By Amy Leisinger, J.D.
The SEC’s Division of Enforcement primarily focuses on the most substantial challenges and risks facing investors and markets and how to best use limited resources to effectively address these issues, said Enforcement Co-Director Steven Peikin in a keynote Address to the UJA Federation. Generally, today’s problems continue to involve outright fraud and other forms of misconduct that undermine market confidence and work against the interests of retail investors, he explained. However, the contours of risks are always changing given the ingenuity of bad actors, increasing market complexity, and rapid technological development and Enforcement staff has been forced to adapt to a shifting landscape, the director explained.
Cybersecurity and ICOs. According to Peikin, the Division of Enforcement has increased its focus on, and dedicated additional resources to, cyber-related matters, including initial coin offerings. In particular, the director identified four areas that pose significant risks, including: (1) illegal trading and manipulation resulting from hacking; (2) failure to safeguard information; (3) cyber-related disclosures; and (4) ICOs, cryptocurrencies, and blockchain.
ICOs have raised billions in recent years from a broad base of investors, Peikin said, but this growth can obscure the high risk actually involved with the investments. Nevertheless, digital assets could hold promise for increased efficiency in transactions, and properly conducted ICOs could be an innovative way to raise funds, he explained. As such, the Commission has pursued a balanced approach: detecting and halting misconduct without discouraging lawful and beneficial capital formation and technological innovation, Peikin stated. In The DAO report, the SEC explained how ICOs fit into the established framework for securities offerings and provided insight into how to determine whether an ICO constitutes an offering and, separately, SEC divisions have issued statements warning investors about ICO investment and risks associated with online trading platforms. Because ICOs could fundamentally alter the capital-raising process and because hacking and data intrusion could undermine investor confidence in the markets, the Division of Enforcement will meet cyber issues head-on, according to the director.
“[O]ur hope is that speaking clearly about these issues to market participants may mean there are fewer cases that we have to bring,” Peikin said
Individual liability. The director also stressed a continuing focus on holding individuals accountable for misconduct as appropriate. The goal is to stop problems before they start, Peikin explained and, to do so, enforcement efforts need to advance goals of individual and general deterrence to maximize effectiveness. Charging culpable individuals, such as executives, in addition to companies can have a broad effect on corporate culture, despite the increased costs of building cases against them, he noted.
“The cost is worth it,” Peikin opined, because “the deterrent effect of individual accountability has outsized effects on our markets.” Peikin opined.