SEC Enforcement Chief Warns of Harsher Sanctions, Even for First Offenses
The head of the Securities and Exchange Commission’s enforcement unit on Thursday sent a wake-up call to broker-dealers that the agency will ratchet up fines and penalties as a more effective deterrent against misconduct.
“We must design penalties that actually deter and reduce violations, and are not seen as an acceptable cost of doing business,” said Gurbir Grewal, director of the Division of Enforcement, in remarks addressed to lawyers at the Practicing Law Institute’s 2021 Broker/Dealer Regulation and Enforcement.
Grewal, the former New Jersey Attorney General who took on the enforcement role in July, said the SEC would review areas where it found that prior penalties were not sufficient. Even for broker-dealers who were first time offenders, the SEC could impose harsher sanctions for firms committing the same type of rule violations previously charged against other firms.
“[T]o achieve the intended deterrent effect, it may be appropriate to impose more significant penalties for comparable behavior over time,” Grewal said, according to a transcript of the remarks. “Doing so will make it harder for market participants to simply ‘price in’ the potential costs of a violation.”
Fines in previous cases were often an important benchmark in determining what would be a fair and consistent sanction in future violations, but now the industry should “expect to see increased penalties based on the Enforcement Director’s comments,” said Susan Shroeder, a partner and Vice Chair of the Securities & Financial Services Department at WilmerHale.
“In other words, the same misconduct may now give rise to much higher fines, not just for ‘repeat offenders’ but also for defendants who did not previously violate the rules,” Shroeder, who was head of the Financial Industry Regulatory Authority’s enforcement unit from 2017 to 2019, wrote in an email.
Grewal did not discuss the specific violations that could warrant higher fines but also touted a shift to “proactive enforcement.” He cited as an example speeding on the New Jersey Turnpike leading to accidents if left unmonitored.
“As speeds climb higher and higher, you eventually have situations where accidents increase and heightened enforcement follows,” Grewal said. “But for all of the victims, it’s too late.”
Grewal highlighted specifically Regulation Best Interest and customer relationship disclosure summaries (Form CRS) as well as recordkeeping as potential trouble spots.
“Let me be clear here: I am talking about more than putting together a stock policy and giving a check-the-box training,” Grewal said. “This requires proactive compliance.”
The stance likely means the SEC will be more willing to impose sanctions “even where there is no other misconduct and the compliance failure is not the proximate cause of any customer harm,” according to Shroeder.
“For example, under Regulation Best Interest Enforcement might charge a firm with failures to implement a reasonable supervisory system even if the firm’s recommendations were all in the customer’s best interest and no customer harm has been identified,” Shroeder said.
In discussing record-keeping issues, Grewal used as an example an unidentified California broker-dealer that agreed to a fine last year for failing to preserve business-related texts after the SEC found that some brokers were using personal devices to communicate about trading with customers, other employees and third parties.
“Recordkeeping violations may not grab the headlines, but the underlying obligations are essential to market integrity and enforcement,” Grewal said. “Not only do these failures delay and obstruct investigations, they raise broader accountability, integrity and spoliation issues.”
The SEC also this summer embarked on an enforcement initiative aimed at ensuring that firms had properly filed their Form CRS documents. It settled with more than two dozen broker-dealers that had not properly distributed the forms, which provide information about potential conflicts of interest.
“Providing retail investors with essential information is the point of the Form CRS requirement, and we will continue to ensure that firms are satisfying their obligations to do so because that’s what’s required to prevent future investor harm,” Grewal said.
His comments reinforce what is expected to be a more vigorous enforcement stance under SEC Chair Gary Gensler and Grewal referenced Gensler’s previous comments that firms should “step back from the line” if their actions cross into a grey area.
Gensler’s predecessor, Jay Clayton, who is Of Counsel at Sullivan & Cromwell and non-executive Chairman of private equity giant Apollo Global Management, did not immediately return an emailed request for comment on Grewal’s remarks.