, self-reported, remediated, or took other steps to meaningfully cooperate with our investigation.”
“Work with us, and we’ll work with you”
Wadhwa’s speech also covered the regulator’s ongoing efforts to extoll the benefits of early, substantive cooperation during investigations. He noted that the SEC has been “talking very deliberately about the benefits of cooperation for several years now,” referencing an earlier speech by Grewal that “distilled the message we have been very clearly conveying for some time: ‘work with us and we’ll work with you.’”
Instances of enforcement actions where firms have either seen their penalties reduced or avoided penalties altogether as a result of effective cooperation have been on the rise thanks to the regulator’s repeated efforts to spell out the benefits of proactive partnership:
“In fiscal year 2024, we saw those efforts bear a lot of fruit, with market participants really stepping up their self-policing, self-reporting, remediation, and other cooperation.”
And this is a trend that has continued into this fiscal year, with Wadhwa using the example of the Commission’s recent enforcement against JPMorgan, where the regulator issued no penalty in one action thanks to the firm’s “self-reports, remedial measures, and voluntary payments of over $100 million to harmed investors.”
Wadhwa outlined the multiple benefits of firms taking appropriate and timely cooperative action, pointing to firms that cooperate in resolving cases more quickly and with reduced sanctions, the benefits to the regulator which is able to close cases and refocus resources, and the benefits to investors who are no longer at risk from conduct issues and protected by improved compliance efforts.
However, Wadhwa counselled firms that cooperation is not necessarily a ‘get out of fines free’ card in and of itself:
“I recognize that we don’t have a formal policy that guarantees certain outcomes based on certain conduct. But based on what we’re seeing at the Division, our message is clearly being heard, and market participants and their counsel – at least those who are paying attention – are responding.”
The best measure of success
Wadhwa’s speech clearly points to a continuation of the regulator’s attitude towards firms that cooperate and work alongside it, and towards the merits of its ongoing off-channel communications enforcements. It is clear that the regulator sees its focuses and enforcement actions as having contributed to unearthing a longstanding compliance problem:
“I think the better take-away from the scale of the initiative, both in terms of the dollar amount of penalties and number of firms charged, is that it has shone a light on how widespread noncompliance was when it came to this practice. And, given how far back in time this practice went, it was not the result of folks working remotely during the pandemic.”
For Wadhwa, it is not the dollar amounts in fines the enforcement actions have recouped that are a sign of success, but the contribution to changed behaviors and better compliance practices:
“I think the best measure of the success of the initiative is how it has changed industry behavior and spurred proactive compliance by market participants. We’re seeing that in the number of firms that are improving their policies and procedures and implementing remedial measures.”
If the SEC believes its approach and focuses has affected such substantive and lasting change, it is a fairly safe bet that – even with any further changes in leadership – it will more than likely continue to prioritize off-channel communications enforcements. Even the most hesitant of firms should have gotten the message by now.
