Peikin: Monetary Sanctions are Not the Only Enforcement Tools

SEC Division of Enforcement Director Steven Peikin wants you to know that he does not think every violation is best solved with a civil money penalty. Other enforcement tools, he said in an October 3 speech, including non-monetary relief such as undertakings, conduct-based injunctions, bars and suspensions can also prove quite effective – with the mix to be decided on a case-by-case basis.

Peikin, who has been in his position a little more than a year, made clear that financial penalties, including both civil money penalties and disgorgement, will continue to be assessed when appropriate – and provided examples of cases during the past year where the SEC has done just that, he said at a conference in New York City. His point seemed to be that, just as metrics such as the number of enforcement actions brought are not by themselves a good measure of agency effectiveness, financial penalties alone should not be viewed as the best enforcement tool.

In terms of viewing how effective the Division of Enforcement is in its efforts, Peikin said that he, along with Co-Director Stephanie Avakian, are viewing the effectiveness of the Enforcement Division’s work through “a different set of questions.” These are:

• Are our efforts protecting retail investors?
• To what extent is the Commission holding individuals accountable for violations of the law?
• Are we keeping pace with technological change?
• Do the remedies we recommend effectively further enforcement goals?
• Are we efficiently allocating the Division’s resources?

His remarks about financial and non-financial penalties related to the question about having remedies that effectively further enforcement goals, he said. “It is tempting to focus solely on the Commission’s ability to obtain significant financial penalties in enforcement actions. Large dollar figures attract headlines and some view them as a proxy for how tough we are, and, relatedly, the effectiveness of our enforcement efforts.”

“While we do seek and obtain some form of monetary relief – whether disgorgement, penalties or both – in most of our actions, non-monetary relief can be highly important to achieving the Commission’s overall goals, as well,” Peikin said. “For that reason, a case-specific approach to remedies and relief is important.”

“What we see here is a much more tailored approach to SEC enforcement remedies,” Murphy & McGonigle partner Stephen Crimmins. “Recognizing that judges have become increasingly skeptical of injunctions that simply order a settling defendant to ‘obey the law,’ the SEC is now seeking prophylactic relief designed to deal directly with specific situations. Peikin’s call for ‘nuanced and qualitative evaluation’ of remedies will hopefully open the door to constructive dialogue between the staff and defense counsel to get to appropriate outcomes.”

“Under the new administration, it appears the SEC has focused on the larger high profile cases,” said Tesser, Ryan & Rochman partner Gregory Ryan. “This policy of ‘quality rather than quantity’ likely reflects an attempt by the Commission to create a deterrence within the industry against wrongdoing and investor harm.”

When non-monetary penalties make sense

Key questions guide the Division in determining the kinds of “relief” they mete out in court cases or settlements, Peikin said. These are:

• Does the relief punish bad actors and restore money to harmed investors?
• Does it advance the goals of specific and general deterrence?
• Does it put into place meaningful protections for investors going forward.

“If we have a good set of remedies, we can answer each of these questions affirmatively, and to do so often requires looking not just to penalties and disgorgement, but forms of equitable or remedial relief that are available to us,” he said.

Peikin then discussed the following types of non-monetary relief that he said are of particular significance:

• Undertakings. These are “affirmative steps” take by a defendant “in order to come into and remain in compliance with the specific terms of the court’s order,” although these can also be put in place in administrative and cease-and-desist proceedings, he said. “Many require the settling party to retain a compliance consultant or monitor to make recommendations to the issuer and report to the Commission on terms specifically defined in the settlement papers. . . . Undertakings are a forward-looking remedy; they are specifically designed with an eye toward what happens after the settlement. So when they are well-crafted, they unquestionably provide unique benefits to investors in the long term.” As an example, he noted the agency’s recent settlement with Elon Musk, the chairman and CEO of Tesla. While this is a corporation rather than an asset manager, the point is still the same. The remedies used – appointment of an independent chairman, addition of two independent directors, and the employment of an experienced securities counsel, among them – demonstrate how forward-looking remedies are designed to address improper behavior.
• Conduct-based injunctions. Another forward-looking action, these prohibit a defendant from engaging in conduct that might pose a risk to investors in the future. Sometimes the packages that include these remedies, as well as packages that include undertakings, might also include monetary penalties, Peikin said, but the overall relief the Commission obtains in such instances is “both forward looking and precisely tailored to the facts and circumstances” of each particular case and “stands to benefit investors in the long run.”
• Bars and suspensions. The SEC also has the authority to impose “other forms of forward-looking or remedial relief, such as officer and director bars and associational bars and suspensions,” Peikin said in his address. “Like undertakings, bars and suspensions are not a punishment. Rather, they serve a critical prophylactic function – preserving the integrity of our markets and protecting investors by limiting the activity of known bad actors by removing them from the industry or preventing them from serving as officers or directors at public companies.” As an example, he noted the bars secured against the former CEO of adviser LendingClub Asset Management, who was charged with using fund capital to benefit LendingClub Corporation.

Monetary sanctions

These generally are civil money penalties and disgorgement. “The rationale behind assessing money penalties in actions involving regulated entities is relatively straightforward,” Peikin said. “To preserve the integrity of our markets and protect investors, the Commission is charged with promulgating and enforcing rules governing certain of the business practices we regulate – including broker-dealers, investment advisers, asset managers, credit rating agencies, and exchanges. Penalties are one of the primary enforcement tools we have to incentivize regulated entities to remain in compliance with the rules that protect investors.”

Then, in a sentence not likely to warm the hearts of advisers, broker-dealers and their legal counsels, he said that “Stephanie and I embrace this rationale, and you can expect us to apply it throughout our tenure as co-directors.”

When it comes to corporations that issue securities, however, use of such penalties may require additional considerations, Peikin said. Analysis of cases involving these entities “often involves additional considerations that don’t uniformly apply in matters involving regulated entities.”

“Such issuers,” he said, “are required by statute and regulation to file public periodic and annual reports and financials, and to have policies, procedures and controls in place to enable them to satisfy their obligations concerning the accuracy, completeness and timeliness of such filings. Using enforcement to promote the integrity of issuers’ public filings – which are central to the sound functioning of our capital markets – is a critical part of our mandate. So in matters involving corporate issuer misconduct, decisions about whether to recommend the assessment of penalties require careful and thoughtful balancing of many factors including, of course, the nature of the conduct.”

As for disgorgement, Peikin said that this is handled differently from monetary fines. “Even when a defendant or respondent cooperates and agrees to meaningful undertakings, it should not be entitled to keep its ill-gotten gains, which we are often in a position to restore to harmed investors.”

He noted that the Supreme Court’s Kokesh decision limiting the imposition of disgorgement to a statute of limitations “has been felt across our enforcement program. A few months ago, we calculated that Kokesh led us to forego seeking approximately $800 million in potential disgorgement in filed and settled case. That number continues to rise.”