The past few weeks have ushered in signs of what’s likely to come from the SEC’s Division of Enforcement under the Biden Administration, including a greater number of investigations and a tougher path to “bad boy” waivers for issuers. The SEC’s enforcement program plays a critical role in the agency’s tripartite mission, especially with respect to the protection of investors. The program, like many other aspects of the SEC, takes many of its cues from the agency’s leadership. At least for now, Acting Chair Allison Lee is at the helm. Before becoming a Commissioner, Lee was a former SEC enforcement staffer and previously served as enforcement counsel to a former Commissioner.
Acting Enforcement Director Announced
On January 22, 2021, the SEC announced Melissa Hodgman as Acting Director of Enforcement. According to the announcement, Ms. Hodgman had been an Associate Director in Enforcement since 2016 and she joined the Division in 2008. Ms. Hodgman could be tapped to remain in the post once a new SEC Chair is confirmed. Most recently, SEC Enforcement was led by two Co-Directors, one of whom, like Ms. Hodgman, had been Acting Director of Enforcement before the promotion to Co-Director. The SEC’s enforcement program is massive and stands to grow under the current administration. As a point of reference, the SEC brought over 2,800 enforcement cases under each of the past three Chairs. It’s difficult to compare different administrations, and while not the best measure with which to do so, the SEC obtained $11 billion in disgorgement and penalties under Mary Shapiro, $13.4 billion under Mary Jo White, and $15 billion under Jay Clayton. The last number stands out, given that many presumed that the agency’s enforcement posture would soften under a Republican appointee, but that clearly was not the case under Chair Clayton.
Enforcement Staff Authorized to Issue Formal Orders of Investigation
On February 9, 2022, Acting Chair Lee announced that she was restoring the authorization for senior SEC Enforcement officers to approve the issuance of a Formal Order of Investigation. This means that, once again, senior Enforcement officers may exercise the delegated authority of the SEC to authorize staff to subpoena documents and take sworn testimony. Lee’s announcement cites to better protecting investors, including by enabling investigative staff “to act more swiftly to detect and stop ongoing frauds, preserve assets, and protect vulnerable investors.” The authority to issue a Formal Order of Investigation rests with the Commission itself. Until this announcement, the Commissioners themselves voted on these authorizations. But like many other aspects of the agency’s oversight, the Commissioners may delegate this function to the staff. That’s precisely what happened in 2009 under Obama-era Chair Mary Schapiro. But the agency pulled back the delegated authority in 2016 under Trump-era Acting Chair Mike Piwowar. The political and policy seesaw has tilted again. With this, we can certainly expect an increase in the number of investigations and formal cases. For example, after the powers were delegated in 2009, Formal Orders of Investigation skyrocketed from 233 in 2008 to 681 by 2016. Removing the requirement of a Commission-level greenlight may also give Enforcement staff additional discretion to pursue actions that may not align with full Commission’s priorities, while at the same time limiting Commissioners’ visibility into broader enforcement initiatives.
Enforcement Settlements No Longer Contingent on “Bad Boy” Waivers
On February 11, 2021, Acting Chair Lee announced that Enforcement will no longer recommend to the Commission a settlement offer that is conditioned on granting a “bad boy” waiver. As noted in the announcement, a violation of certain federal securities laws and regulations can disqualify issuers and individuals from utilizing various exemptions and privileges, such as enjoying “WKSI” status, engaging in a private placement under Reg. D, and serving in various capacities for investment companies. According to the announcement, this step is designed to “enshrine best practices and ensure that [SEC] policies and procedures are designed to eliminate the potential for any structural conflicts or pressures” and “will help preserve the independence of these separate processes and better protect investors and markets.”
Time will tell whether this is a case of policy prevailing over pragmatism, perhaps even rendering it more difficult for the Commission to secure settlements or, even if secured, only after a drawn out process that consumes unnecessary staff and issuer resources. Some would argue that the privileges and exemptions to which the waivers relate are just that, and that companies (and individuals) that fail to comply with federal securities laws should lose the ability to rely on them, or at least must justify continued reliance. Others would argue (A) that the matters leading to a disqualification are too broad, (B) that the disqualifications are often to the detriment of shareholders, rather than those responsible for the bad acts themselves, and (C) that the disqualifications are punitive in nature, rather than, as Acting Chair Lee puts it, “forward looking and focused on protecting investors, the market, and market participants from those who fail to comply with the law.”
