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If you’ve been working with companies on SEC compliance, one question that you are bound to get sooner or later is, “What happens if we fall short of what’s required?” Sometimes, the answer is “Not much.” But this Gibson Dunn memo says that in the current environment, the risk of SEC enforcement is very real. It is striking to reflect on the Enforcement Division’s expansion plans:

The Commission has so far not slowed its enforcement strategy, and is unlikely to do so in the months ahead. In the Consolidated Appropriations Act of 2023, Congress agreed to give the Commission $2.2 billion in funding for the current fiscal year, a $210 million increase over the prior fiscal year. The Commission is planning to use the increased funding to hire 400 more staff members, including 125 new personnel for its Enforcement Division. Of those 125 new hires for the Enforcement Division, 33 will be joining the Crypto Assets and Cyber Unit, a sub-unit of the Commission that has already seen heightened activity this year. With a rapidly expanding workforce, the Commission could end up filing even more enforcement actions this year than the 760 it filed in fiscal year 2022—a 9% increase over the prior year.

The memo walks through key topics that appear to be getting the Enforcement Division’s attention. While we have blogged about many of these actions in real-time, this recap can help you remember where things stand:

In the area of financial reporting and accounting, this Commission has brought a number of technical accounting and disclosure cases against issuers and individuals, and has pushed the boundaries of its own jurisdiction to bring charges relating to harassment and workplace misconduct under the guise of non-disclosure and internal controls failures. As all administrations do, the SEC has maintained a steady diet of insider trading cases, and used some of those cases to send a message tied to its rulemaking. The same is true in the cybersecurity area, where we now have final rules that will no doubt provide additional bases for the SEC to bring new cases. Finally, the SEC recently awarded its largest whistleblower bounty in the history of the program—greater than the entire amount awarded in all of 2022—that evinces a program that has been wildly successful at attracting more and better tips from individuals with first-hand knowledge of potential wrongdoing.

One of the insider trading cases that the memo discusses is the 10b5-1 complaint that the SEC & DOJ filed earlier this year. I blogged last fall that the agencies are using data analytics to identify suspicious trades. A recent WSJ interview with the outgoing head of the DOJ’s criminal division reinforces that it’s going to become more & more difficult for unusual activity to fly under the radar:

The Justice Department’s recent use of data analytics is a sea change for how such techniques have traditionally been used in criminal cases. Where data was applied in the past to build a case once it had already been identified, the goal of the department’s more recent efforts has been to find cases where patterns in the data warrant further investigation, according to Polite.

So, the regulators have new tech tools, plus more humans to use them, and more rules to enforce. Maybe securities lawyers aren’t speeding toward obsolescence after all.

– Liz Dunshee