As we await the impact of the Biden Administration on the direction of the SEC, we have been given a glimpse of what is to come in a speech last month by the newly confirmed commissioner, Caroline Crenshaw. Specifically, Commissioner Crenshaw’s speech focused on “individual culpability” and penalties in the SEC’s enforcement program. Strikingly, the Commissioner decried the SEC’s past stance on penalties: “It is clear to me that the Commission has historically placed too much emphasis on factors beyond the actual misconduct when imposing corporate penalties – including whether the corporation’s shareholders benefited from the misconduct, or whether they will be harmed by the assessment of a penalty. This approach is fundamentally flawed.” Commissioner Crenshaw then stated that she thinks the SEC should revisit its approach to corporate penalties. It remains to be seen how Crenshaw’s remarks will be observed at Enforcement with respect to corporate penalties, let alone the application of her observations about the focus on “factors beyond the actual misconduct” could also be extended to individuals who are similarly facing substantial penalties for factors beyond their misconduct.
In what she called “misaligned incentives” among corporations who are tempted to spend money on operations at the expense of investing in compliance, Commissioner Crenshaw emphasized the SEC’s civil penalty authority and using it to “deter malfeasance and promote a fair market.” In order to achieve this, she stated that her focus will continue to be “on vigorous enforcement of our existing laws and regulations” and “ensuring that the violator pays the price.”
Commissioner Crenshaw elaborated on exactly what “price” corporations should pay to be held accountable. She argued that (1) “corporate penalties should be tied to the egregiousness of the actual misconduct – not just the benefit or impact on the shareholders” and (2) “the Commission should not treat the presence or absence of a shareholder or corporate benefit as a threshold issue to imposing a penalty.” Surmising that “[i]t is not clear to me that SEC penalties actually harm investors,” Commissioner Crenshaw proffered that SEC enforcement penalties could result in higher profits for shareholders because it would force changes to the company’s operations such as “strengthen internal controls, clarify lines of responsibility, and prioritize individual accountability” that “likely lead to better future outcomes” for shareholders.
With this background Commissioner Crenshaw called for reconsideration of the SEC’s 2006 statement on penalties so that enforcement can be more focused on “setting penalties that are based on the actual misconduct and reflect the extent of cooperation with the Division of Enforcement staff” as well as “consider the extent of harm to victims and, if we know it, the number of harmed investors.” The reference to the extent of cooperation could also signal a more nuanced scale of cooperation credit, beyond the narrower view that cooperation credit is reserved for extraordinary pre-investigation self-examination.
With the insight from Commissioner Crenshaw’s speech, the next few years at the SEC could see a new focus on individual accountability and consideration for penalties in order to, in Commissioner Crenshaw’s words, “correct the course” of SEC enforcement. It remains to be seen how Crenshaw may be able to influence other Commissioners (let alone the Chairman) to accept her view points to achieve consensus so as to influence enforcement action and views going forward.