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The SEC Speaks in 2022

The SEC Speaks in 2022  

Practicing Law Institute

Friday, September 9, 2022

Topline

  • In his remarks, SEC Commissioner Mark Uyeda highlighted the absence of the digital asset issue from the SEC’s rulemaking agenda, said regulations that are ineffective and costly must be avoided, and asserted that rulemaking proposals should have sufficient time for public comment.
  • SEC staff discussed how Artificial Intelligence (AI) analytics is a major component of the Consolidate Audit Trail (CAT).
  • The Division of Examinations will be conducting exams next year to examine how people are complying with and adopting to Rule 15c2-1.

Division of Enforcement

Panelists

  • Gurbir S. Grewal, Director
  • Sanjay Wadhwa, Deputy Director
  • Samuel J. Waldon, Chief Counsel
  • Olivia Choe, Chief Litigation Counsel
  • David L. Hirsch, Chief, Crypto Assets and Cyber Unit
  • Osman E. Nawaz, Chief, Complex Financial Instruments Unit
  • Creola Kelly, Chief, Office of the Whistleblower
  • Daniel R. Gregus, Regional Director, Chicago Regional Office
  • Daniel M. Gallagher, Commentator
  • Harvey L. Pitt, Commentator

Grewal highlighted numerous reports describing the outsized impact on non-White and lower-income investors resulting from problems in the cryptocurrency (crypto) market, adding that crypto appeals to these populations due to their skepticism of the financial system. He said critics are upset that the SEC is not giving crypto a pass from the application of securities laws and added that if crypto firms use products that meet the Howey test, the Commission will apply securities laws to those products.

Choe said the Commission expects litigation in the crypto asset space to continue in the coming year and that the SEC is committed to continuing to litigate and commit resources to those cases.

Pitt asked about the Jarkesy v. SEC decision, and Choe said the Supreme Court will be taking up a number of cases about “our administrative processes.”

Hirsch discussed decentralized finance (DeFi) and said a permissionless and less accountable financial system is bad for retail investors and an unsuccessful strategy over the long term. He emphasized the importance of cybersecurity reporting in a timely manner, both for registrants and public issuers.

Commissioner’s Remarks

In his remarks, SEC Commissioner Mark Uyeda highlighted the absence of the digital asset issue from the SEC’s rulemaking agenda and criticized the Commission’s lack of guidance in that space. He also said robust capital markets have addressed the challenges of the pandemic and emphasized that “solid economic analysis” can ensure effective regulation. He mentioned that many securities regulations have not been inspected in decades and that regulations that are ineffective and costly must be avoided. He also asserted that rulemaking proposals should have sufficient time for public comment, and the Commission should consider the cumulative impact of rulemakings and perform proper economic analysis. Uyeda said proposals should state current studies the Commission is relying on so that the public can provide additional data in the comment process. He added that the Commission should not take steps that deter public comment and highlighted that some of the SEC’s proposals in 2021 and 2022 only had 30-day comment periods. He also stated that multiple of the Commission’s proposals affect the same group of stakeholders and said the Commission should not take rulemaking shortcuts. Uyeda then said regulation by enforcement fails to provide a mechanism for participation by market participants or provide the nuance and guidance that would allow participants to tailor their practices.

Division of Economic and Risk Analysis

Panelists

  • Chyhe Becker, Deputy Director, Division of Economic and Risk Analysis
  • Mike Willis, Associate Director, Division of Economic and Risk Analysis
  • Eugene Canjels, Assistant Director, Division of Economic and Risk Analysis
  • Marco Enriquez, Senior Applied Mathematician, Division of Economic and Risk Analysis
  • Daniel M. Gallagher, Commentator
  • Cynthia Glassman, Commentator

Becker discussed how the Division touches all aspects of the SEC rulemaking process. She also discussed research in financial economics and investors risks aversion after the 2008 financial crises. She concluded her remarks by highlighting how the Consolidate Audit Trail (CAT) allows the Commission to use artificial intelligence analytics to see traders on both sides.

Willis discussed the ways on how to identify of legal entity as well as why digital identifiers are needed. He highlighted the importance of enhancing cyber-security and legal entities collaborating on cybersecurity. 

Canjels noted the Division’s role within the SEC and discussed several cases of fraud that the Commission was a party in. Those cases include SEC v. Lemelson, USA v. Hild, and SEC v. McDermott.

Enriquez discussed the increase in registrants outpacing workforce growth and regulators turning to artificial intelligence technologies. He said regulators are paying more attention to Artificial Intelligence and that they are mainly focused on machine learning and information extraction. He noted that there is a big effort to apply analytics to CAT data.

Gallagher touched on the importance of protecting personal identifying information as it relates to CAT and compared Chair Gensler’s current rulemaking agenda to a Dodd-Frank like rulemaking agenda.

