On October 8 and 9, the Securities and Exchange Commission (SEC or Commission) held its annual “SEC Speaks” program in partnership with the Practicing Law Institute, this year in a virtual format and after a several-month postponement due to COVID-19. Over the course of the conference, SEC Commissioners and senior members of the Commission staff addressed developments and trends, priorities for the upcoming fiscal year, and the impact of COVID-19 on the Commission’s activities.
This alert summarizes the enforcement- and examination-related remarks and highlights the key takeaways for SEC-regulated entities and individuals as the Commission continues to press ahead with its initiatives in the midst of a global pandemic.
Key Takeaways
- The Commission has quickly implemented and adapted to new practices to advance its initiatives while COVID-19 persists. Examination and enforcement staff are increasingly adept at conducting their work remotely, and, in all aspects of the Commission’s work, it appears that the next year will be “virtual” business as usual.
- At the same time, the SEC is identifying and pursuing securities violations arising from the market variability created by the pandemic. In particular, the Division of Enforcement is monitoring for investment scams and misrepresentations in financial statement disclosures, and examiners are focused on financial stress triggered by the fluctuating economy.
- Issues relating to the SEC’s authority to order disgorgement continue to occupy the staff as Liu plays out in the lower courts. Going forward, it will be important for defense counsel to show the work involved with disputing and countering a disgorgement amount proposed by the staff in negotiations.
- Though at no point during the two-day panel did the Commission engage in a substantive discussion of its widely debated amendments,1 the Whistleblower Program can be expected to serve as an ongoing source for investigations and enforcement actions in the coming year.
- The SEC’s commitment to diversity and inclusion is a constant theme worth noting. In her remarks, Commissioner Crenshaw spoke highly of the SEC’s commitment to diversity and advised that closing gender gaps and racial diversity should be treated by organizations like other business objectives: make a plan, create metrics to measure progress, mentor colleagues, and recognize growth.
On the first day of the program, speakers from the Office of Compliance Inspections and Examinations (OCIE) provided their observations from 2020 thus far, highlighting a number of areas of concern that have arisen as a result of the COVID-19 pandemic. Drawing in part from these COVID-19 related concerns, the speakers also offered a glimpse at planned 2021 examination priorities.
OCIE released 2020 examination priorities in January. The speakers noted that the COVID-19 pandemic highlighted additional compliance risks for the exam staff that led to new areas of focus. Generally, these risks stemmed from two pandemic-related effects: market volatility and remote-work arrangements. With respect to market-volatility, the areas of emphasis include proper protection of investor assets, including collecting funds and monitoring disbursements given market volatility and a heightened possibility for fraudulent offerings due to false or misleading claims. The speakers also addressed risks stemming from changing workplace environments, including ensuring proper supervision and oversight of personnel; the maintenance of business continuity plans that allow for remote operation and supervision; and protection of personally identifiable information in a remote environment. In his opening remarks, Commissioner Elad Roisman noted that through changing circumstances and challenging work environments, the staff has successfully carried on the SEC’s mission, in spite of the volatility associated with this year.
Looking ahead to 2021, the speakers identified several topics that are likely to be examination priorities, particularly given the changing economic environment and logistics of coping with a continuing global pandemic. First, speakers noted a likely focus on liquidity events resulting from an economic downturn, citing the potential tumult in the real estate market, for instance. Fluctuating valuations of securities caused by rapid growth and drops in the market may be a focus of exams. Second, speakers emphasized that ensuring policies and procedures are in place that lead to proper supervision of employees is likely to be a concern in examinations. Finally, speakers discussed the July creation of the Emerging Risk Examination Team (ERET) within OCIE, which is tasked with providing specialized support to examination teams where a crisis event may occur. As the COVID-19 pandemic continues, OCIE expects the ERET, along with its usual resources, to continue to address the changing compliance landscape.
II. Accounting IssuesIn a panel led by Sagar S. Teotia, the SEC’s Chief Accountant, senior accountants from the Divisions of Enforcement, Corporate Finance, and Investment Management discussed accounting updates and issues encountered in the past year.
A main discussion point was the effect of COVID-19 on accounting procedures. The Office of the Chief Accountant received a large volume of questions related to COVID-19 and the speakers emphasized the Office’s dedication to providing high-quality financial information. Mr. Teotia focused on the staff’s collaborative efforts with domestic and international entities alike to increase transparency in a global market affected by the pandemic.
The Chief Accountant for the Division of Enforcement, Matthew S. Jacques, highlighted the Division’s work to become more efficient in its investigations. Rather than examining a large swath of information, the Division is conducting smaller, targeted inquiries. Mr. Jacques also warned that recent market declines and stress may reveal past misconduct or encourage new misconduct. He explained that it is still too early to distinguish these patterns but the Division is on high alert and actively searching for misconduct. Mr. Jacques concluded his remarks with a discussion of best practices. In particular, given the technical nature of accounting investigations, Mr. Jacques highlighted the importance of including knowledgeable professionals in discussions with the SEC in order to expedite and elucidate the investigatory process.
Keeping with the theme of guidance with respect to the era of COVID-19, the Chief Accountant for the Division of Investment Management, Alison Staloch, discussed the Division’s update of Frequently Asked Questions related to the custody rule and issues with board meetings and electronic signatures to fit the needs of remote work. She also introduced the revival of the “Dear...
