SEC Enforcement Speech: Umm, Wow

Compliance officers, clear your schedule and retreat to your reading nook! We have an important speech to consider on the future of enforcement at the Securities and Exchange Commission. 

Commissioner Caroline Crenshaw, a Democratic appointee who joined the SEC only seven months ago, spoke Tuesday at the spring meeting of the Council of Institutional Investors — and took a wrecking ball to longstanding assumptions about how large the penalties should be in cases of corporate misconduct. 


Specifically, Crenshaw faulted an SEC enforcement policy in place since 2006 that says the agency should be careful not to impose a penalty that might unduly burden shareholders of the company in question. The logic behind that policy has been that a company’s current shareholders at the time of resolution might not have benefitted from the misconduct that happened earlier; and that those current shareholders would suffer because paying the penalty leaves that much less money for the company to put to good use. 

Crenshaw’s response: what does any of that have to do with the need to, ya know, punish misconduct? 

“It’s clear to me that the Commission has historically placed too much emphasis on factors beyond the actual misconduct when imposing corporate penalties — including whether the corporation’s shareholders benefited from the misconduct, or whether they will be harmed by the assessment of a penalty,” Crenshaw said. “This myopic approach is flawed and the reason why we need to make a change.” 

Ooof. In the genteel world of SEC speeches, that is a haymaker punch.

So How Should Penalties Work?

Crenshaw proceeded to sketch out a sharply different idea of the role corporate penalties should play in SEC enforcement. First, she said, penalties should be tied to the egregiousness of the offense. Second, the potential for shareholder harm shouldn’t be a threshold issue for assessing a penalty. 

Instead, Crenshaw argued, the SEC should consider all the factors mentioned in that 2006 enforcement policy — including whether the company self-reported the misconduct, and then fixed whatever conditions allowed the misconduct to happen in the first place. 

But, Crenshaw said, she wants to see true cooperation and remediation:

I want to make clear, however, that cooperation credit is not afforded to companies that merely respond to Enforcement Division requests, or to those that offer to conduct a not-so-independent investigation led by corporate counsel. Meaningful cooperation requires a commitment to proactively identifying and remediating wrongdoing, as well as holding accountable those individuals responsible for misconduct. It’s about substantially shortening the staff’s investigation and working with the staff toward an efficient resolution.

And Crenshaw threw in some red meat for compliance professionals, stressing that penalties large enough to scare a company into getting its conduct act together are nothing to fear. On the contrary, such penalties are the point:

If the penalties are sufficiently high to motivate the company to remediate problems, strengthen internal controls, clarify lines of responsibility, and prioritize individual accountability, those are all changes that likely lead to better future outcomes, and higher profits for shareholders. 

What This Means for Enforcement

At the moment, Crenshaw’s words mean nothing specific because the SEC doesn’t yet have a permanent SEC chairman. But the chairman nominee, Gary Gensler, seems on a glide path to win Senate confirmation sometime soon (the U.S. Chamber of Commerce just endorsed him, for pete’s sake) — and Gensler is expected to be no slouch about SEC enforcement once he does arrive. 

In that case, we need to consider Crenshaw’s speech something like a stalking horse for future SEC enforcement, where she stakes out bold positions while the chairman portrays himself as more of a centrist. 

Still, what would Crenshaw’s statements mean for corporations if her ideas do become new policy? What are the implications?

First, a bolder stance on penalties helps the SEC to wriggle free from persistent legal battles about the limits of its disgorgement powers. This came up most recently in that court case from last year, Liu v. SEC, where plaintiffs had argued that the SEC had no power to push for disgorgement in federal court at all. Ultimately the Supreme Court ruled against the plaintiffs, but trimmed the SEC disgorgement power somewhat, and — 

— and who cares, really, in a world where the SEC just imposes penalties instead? By adopting Crenshaw’s positions, the agency will give itself a much freer hand to impose penalties, disgorgement, or some mix of the two, to reach settlements the commissioners believe best.

Second, I’m curious to see how Crenshaw’s views would apply to FCPA cases specifically. We sometimes hear FCPA critics refer to bribery as a victimless crime; or say that the criminal gains from an FCPA violation can’t easily be returned to harmed investors. (This exact issue came up during Supreme Court oral arguments in the Liu case.) 

Crenshaw says such questions don’t matter when compared against the greater purpose of penalties: to punish bad behavior in an offending firm and to deter others from similar misconduct in the future. So perhaps the SEC would have a bigger appetite for FCPA penalties — or more precisely, perhaps the SEC will feel less need to keep FCPA penalties low under some shaky concern about shareholder harm.

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