In October, the annual “SEC Speaks” event took place, where the SEC Chair, Commissioners, senior leaders and other staff provided public remarks and updates on the initiatives and priorities of the agency. One of the speeches was given by Gurbir Grewal, the new SEC Director of the Division of Enforcement. Director Grewal’s speech focused on a decline of public trust in financial institutions and markets and identified several policy changes the SEC would be implementing to restore that trust.
Significantly, Director Grewal announced that the SEC will be requiring “admissions” from wrongdoers “in appropriate circumstances.” This is not the first time the SEC has required admissions of wrongdoing, but it is helpful to review the SEC’s past policies to understand why Director Grewal’s statement is significant. For many years, the SEC would settle cases without requiring any specific admission of wrongdoing and these settlements would contain language reflecting that the individual or corporation “neither admits nor denies” any wrongdoing. During the Obama administration, the SEC shifted its settlement requirements and required admissions of wrongdoing in significant or egregious cases or where there were parallel criminal proceedings. But, under the Trump administration, the SEC reverted back to previous policy.
The return to requiring admissions of wrongdoing announced by Director Grewal appears to be broader than any of the SEC’s previous policy requirements. Director Grewal vaguely stated that admissions would be required “in appropriate circumstances . . . in cases where heightened accountability and acceptance of responsibility are in the public interest.” It remains to be seen how broadly this policy will be applied, but it bears noting that Director Grewal did not place any limits on its use.
This is an important shift. Admissions of wrongdoing matter, as they are legally binding admissions that an individual or corporation violated the law made before a government regulator. An admission is unambiguous, unlike the commonly seen language that “neither admits nor denies” allegations. And these admissions of wrongdoing can have additional, collateral implications.
For example, an admission that an individual or entity “knowingly” violated the securities laws can have consequences with other regulatory agencies (e.g., the Office of Comptroller of Currency, the Federal Reserve, the Department of Defense) or self-regulatory organizations (e.g., FINRA, NYSE, Nasdaq, CFE, CME). It could also be used against the individual or entity in civil litigation, not least in securities’ class actions. An admission of illegal behavior could trigger an exclusion in a D&O insurance policy that would deny coverage to an otherwise covered individual or entity. Simply put, these collateral consequences must be considered when potentially agreeing to admissions of wrongdoing with the SEC in order to resolve a matter.
Director Grewal made several other noteworthy pronouncements. First, he indicated that the SEC would increasingly impose another existing enforcement remedy—the officer and director bar which excludes an individual from acting as an officer or director of a public company—where there are admissions of wrongdoing. Second, he related that the SEC would heavily rely on other “tools” at its disposal, such as injunctions and undertakings, in order to enforce compliance with securities laws. Third, he noted that SEC staff would be more empowered in their enforcement, meaning that individual or corporate targets of enforcement efforts will have less opportunity to appeal adverse decisions to the SEC’s more senior attorneys and potentially leading to divergent enforcement decisions, priorities, and policies.
In short, Director Grewal’s remarks indicate what many have expected—that the SEC may ramp up its enforcement efforts and do so with more “teeth.”