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At the Practicing Law Institute’s annual SEC Speaks conference, U.S. Securities and Exchange Commission (SEC) leadership outlined the agency’s current enforcement priorities and outlined its agenda for the year to come. The in-person conference, held in Washington, D.C., on September 8-9, 2022, covered a wide range of topics, including successful SEC enforcement actions; proposed environmental, social and governance (ESG) regulations; and the trade implications of the Russian-Ukrainian conflict. During various roundtables dominated by rapidly changing market conditions, the agency has, however, emphasized its cryptocurrency regulation, which is still in development.

The tone was set early on with SEC Chairman Gary Gensler quoting Judge Thurgood Marshall to warn that “Congress has painted the definition of a security with a broad brush.” Within this broader framework, Gensler and SEC leadership outlined the agency’s plans to adapt existing regulations and court precedents to respond to market innovations and control new sources of risk.

Below are five key takeaways from this year’s conference:

1. ‘Main Street’ Goes Digital: The SEC Puts Crypto Assets at the Forefront

President Gensler used his introductory remarks to send an unequivocal message that the SEC’s “investor protection” mission extends to the cryptocurrency market. Quoting inaugural SEC Chairman Joseph Kennedy (about 1935), Gensler pointed out that “no honest business need fear the SEC” and said that nothing in the crypto market is inconsistent with the scope of current securities laws. Chairman Gensler claimed that the “vast majority” of the nearly 10,000 existing crypto tokens are securities that fall under federal securities regulation. He added that where crypto “intermediaries” operate as exchanges, brokers or dealers – for example, matching buyer and seller orders, executing transactions or acting as a custodian – they should assess their registration obligations. The Chairman further encouraged intermediaries to register each of their independent functions, which in some cases could lead to disaggregation into separate legal entities to mitigate potential conflicts of interest and enhance investor protection.

Other SEC executives also pointed to the committee’s focus on crypto. For example, Office of the Chief Accountant (OCA) staff have observed that entities protecting crypto assets on behalf of other parties do not always “transparently” disclose unique technology, legal, and regulatory risks to their own investors. with which they are confronted. Office of International Affairs (OIA) staff flagged “unsupported” crypto, stablecoin, and decentralized finance (DeFi) trading platforms as top concerns. Enforcement Division Market Abuse Unit (MAU) staff reported ignoring financial product “labels” and viewing many crypto cases as relatively straightforward under the laws current securities.

2. Law enforcement maintains focus on individual responsibility

In his Remarks, Enforcement Division Director Gurbir Grewal explained that by taking enforcement action, the SEC not only seeks to impose accountability and encourage compliance, but also aims to build investor confidence. . Included in this “regulation by enforcement” program are people who play a gatekeeper role within regulated entities.

Expanding on Director Grewal’s comments, Enforcement Division Chief Counsel Samuel Waldon focused his remarks on three mechanisms by which the SEC seeks to impose individual liability:

  • Section 304 of the Sarbanes-Oxley Act. In short, SOX-304 provides that if an issuer is required to prepare an accounting restatement “as a result of misconduct”, then the CEO and CFO must reimburse the company for “any” bonuses, incentives or stock-based compensation received during the previous year and any profit made on the sale of the company’s shares during the previous year. In deploying this provision, Chief Counsel Waldon emphasized that the law “applies to the guilty and not guilty CEOs and CFOs alike” and that the SEC can sue for everything compensation subject to SOX 304 – not just the amount by which an officer’s compensation was inflated due to the misconduct at issue.
  • Director and officer bars. Chief Counsel Waldon described the D&O bars as a “powerful” remedy that the Enforcement Division will seek “more broadly.” In addition to the usual circumstances in which such bans are sought, Waldon said the division will also seek bans in the form of “equitable” judicial relief, including penalties based on the character and fitness of an individual. individual. Waldon even suggested D&O bars as a prophylactic measure in cases where the defendant has not previously served as an officer or director, but may do so in the future.
  • Restitution litigation after Liu v. SECOND. Finally, the decision of the Supreme Court of the United States in Liu v. SECOND asserted the power of the SEC to seek restitution, but limited those amounts to the wrongdoer’s net profits and allowed legitimate expenses to be deducted from that total. In his remarks, Waldon emphasized that there remains the obligation of the defendant to adequately support any expenses that are claimed as a deduction cited to reduce the reimbursement. Expose on a question left unanswered after Liu, Waldon said the SEC will continue to seek restitution in cases where it is not possible to return returned funds to investors. Instead, the funds are deposited with the US Treasury Department (a practice the Court questioned but did not specifically address in the case). Liu decision).

