October 9, 2018

SEC Enforcement’s “Guiding Principles”

As a look-back on their first full year as Co-Directors of the SEC’s Division of Enforcement, Stephanie Avakian gave this speech – and Steve Peikin gave this speech – to recap their accomplishments. Stephanie’s speech expands on Enforcement’s “Guiding Principles” for investor protection – and emphasizes that statistics showing a decline in the number of enforcement actions don’t adequately reflect the quality of their efforts. Instead, the goal is to use limited resources to bring “meaningful cases that send clear & important messages.” Here’s the intro:

Last year Steve and I articulated five principles that would guide our decision-making. They are: (1) focus on the Main Street investor; (2) focus on individual accountability; (3) keep pace with technological change; (4) impose sanctions that most effectively further enforcement goals; and (5) constantly assess the allocation of our resources.

I’m going to talk about the Division’s approach to dealing with initial coin offerings (ICO) and digital assets, and second, I will address the Division’s Share Class Selection Disclosure Initiative. These two examples illustrate our approach of identifying challenges and risks facing investors and markets, and developing a response that addresses those challenges in a thoughtful and effective way, and that maximizes our use of resources.

In the context of ICOs, she goes on to discuss non-fraud enforcement actions for ICO registration cases – and says Enforcement isn’t going to shy away from recommending substantial remedies for Section 5 violations. And as I’ve previously blogged, it’s not just issuers who can be the target of an ICO enforcement action. Recent settlements included a hedge fund that violated investment company registration requirements and an unregistered broker dealer.

SEC Enforcement: “Money Isn’t Everything”

John’s blogged that the magnitude of monetary penalties might not be the right way to measure enforcement activity – and Steve Peikin seems to agree. In his recent speech, he elaborated on the full range of relief that the Division of Enforcement recommends to the SEC – and says Theranos is a good example of how customized non-monetary remedies are deployed:

Aspects of the Theranos matter have been covered extensively in other forums. But for today’s purposes, one of the most important elements of the Commission’s settlement with Holmes were undertakings that (1) required her to relinquish her voting control over Theranos by converting her supermajority shares to common shares, and (2) guaranteed that in a liquidation event, Holmes would not profit from her ownership stake in the company until $750 million had been returned to other Theranos investors.

In Theranos, the Commission confronted a situation where, because of the capital structure of the company, Holmes had nearly complete control of the company. And given what we alleged had occurred, it was appropriate to seek relief that protected investors from potential misuse of that controlling position going forward. The undertakings were designed to do exactly that.

Tomorrow’s Webcast: “This Is It! M&A Nuggets”

Tune in tomorrow for the webcast – “This Is It! M&A Nuggets” – to hear Weil Gotshal’s Rick Climan, Arnold & Porter’s Joel Greenberg, McDermott Will’s Wilson Chu and Sullivan & Cromwell’s Rita O’Neill impart a whole lot of practical guidance!

Liz Dunshee