2019 Mid-Year Securities Enforcement Update

I. Introduction: Themes and Notable Developments

A. Continued Focus on Protection of Main Street Investors

The first half of 2019 has seen a continuation of the Commission's emphasis on protecting the interests of Main Street investors. Chairman Clayton reiterated these themes in his testimony in May before the Financial Services and General Government Subcommittee of the U.S. Senate Committee on Appropriations. 1 In addition to the no less than 43 references to Main Street investors, the Chairman's testimony highlighted: (1) the Retail Strategy Task Force, formed in 2017, to use data-driven strategies to generate leads for investigation of industry practices that could harm retail investors, as well as (2) the mutual fund share class initiative as an example of returning funds to retail investors through a program to incentivize self-reporting and cooperation. To be sure, the Commission brought a number of enforcement actions focusing on various offering frauds, often with themes related to some form of cryptocurrency or digital asset. 2 The Chairman also noted in his Congressional testimony that the Commission's FY 2020 budget request contemplates adding add six positions to the Commission's investigations of conduct affecting Main Street investors.

On June 5, 2019, the SEC adopted a set of rules intended to enhance the quality and transparency of retail investors' relationships with investment advisers and broker-dealers. 3 The new "Regulation Best Interest" requires broker-dealers to act in the best interest of a customer when making recommendations for securities transactions or investment strategies to a retail consumer. This means broker-dealers may not place the financial or other interests of the broker-dealer ahead of the customer. In order to satisfy the fiduciary obligations required by Regulation Best Interest, broker-dealers must: (1) make certain disclosures regarding any conflicts of interest; (2) exercise reasonable diligence, care, and skill in making recommendations; (3) maintain policies and procedures designed to address conflicts of interest; and (4) maintain policies designed to achieve compliance with the regulation. 4 Regulation Best Interest takes effect on September 10, 2019. Firms will have until June 30, 2020 to comply with the regulation.

B. Full Commission and other Senior Staffing Updates

During the first six months of this year, there were a number of leadership changes, several of which reflect the advancement of lawyers with many years of experience in the Division of Enforcement to positions of senior leadership.

On June 20, the U.S. Senate confirmed Allison Lee to serve as the fifth Commissioner with a term ending in 2022. Commissioner Lee was sworn in on July 8, bringing the Commission back to its full complement of Commissioners. Commissioner Lee replaces prior Democratic Commissioner Kara Stein. Commissioner Lee previously served at the Commission for over a decade, including as counsel to Commissioner Stein, as well as a Senior Counsel in the Complex Financial Instruments Unit of the Division of Enforcement. How long the full Commission will last is uncertain as there have been reports that Commissioner Robert Jackson, the only other Democratic Commissioner, may be stepping down in the near future to return to teaching and NYU Law School. Commissioner Jackson has not commented on his plans.

Other changes in the senior staffing of the Commission include:

In June, David Peavler was appointed Director of the Fort Worth Regional Office. Mr. Peavler rejoined the SEC after serving two years as the General Counsel of HD Vest Inc. He previously worked for 15 years in the Division of Enforcement in the SEC's Fort Worth Regional Office. In May, Erin Schneider was appointed Director of the San Francisco Regional Office. Ms. Schneider joined the Commission in 2005 as a Staff Attorney in the Division of Enforcement in the San Francisco Office, became an Assistant Director in the Asset Management Unit in 2012 and an Associate Director in the San Francisco Office in 2015. Also in May, Adam Aderton was appointed Co-Chief of the Asset Management Unit of the Division of Enforcement. Mr. Aderton joined the Commission as a staff attorney in the Division of Enforcement in 2008, joined the Asset Management Unit in 2010, and became an assistant Director of the Unit in 2013. More broadly, until recently, the Commission had been subject to a hiring freeze which led to an approximately 10% decline in staffing both in the Enforcement Division and the Commission overall. Under its FY 2019 budget, the Commission has been able to resume some hiring, but not sufficient to restore staffing levels to their prior levels. Accordingly, the Enforcement Division will continue to endeavor to accomplish more with less for the foreseeable future.

C. Change to Commission Practice on Consideration of Settlement Offers with Waiver Requests

On July 3, Chairman Jay Clayton announced a change in the process by which the Commission will consider settlement offers from prospective defendants who are also seeking a waiver from a regulatory disqualification that would be triggered by the settlement. 5 In effect, the new policy actually restores Commission practice to what it had been historically, prior to a change under the last administration, and represents a much-needed, common sense improvement to the Commission's settlement process.

The issue arises when negotiating a settlement that triggers a regulatory disqualification. The client can request a waiver from the disqualification. However, the last administration had revoked the authority previously delegated to the regulatory divisions to decide waivers and required a party to make an unconditional offer of settlement without assurance as to whether the Commission would grant the waiver. This meant that a party could be bound to a settlement that triggered a disqualification without assurance of receiving a waiver. In some cases, the risk was significant.

Under the new policy, the Commission will still be the decision-maker on waivers, but will consider the settlement offer and waiver request simultaneously and as a single recommendation. Most important, if the Commission approves the settlement offer, but not the waiver, the party could withdraw the settlement offer and will not be bound by the offer.

As the Chairman's statement explains:

... an offer of settlement that includes a simultaneous waiver request negotiated with all relevant divisions . . . will be presented to, and considered by, the Commission as a single recommendation from the staff. . . . [I]n a matter where a simultaneous settlement offer and waiver request are made and the settlement offer is accepted but the waiver request is not approved in whole or in part, the prospective defendant would need to promptly notify the staff (typically within a matter of five business days) of its agreement to move forward with that portion of the settlement offer that the Commission accepted. In the event a prospective defendant does not promptly notify the staff that it agrees to move forward with that portion of the settlement offer that was accepted (or the defendant otherwise withdraws its offer of settlement), the negotiated settlement terms that would have resolved the underlying enforcement action may no longer be available and a litigated proceeding may follow.

In sum, under the new procedure, parties will simply receive the same benefit as any settling party - certainty, finality and the clarity of knowing the full consequences of their offer to settle.

D. Whistleblower Awards Continue

The Commission continued to issue significant awards to whistleblowers for providing information that led to financial recoveries in enforcement actions. As of June 2019, the SEC has awarded over $384 million to 64 whistleblowers since the program began in 2012. 6

In March, the Commission announced a pair of awards totaling $50 million to two whistleblowers...