SEC Eyes More Use of Penalties

Brace yourselves, compliance officers: the head of enforcement at the Securities and Exchange Commission delivered a speech today promising a continued emphasis on monetary penalties as part of corporate settlements, until people and corporations “realize that compliance with securities laws is cheaper than violating them.” 

SEC enforcement director Gurbir Grewal delivered his remarks at the 2022 Securities Enforcement Conference in Washington. Grewal did have some encouraging words for effective corporate compliance programs, and we’ll get to those presently — but the part about using monetary penalties more often, and in greater amounts, was definitely the show-stopper. 

“If market participants think that getting fined by the SEC is just another expense to be priced into the cost of doing business, then penalties are neither an effective punishment nor a deterrent,” he said. 


Moreover, Grewal said, that principle holds true in cases involving both fraud and negligence. That is, even in a corporate scandal where executives had no deliberate intent to violate the law, monetary penalties are a valid tool because they remind executives to take their duties and responsibilities seriously.

“After all, investors are harmed equally whether someone violates the law through bad intent or simply through negligence,” he said.

To underline his point, Grewal also cited statistics the SEC released Tuesday about its enforcement activities in fiscal 2022 (which ended Sept. 30 of this year). Money ordered in SEC actions, comprising civil penalties, disgorgement, and pre-judgment interest, totaled $6.44 billion, an SEC record. Civil penalties alone totaled $4.19 billion, also an SEC record. 

Grewal then gave the example of an enforcement action imposed against Allianz Global Investors earlier this year, where Allianz had to pay $315.2 million in disgorgement and $675 million in penalties. Such settlements, where penalties considerably exceed disgorgement, should be the norm, he said.

Indeed, Grewal noted, from 2016 to 2021, SEC settlements typically ordered more than twice as much in disgorgement as they did in penalties. “To me that ratio is backwards,” he said. “It means on the macro level that the potential reward for getting away with violating securities law was much greater than the potential downside for getting caught.”

We’ve Been Here Before, People

If Grewal’s message about more penalties rings a bell, that’s because he and other senior SEC officials promised exactly that when they all took office last year. 

First came a speech from SEC commissioner Caroline Crenshaw in March 2021, where she laid out the legal theory for why more use of penalties made sense. “Corporate penalties should be tied to the egregiousness of the actual misconduct – not just the benefit or impact on the shareholders,” Crenshaw said.

Grewal then followed suit with his own speech in October 2021, where he promised that more aggressive use of corporate penalties was coming. One telling passage from those remarks last year:

“As we evaluate relevant penalty factors, we will also be closely assessing whether prior penalties have been sufficient to generally deter the misconduct at issue. Where they have not been, you can expect to see us seek larger penalties, both in settlement negotiations and, if necessary, in litigation.”

In today’s speech, Grewal basically declared that promise fulfilled. More aggressive use of monetary penalties is here to stay, at least as long as Grewal and SEC chairman Gary Gensler are around — and given the results of last week’s midterm elections, it seems that they can stick around for at least another two years if they want.

The Importance of Compliance

Grewal did also have some soothing words about the importance of compliance programs. As much as the SEC might use monetary penalties to punish and deter misconduct, he said, the SEC also wants to reward companies that self-report misconduct and then cooperate with ensuing investigations by not imposing penalties.

“We absolutely need market participants to help by self-policing — and when things do wrong, to meaningfully cooperate with our investigations,” he said.

As an example, Grewal pointed to an enforcement action against healthcare giant Baxter International back in February. In that case, the company dabbled in improper foreign exchange transactions to prop up the company’s reported net income. Baxter did end up paying an $18 million penalty in that case, although SEC officials did praise the company for its “substantial cooperation” throughout the investigation.

Exactly what did Baxter do, that others might follow its example? According to the SEC settlement order, Baxter first informed the SEC of its potential trouble before the company disclosed the matter publicly. Then… 

Baxter provided substantial cooperation to the Commission’s staff throughout its investigation, including by providing detailed explanations of how the FX Transactions worked, summarizing witness interviews, and providing other relevant information to the staff, both on their own initiative and at the staff’s request. The cooperation afforded by Baxter substantially advanced the quality and efficiency of the staff’s investigation and conserved Commission resources.

Nothing we haven’t seen elsewhere, particularly in FCPA enforcement cases. The more you cooperate and make regulators’ lives easier, the less they’ll impose monetary penalties, compliance monitors, and other costly measures. 

“I hope this is a message that each of you will take back to the companies you represent,” Grewal said at the end. Indeed. 

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