“Change came swiftly” at the SEC during the first six months under the Biden administration; yet this is only just the beginning, according to 2021 Mid-Year Securities Enforcement Update by Gibson, Dunn & Crutcher LLP.
“In sum, it is safe to say that the next four years will see a return to increasing regulatory oversight and escalated enforcement of market participants,” the law firm noted in the update published on July 20, 2021.
On the enforcement side, the update especially pointed to the appointment of Gurbir Grewal as SEC enforcement director. He was previously New Jersey Attorney General.
“With the appointment of Mr. Grewal, [SEC] Chairman [Gary] Gensler continues a trend, begun in the wake of the 2008 financial crisis, of appointing former prosecutors to that position,” Gibson Dunn wrote, referring to Gensler’s tenure as the chairman of the Commodity Futures Trading Commission (CFTC) under the Obama administration. At the time, Gensler pursued aggressive enforcement against major financial institutions.
The update said that Grewal was the Bergen County Prosecutor and Assistant U.S. Attorney in the District of New Jersey and Eastern District of New York before becoming New Jersey Attorney General.
“Now that the new Commission leadership is taking shape, we expect the coming months to reflect increasingly the influence of the new administration,” Gibson Dunn stated. “Undoubtedly, this will translate into heightened scrutiny on legal and compliance departments and financial reporting functions of financial institutions, investment advisers, broker-dealers, and public companies.”
Scrutiny of SPACs
The update also noted SEC initiatives related to environmental, social, and governance (ESG) disclosures, including an enforcement task force, as well as special purpose acquisition companies (SPACs).
On July 13, the SEC brought charges against SPAC Stable Road Acquisition Company, its sponsor, and its CEO as well as the proposed merger target Momentus Inc. and the company’s founder for allegedly misleading claims about Momentus’s technology and national security risks.
“To emphasize the point, SEC Chairman Gary Gensler took the unusual step of providing comments that echoed the concerns of senior officials and sent a clear message that even when the SPAC is ‘lied to’ by the target, the SPAC and its executives are at risk for liability under the securities laws if their diligence fails to uncover misrepresentations or omissions by the target,” Gibson Dunn noted.
On July 29, the SEC brought another SPAC-related charges against the founder of Nikola Corp. Trevor Milton for allegedly disseminating false and misleading information repeatedly.
“Some might say the SEC is ‘targeting’ SPACs; to me, the targets they’ve struck seem to be well-justified,” Jack Ciesielski, founder of investment research firm R.G. Associates, wrote in his Weekly Reader on July 30. “Until they work out the differential disclosure requirements between IPOs and SPACs – projections allowed for SPACs, not allowed for IPOs – however, I think the SEC will continue to play a grinding game of ‘whack-a-mole’ with SPACs and their promoters.”
Separately, the Financial Industry Regulatory Authority (FINRA) is preparing to do targeted sweeps of SPACs.
FINRA member firms “that have participated in SPAC transactions as underwriters or advisers should expect to receive requests from FINRA’s Examinations and Enforcement departments regarding, among other things, potential conflicts of interest presented by their roles in SPAC transactions,” Sidley Austin LLP wrote in a July 26 client memo. “FINRA’s Corporate Financing Department may also use this period as an opportunity to more closely scrutinize disclosures in SPAC initial public offerings.”
International Scrutiny on SPACs
Issues concerning SPACs are not limited to the United States, and international securities regulators are also stepping up oversight.
The International Organizations of Securities Commissions (IOSCO) said on July 27 that it has formed a SPAC network and held its first meeting on July 26 to discuss issues raised by SPACs.
The SEC is a member of IOSCO.
SPACs have long existed before the surge since last year, but IOSCO said that they may raise regulatory concerns. The international organization said that its board agreed to form the IOSCO SPAC Network to facilitate information sharing about SPACs and better monitor developments.
The network is chaired by IOSCO board Vice Chair Jean-Paul Servais, chairman of the Financial Services and Markets Authority of Belgium.
“I am pleased that so many members of IOSCO have joined the SPACS network to exchange experiences on non-traditional IPOs via SPACS and discuss emerging issues related to investor protection and fair, orderly and efficient markets,” Servais said in a statement.
Gibson Dunn meanwhile said the SEC has been increasing its focus on controls and disclosures related to cyberattack risks. And this is expected to intensify.
The update pointed to a disclosure by the enforcement division that it was conducting an investigation regarding a cyberattack involving a compromised software made by SolarWinds Corp.
“As part of that investigation, the Division staff issued letters to a number of entities requesting information concerning the SolarWinds compromise,” the law firm stated. “The inquiry is notable both for its public nature as well as the scope of the requests and signals a heightened scrutiny of how companies manage cyber-related risks.”
Shift in Approach to Levying Penalties?
Further, not only is the SEC going to be aggressive in going after wrongdoers, Gibson Dunn said it may be shifting its approach to corporate penalties. And the update mentioned Commissioner Caroline Crenshaw’s speech that criticized a 2006 statement that described the factors when deciding whether to assess penalties against a corporation. It suggested that the commission should be careful not to impose penalties that unduly burden shareholders.
She suggested different factors to focus on: the egregiousness of the misconduct; the extent of the company’s self-reporting, cooperation, and remediation; the extent of harm to victims; the level of complicity of senior management; and the difficulty of detecting the alleged misconduct.
“Anecdotal experience suggests that a majority of the Commissioners, and consequently, the staff of the Enforcement Division, are following the principles outlined in Commissioner Crenshaw’s speech,” Gibson Dunn concluded.
“The significance of this for public companies is that the Commission’s approach to corporate penalties diverges from its statutory underpinnings,” the update noted. This is because the securities laws provide for prescribed penalty amounts per violation.
“In general, in litigated cases, district courts and administrative law judges have generally imposed reasonable limits on the penalties sought by the Commission,” the law firm wrote. “If the Commission is no longer following the 2006 guidance, then untethered from a consideration of corporate benefit or shareholder cost-benefit, the Commission’s posture on corporate penalties is vulnerable to subjective assessments of egregiousness and corporate cooperation.”
This article originally appeared in the August 9, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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