Outgoing SEC Chair Reflects on the Agency’s Enforcement Program and Advocates for Increased Authority
On November 18, 2016, outgoing SEC Chair Mary Jo White delivered a speech at New York University School of Law entitled “A New Model for SEC Enforcement: Producing Bold and Unrelenting Results.” Chair White’s remarks covered a broad range of enforcement initiatives and outcomes from her tenure as SEC Chair. This post summarizes the aspects of Chair White’s remarks most relevant to private fund sponsors.
Private Fund Disclosures, Expenses, and Conflicts of Interests
Chair White noted that over the past three years, the SEC has brought a total of 11 enforcement actions against private equity advisers, addressing various alleged improper activities including undisclosed fees and expenses, impermissible shifting and misallocation of expenses, and failures to adequately disclose conflicts of interests to clients. Chair White cited several press reports noting that the private equity industry has enhanced disclosures in fund governance documents. This industry shift in response to the SEC’s enforcement activities should mitigate not only regulatory risk but also litigation risk with limited partners.
Chair White noted that the SEC recently surpassed the $100 million mark for awards to whistleblowers. Meanwhile, tips in fiscal year 2016 surpassed 4,200, rising over 40% from 2012, the first fiscal year the whistleblower program was in place. By touting the amount of the awards, Chair White was not merely celebrating the success of the program, she seemed to be advertising for prospective whistleblowers to come forward.
A Call for an Increased Focus on Executive Liability
Chair White also called for an expansion of the SEC’s white collar enforcement authority and an increase in the deterrent penalties available to the agency. After Chair White noted the agency’s increased focus on charging individual respondents in enforcement actions, she suggested consideration of a recently-enacted regulatory framework in the United Kingdom known as the “Senior Manager Regime” which would hold an entity’s senior executives accountable for certain corporate transgressions. This regime enables U.K. authorities to hold senior executives accountable for offenses that occur in areas of the executives’ responsibilities, even if the executives are not involved in the misconduct, do not know about it, and do not directly supervise any of the offending employees. Advisers to private equity funds should pay close attention to this initiative because of their comparatively leaner management structure, particularly with respect to the control over and management of the underlying funds.
Admissions of Culpability
Chair White highlighted her initiative to extract admissions of accountability in the context of settling enforcement investigations or proceedings. Pursuant to this mandate, the SEC has obtained admissions from 77 defendants and respondents – 30 individuals and 47 entities. Chair White also noted that the SEC does not accept “no admit, no deny” settlements where a defendant has been found guilty or admitted relevant facts in a proceeding involving other criminal or civil authorities.
Investigating to Litigate
Chair White also highlighted the SEC staff’s mandate of “investigating to litigate.” The purpose of this charge, according to Chair White, is to assemble a “trial-ready record [of admissible and persuasive evidence] that can be used to prevail at trial or to secure a strong settlement.” This strategy permits the SEC to demonstrate both its intent and ability to pursue an enforcement proceeding, and share that evidence with defense counsel pursuant to a reverse proffer agreement, which is a useful tool in obtaining favorable settlements from investigation targets. Perhaps as a warning to the industry, Chair White noted that the SEC has not lost a jury trial in federal district court in two-and-a-half years.
Increased Civil Penalties and Access to E-Mails
Chair White concluded her remarks by calling on Congress to increase the amount of civil penalties the SEC is able to obtain in enforcement proceedings. Finally, Chair White was highly critical of a pending bill to revise the Electronic Communications Privacy Act, which would require a criminal warrant to obtain the content of a subscriber’s e-mails from an internet service provider. As a civil enforcement agency, the SEC can subpoena information, but it does not have the ability to obtain criminal search warrants. The proposed statute would eliminate the SEC’s ability to obtain certain email content via subpoena.
While obviously valedictory, the question is does any of it matter? President-elect Trump has suggested that he wants to dismantle the Dodd-Frank Act. What that means, precisely, and whether it will happen, are open questions. Of course, it would take an act of Congress to repeal Dodd-Frank.
On that note, Representative Jeb Hensarling (R-TX), the chairman of the House Financial Services Committee, has introduced the Financial CHOICE Act of 2016 which, as drafted, would exempt advisers to private equity funds from investment adviser registration. As reported in the Wall Street Journal, Rep. Hensarling described President-elect Trump’s general view on Dodd-Frank as “music to my ears,” and stated that he had spoken with President-elect Trump’s team about Financial CHOICE Act in the past: “I think they like the thrust of the legislation and many major components of it.”
While it remains to be seen whether the SEC will continue its aggressive enforcement program following the change of the presidential administration and the appointment of a new SEC chair, Chair White’s legacy is likely to continue to shape the agency’s policies and ideology at least in the near term. Accordingly, private fund sponsors should expect the SEC staff to continue to follow the mandates that Chair White has championed unless and until a new Chair signals a definitive change in direction.