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The SEC’s Charter Communications order prompted a dissenting statement from commissioners Peirce and Uyeda, which focused on what they contend is the SEC’s application of Section 13(b)(2)(B) to internal controls that aren’t covered by the statute:

The fundamental flaw in the Order is its failure to distinguish between internal accounting controls and other types of internal controls. Section 13(b)(2)(B)(i) requires Charter to “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management’s general or specific authorization.” (emphasis added).

The Order recites no facts suggesting that Charter’s management used more funds than the board authorized for share buybacks, that management purchased shares at a quantity or time inconsistent with the board’s authorization, or that management failed to properly record the expenditure of corporate funds and consequent purchase of shares on Charter’s books. Instead, the Order faults Charter because it lacked “reasonably designed controls to analyze” its trading plans for compliance with Rule 10b5-1. Controls designed to answer a legal question—compliance with the regulatory conditions necessary to qualify for an affirmative defense—are simply not internal accounting controls within Section 13(b)(2)(B)’s scope.

This isn’t the first time the SEC has interpreted this statutory provision to cover non-accounting related controls, and it isn’t the first time that commissioners Peirce & Uyeda issued a dissenting statement on the SEC’s use of the statute in this manner.  Remember the Andeavor enforcement action in 2020?  That also involved a buyback program, and the controls failure identified by the SEC in that proceeding related to compliance with the company’s insider trading program.

Commenters also flagged the Andeavor case as an unprecedented use of Section 13(b)(2)(B), and also highlighted its potential implications. As one commenter noted at the time, “if this precedent were followed, any deficiency or breach of internal corporate compliance policy could constitute a violation of internal accounting controls under [Section 13(b)(2)(B)].” It appears that this is exactly the message that the SEC wants to send with this latest enforcement action.

As if this wasn’t enough enforcement-related news for a single day, yesterday the SEC also announced its enforcement results for fiscal 2023.  I don’t think we could’ve timed today’s “SEC Enforcement: Priorities and Trends” webcast better if we tried.

– John Jenkins