By Amanda Maine, J.D.
The regional directors of the SEC’s Los Angeles and San Francisco offices recently spoke at Securities Docket’s Enforcement Forum West on enforcement issues facing the agency. Joined by members of the defense bar, the panelists spoke about the Enforcement Division’s focus on ESG matters, recent litigation against large companies, and potential enforcement actions against SPACs.
Climate and ESG Task Force. Michele Wein Layne of the Los Angeles office discussed the recent creation of an Enforcement Division task force on climate and environmental, social, and governance (ESG) matters. The task force, which was announced by then-Acting Chair Allison Herren Lee, has 22 members drawn from the SEC’s headquarters, regional offices, and Enforcement specialized units and will focus on two areas—public company disclosures and investment adviser strategies. According to Layne, the task force will look at disclosures made by public companies relating to ESG risks to see if they are false or misleading. On the investment adviser side, the task force will keep an eye on advisory firms’ disclosure obligations and fiduciary duties, as well as their marketing and advertising regarding their investment strategies that relate to ESG issues, Layne said.
Jina Choi of Morrison & Foerster, who previously served as head of the SEC’s San Francisco regional office, noted that ESG is a major focus of the agency under the Biden administration, although there are no new specific ESG rules in place yet. She remarked that ESG violations pursued by the SEC might not be the product of a huge fraudulent scheme, but instead may include enforcement actions such as the recent case against Fiat Chrysler, which last year settled SEC charges that it made misleading disclosures about an internal audit of its emissions control systems.
Recent litigation: Regulation FD and Ripple. Panel moderator Jordan Eth of Morrison & Foerster asked about the SEC’s settled enforcement action against AT&T and three of its executives for violating Regulation FD. The SEC has alleged that AT&T violated Reg FD by selectively disclosing material nonpublic information to research analysts. Eth inquired whether people were becoming complacent about Reg FD, to which Randall Lee of Cooley LLP replied that it is human nature to make mistakes. On the face of the allegations, it sounds like a run of the mill FD violation, but Lee commented that since the matter is currently being litigated, the SEC must have taken an aggressive position in settlement negotiations with AT&T.
Eth also asked the panelists about the SEC’s litigation against Ripple Labs regarding its XRP digital asset, which the Commission maintains should have been registered with the SEC as a security or qualified for an exemption. Choi said she was surprised when the SEC filed its action against Ripple because many people in the industry see XRP like the cryptocurrency Ether, which the SEC has not pursued. Choi noted that the enforcement action against Ripple comes after a major victory by the agency last year against Telegram and its digital assets known as "Grams," so perhaps it should not have come as a surprise. However, Choi noted that the matter is currently being litigated and several discovery issues have gone in Ripple’s favor.
Past and future: COVID and SPACs. Erin Schneider of the San Francisco office spoke about how the SEC dealt with COVID-19 issues early in the pandemic. In addition to moving to a virtual office environment, the SEC issued dozens of trading suspensions for companies suspected of taking advantage of the pandemic, such as making dubious claims about treatments, vaccines, testing kits, and PPE, and pumping up the price of the stocks. She also drew attention to the SEC’s enforcement action against The Cheesecake Factory, which allegedly made misleading disclosures about the impact of COVID-19 on its business operations and financial condition. The company agreed to settle the SEC’s charges by paying a $125,000 penalty. While the pandemic is rounding a corner, Schneider said that there are still events happening in the market that are COVID-related, and the SEC will continue to monitor it going forward.
The panel also briefly addressed the recent explosion in the number of special purpose acquisition companies (SPACs) that have gone public and how the Enforcement Division intends to approach this issue. According to Lee, potential SPAC enforcement cases can fall into three buckets: issues involving a company’s sponsors; issues relating to whether the new public company is fit to operate as a public company; and gatekeepers such as underwriters and auditors. Choi said that while she has not seen any recent enforcement activity involving SPACs, given the structure, the amount of money involved, and public statements made by these new public companies, she expects eventual enforcement activity coming out of the SEC. Schneider noted that many new SPACs have originated in the San Francisco region, so her office is paying attention to it.