By Amanda Maine, J.D.
Steve Peikin, co-director of the SEC’s Division of Enforcement, recently participated in a panel discussion at the Securities Docket 2019 Enforcement Forum. Peikin addressed recent Division initiatives, such as its Share Class Selection Disclosure Initiative, as well as the SEC’s approach to remedies and settlements.
SCSD Initiative and self-reporting. Peikin touted the Commission’s Share Class Selection Disclosure (SCSD) Initiative, which encouraged mutual funds to self-report violations of SEC disclosure rules relating to mutual fund fee structures, including 12b-1 fees, in exchange for favorable settlement terms. Nearly 100 firms have entered into settlements with the Commission, including 79 in March and 16 in September.
Bradley J. Bondi of Cahill Gordon & Reindel, who moderated the discussion, asked Peikin if the SEC would pursue similar self-reporting initiatives like the SCSD Initiative and the Municipalities Continuing Disclosure Cooperation Initiative. Peikin said that he would not rule it out but stated that the self-reporting initiatives established by the SEC in recent years involved certain criteria such as behavior that was widespread and difficult to detect.
Bondi also inquired why the SEC chose a self-reporting initiative to capture mutual fund disclosure failures as opposed to a 21A report. For example, Bondi pointed to the Commission’s 21A report from October 2018 which outlined various cybersecurity-related incidents but did not sanction the companies cited in the report. Peikin explained that the SEC had already brought several enforcement actions relating to 12b-1 fee disclosures before the SCSD Initiative, so the self-reporting initiative would be more appropriate.
Regarding self-reporting in general, former SEC Enforcement Director William McLucas, now at Wilmer Hale, said that the lack of guidance about self-reporting from the SEC can result in tough discussions with clients because there are no guarantees for self-reporting in contrast to the detailed guidelines from the Department of Justice. George S. Canellos, formerly of the SEC’s Enforcement Division and currently at Milbank, agreed, stating that without formal guidelines for cooperation credit, the SEC is “all over the map.”
Remedies. Bondi asked Peikin about the Commission’s use of non-monetary penalties. Peikin said that the SEC is taking a creative approach to remedies which may not involve financial sanctions. The SEC wants to address the cause of the problem, he said. As an example, he cited the SEC’s enforcement action against Tesla and its CEO Elon Musk, which involved a settlement requiring Musk to step down as Tesla chairman and imposed certain procedures for monitoring Musk’s public statements about the company.
Bondi cited a Cornerstone report that SEC penalties are trending downward and inquired about how the Commission assesses penalties. Peikin said that the SEC continues to evaluate the harm caused by the conduct, its egregiousness, and how widespread the conduct was in assessing penalties. Peikin also said the Commission wants companies and firms to be aware of the message it sends when imposing a penalty.
Settlements and waivers. Bondi brought up a recent change at the Commission involving the way the SEC approaches settlements and subsequent waivers. Under the new approach, instead of considering settlements and waiver requests separately, the Commission will examine them simultaneously. Peikin said that the policy is still very new and that CorpFin makes its own recommendations separate from Enforcement. He said that the Division is still studying it and to “stay tuned.”
Canellos was not as shy in expressing his opinion on the new policy. He praised the new procedure, stating that before it was enacted, he couldn’t inform his client what the consequences would be when entering a settlement with the SEC. He went on to say that most disqualifications that result from an SEC order, such as disqualification from well-known seasoned issuer (WKSI) status, are “dumb” and can occur from the “tiniest infraction.” According to Canellos, these collateral disqualifications should be a remedy that the SEC seeks, rather than something that flows automatically from the imposition of an administrative order.