3. Cybersecurity Disclosures: A Constant SEC Priority

SEC staff noted that cybersecurity disclosures continue to be an area of ​​interest and explained that several studies demonstrate that cybersecurity risk is a top concern for investors. One March 2022 proposed rule aims to provide investors with more timely and consistent information to address these concerns. Notably, the proposed rule requires registrants to report material cyber incidents on Form 8-K, which means such events would have to be disclosed within four business days after the registrant determines that they have experienced a material incident. As proposed, the rule would also amend Form 10-K to require periodic disclosures regarding policies and procedures that help registrants identify and manage cyber risks and management’s role in implementing those policies and procedures.

David Hirsch, head of the Enforcement Division’s Crypto Assets and Cyber ​​​​​​Unit, stressed the importance of reporting cyber breaches and added that after a breach, issuers should be on heightened alert to insider trading clues and focus on protecting any personally identifiable information (PII) or other sensitive information that may have been compromised.

4. The SEC sheds light on the application of ESG rules

The launch last year of the SEC Climate and ESG Task Force within the Enforcement Division cemented the agency’s focus on ESG and climate-related issues, but we continue to see how enforcement in this space can grow. Enforcement staff pointed to a recent lawsuit brought against an investment adviser based on alleged misrepresentations that its fund investments had undergone an ESG quality review. Enforcement staff pointed out that a “good lesson” for advisers recommending ESG-related strategies is to also ensure disclosures comply with ESG rules and regulations.

Additionally, compliance staff noted that the asset management unit, in particular, will focus on ESG and climate-related information to determine whether it contains accurate statements. Review Division staff focused on whether advisors provide “accurate and adequate information” on elements of the CRS form, including those related to climate risks, and how entities have remedied the previously identified shortcomings. These comments follow the recent statement from the SEC proposed rules improve ESG information for investment advisers and investment companies. Given the in-depth comments on the ESG, it would not be surprising if enforcement actions continue to intensify in the coming year.

5. A new emphasis on disclosure of emerging risks, including the Russian-Ukrainian war

Finally, the SEC will ensure that registrants make adequate disclosures in areas of emerging risk in the coming fiscal year, including risks associated with the Russian-Ukrainian war, supply chain issues and the ‘inflation. Echoing a theme permeating many SEC Speaks presentations where staff cited the Russian-Ukrainian conflict as a serious business challenge, Corporate Finance Division staff advised filers to consider the need to disclose the Russian-Ukrainian war even if the declarants do not. do business in these countries. This conflict could aggravate supply chain disruptions, which have been caused by the pandemic and have contributed to inflationary pressures, resulting in strains on businesses and the economy. More generally, inflation has led to higher costs and lower demand for products and services. Staff advised registrants to consider whether these developments affect their business and, if so, to avoid boilerplate in their communications and disclosures. The Corporate Finance Division has also announcement plans to add units to its disclosure review program to assess disclosures in issuer filings involving crypto assets and certain life sciences companies.

Take away food

Throughout the conference, SEC staff highlighted important new areas, such as cryptocurrency and ESG disclosures, and highlighted areas of ongoing interest, such as cybersecurity and individual responsibility. For now, it appears that SEC management is taking somewhat of a “one-size-fits-all” approach to regulating these various issues, working within the framework of existing securities law and tackling all the nuances through other means, such as rule-making, enforcement and regulations. The regulatory environment by enforcement means that issuers and regulated entities would be well served by devoting compliance resources to the SEC’s enforcement priorities and staying attuned to the developing legal landscape.

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