Division of Examinations

Panelists

  • Richard R. Best, Director, Division of Examinations
  • Adam R. Wendell, Deputy Director, Office of Municipal Securities
  • Lori H. Price, Acting Director, Office of Credit Ratings
  • Natasha V. Greiner, Co-National Associate Director, Investment Adviser/Investment Company Program, Division of Examinations
  • John Polise, National Associate Director, Broker-Dealer and Exchanges Program, Division of Examinations
  • Keith E. Cassidy, National Associate Director, Technology Controls Program, Division of Examinations
  • Allison Fakhoury, National Associate Director, Office of Clearance and Settlement, Division of Examinations
  • James T. Giles, Acting Chief Risk and Strategy Officer, Division of Examinations
  • Paul S. Atkins, Commentator
  • Daniel M. Gallagher, Commentator
  • Harvey L. Pitt, Commentator

Best said the Division is making significant progress on their joint venture to oversee security-based swap dealers. He noted that one of the Division’s top priorities is addressing private funds and is working to appropriately cover this space.

Greiner discussed the top priorities within her office, which include Private Funds, Environmental, Social, and Governance (ESG), climate risks, Form CRS, and compliance with new rules. She said as it relates to Private Funds, the Division continues to examine closely fees, custody rule compliance, and disclosure. Greiner said it is important that companies file their ESG disclosures and are saying and reporting what they are actually doing. She also noted that companies are failing to file their Form CRS and when they are filed many times they are incomplete.

Polise said Reg BI will be a core part of the Division’s programs moving forward because it affects the fiduciary duty rule and broker-dealer. He added that there will be more examinations on sale programs as it relates to Reg BI and that companies should be on alert for staff bulletins related to Reg BI. Polise said Reg S-P enforcement has also been a top priority. He noted that there have been few crypto issues because of custody issues, but that his office will continue to be alert. He also said the Division has set up a working group to examine more closely the customer protection rule and net capital rule. He concluded by saying the Division will be conducting exams next year to examine how people are complying with and adopting to Rule 15c2-1.

Atkins stated that the Commission does not have any real plan to define ESG and urged the Division to try to make progress on the definition.

Gallagher asked if there has been a rethinking of largely deferring to FINRA regarding broker dealers. Polise said no adding that they are just trying to implement the institutional priorities of the SEC.

Pitt asked what companies should do if some of the lawsuits against the Commission materialize as it relates to some of the new rules the Commission has put forth. Greiner said companies should not act until the rule has been adopted.

Judicial and Legislative Developments

Panelists

  • Dan M. Berkovitz, General Counsel
  • Michael A. Conley, Solicitor
  • Dominick V. Freda, Assistant General Counsel
  • Tracey A. Hardin, Assistant General Counsel
  • Jeffrey A. Berger, Senior Appellate Counsel
  • Kerry J. Dingle, Senior Appellate Counsel
  • David D. Lisitza, Senior Appellate Counsel
  • Daniel Staroselsky, Senior Appellate Counsel
  • Brooke Wagner, Appellate Counsel
  • Roberta S. Karmel, Commentator
  • Laura S. Unger, Commentator

Unger questioned the way the SEC administrative law judges (ALJ) are chosen, and Freda countered that the Commission is following the Supreme Court’s edict on appointing ALJs. Conley discussed how the Commission settles cases, prompting a discussion on the Commission’s “no admit, no deny” policy. Karmel said the disgorgement remedy used by the SEC in enforcement cases is acceptable, and SEC staff said the Commission has the burden of estimating the amount of profit from fraud to be paid back to defrauded investors.

Workshop E: Division of Enforcement

Panelists

  • Thomas P. Smith, Jr. Acting Regional Director, New York Regional Office, Division of Enforcement
  • Jason J. Burt, Acting Regional Director, Denver Regional Office, Division of Enforcement
  • Charles E. Cain, Chief, Foreign Corrupt Practices Unit, Division of Enforcement
  • Rebecca Olsen, Deputy Chief, Public Finance Abuse Unit, Division of Enforcement
  • Stacey Bogert, Associate Director, Division of Enforcement
  • Mark Cave, Associate Director, Division of Enforcement

Burt discussed the importance of companies acting in their clients’ best interests and disclosing important information. He also mentioned the case of SEC v. BNY Mellon and said BNY did not adequality disclose ESG information to their investors. He concluded by discussing conflict disclosure and said going forward the Commission will vigorously pursue conflict disclosure cases.

Olsen discussed actions brought forth this year in the municipal bond space as it relates to municipal issuer disclosure fraud, broker-dealer abuses, and municipal advisor misconduct.

Bogert discussed cases related to Reg BI rule requirements of broker-dealers and their associated persons as it relates to disclosure obligations, care obligations, conflict of interest obligations, and compliance obligations. She mentioned one of the cases the SEC brought forth was brought against J.P. Morgan Securities.

Cave discussed Special Purpose Acquisition Companies (SPACs) enforcement procedures brought forth by the Commission. He noted that there are a growing number of SPACs looking for mergers. He said as the market changes the Commission is a focused on how risks in the market are evolving.

For more information on this event, please click here.

For an archive of past SIFMA hearing coverage, please click here.