It is important to remember that parties with the SEC for various reasons. Often, they do so even when they feel they have a strong case in support their actions. Companies must consider a multitude of factors when deciding whether to settle a case—a focus on speed, cost, and certainty is a common thread. These considerations include a swift resolution vs. a drawn out battle with the SEC; balancing the cost of a fine vs. the cost of litigating (plus a fine, to boot, if unsuccessful in disputing the allegations); the ability to (typically) settle without admitting the claims levied by the SEC (but also without denying them); potential reputational harm of drawing the facts of a particular matter out into the public domain; and the risk of holding up other commercial endeavors if a matter remains open (e.g., counterparties that might be uncomfortable proceeding with a deal if the company is subject to a pending enforcement matter).
Waivers, while often granted, are not the default. That said, when considering whether to settle a pending enforcement matter with the SEC, companies often seek a waiver as part of the overall negotiations. This announcement by Acting Chair Lee calls into question whether companies will take a more aggressive stance on challenging Enforcement staff’s allegations of wrongdoing. Without the certainty of receiving a waiver, it leaves companies in the wind in this respect. Acting Chair Lee’s statement indicates her view that these waivers “should not be used as a bargaining chip in settlement negotiations or regarded as an obstacle to be overcome on the way to a settlement.” But this uncertain outcome on the waiver side of the equation could create obstacles that companies are unwilling to leave to chance—i.e., whether the Division of Corporation Finance or Division of Investment Management will grant the waiver.
It seems like a worthy endeavor to, as Acting Chair Lee put it, “eliminate the potential for any structural conflicts or pressures.” But this step may encourage less or fractured communication between SEC divisions and their staff—exactly the opposite of what the industry needs. One must only look to the SEC’s “ICO” settlements to see that it’s not uncommon for Enforcement staff considerations to dovetail with considerations of staff in other SEC divisions. Several of those settlements included undertakings beyond the traditional enforcement toolset, such as imposing requirements that extend to obligations typically within the jurisdiction of the Division of Corporation Finance, like registering as a reporting company and providing disclosures.
In a rebuttal statement, Commissioners Hester Peirce and Elad Roisman expressed their concern and disagreement with the new policy. They support the legacy approach of considering and accepting contingent settlement offers. In their view, the “judgment of the Division of Investment Management and the Division of Corporation Finance remained fully independent of the Division of Enforcement, and the policy has not created structural conflicts or pressures between the settlement and waiver processes undertaken by the different operating divisions. In short, the policy worked well.” They also point to the concern that about certainty and finality, noting that “[i]nsisting that an entity that is willing to settle be left in the dark about whether its waiver application will be granted significantly alters the entity’s settlement calculus because it undercuts the certainty and finality that settlement might otherwise provide.”
These recent steps signal a shift in tone and could preview what the agency’s enforcement program will look like under the next Chair who is seated, which is expected to be former CFTC Chair Gary Gensler. We will keep a close watch as these matters develop.
 The SEC – Revitalized, Reformed and Protecting Investors, SEC Press Release, available at https://www.sec.gov/news/press/2012/2012-240-accomplishments.htm; Protecting Investors and Our Markets Through Rigorous Oversight, Robust Enforcement, and Transformative Rulemaking (April 2013-October 2016), SEC Press Release, available at https://www.sec.gov/about/sec-accomplishments.htm; SEC Chairman Jay Clayton Confirms Plans to Conclude Tenure at Year End, SEC Press Release, available at https://www.sec.gov/selected-sec-accomplishments-may-2017-2020.
 Select SEC and Market Data Fiscal 2008, pg. 21, available at https://www.sec.gov/files/secstats2008.pdf; http://www.sec.gov/news/speech/2009/spch080509rsk.htm; Select SEC and Market Data Fiscal 2016, pg 24, available at https://www.sec.gov/files/2017-03/secstats2016.pdf.