Publications

In First Public Remarks, Director of Enforcement Ryan Lays Out “Principles, Process, Priorities”

Summary: Enforcement Director Judge Margaret Ryan made her first public remarks at the Los Angeles County Bar Association’s Annual Securities Regulation Seminar. Focusing on “principles, process, priorities,” Ryan laid out her vision for the Division of Enforcement.

• Noting that she is “acutely aware” of past criticisms of the Division and acknowledging that some of them “are valid and warranted course correction,” Ryan zeroed in on updates to the Wells process, discussed further below. Turning to priorities, Ryan unsurprisingly began with “scams” that target retail investors as well as accounting fraud, insider trading, wash trading, and market manipulation schemes. More interestingly, she closed her discussion of priorities by focusing on “compliance” violations and asserted that “many violations of these provisions should not—and do not—result in enforcement” but that some “may warrant enforcement action.” Finally, and notably, Ryan appeared to express support for remediation of non-fraud conduct by other Divisions (e.g., Examinations) as an alternative to enforcement.

Takeaway: The Director directly reminded market participants that enforcement activity is not dead, warning that: “reports that enforcement work at the SEC has been tossed to the wayside are not only greatly exaggerated but flat out wrong.”

Best Practice Tip: Investment advisers will continue to be at the heart of the SEC’s examination and enforcement programs and should continue to ensure practices comport with regulatory requirements. Where there are significant deficiencies, advisers should consider opportunities for proactive remediation outside of the enforcement context.

SEC Announces Updates to the Enforcement Manual

Summary: The Enforcement Division announced “significant updates” to its Enforcement Manual, which had not been updated since 2017. The updates were designed to “ensure greater uniformity” in the enforcement process. Among other things, the revisions standardize the Wells process with respect to process, oversight, and timing. Perhaps most significantly, the updates to the Manual now provide for a clear expectation that the Staff “should be forthcoming about the contents of the investigative file.” Of all the changes in the Manual, this has the potential to be the most transformational, as it should—if faithfully applied—allow potential respondents to assess evidence obtained from third-parties, such as investors, which is often critical to assessments of materiality and intent.

• Other noteworthy updates include increased oversight during key milestones of an investigation, a more robust framework for assessing cooperation credit, and the express acknowledgement that settlement discussions may proceed in parallel with requests for the staff to consider waivers from automatic disqualifications and other collateral consequences that result from an enforcement action.

Takeaway: The updates underscore the Commission’s efforts to increase internal efficiency and provide predictable process and transparency for potential respondents. Changes such as access to the investigative file, and presumed involvement of senior leadership in not only the Wells process, but all key milestones in an investigation are emblematic of an overall shift in tone that gives the sense that leadership can be approached with more frequency. These changes will be particularly important in investigations with aggressive legal theories or procedural approaches.

Best Practice Tip: It remains to be seen how these changes will play out in active enforcement actions; we will continue to provide updates. In the meantime, advisers with investigations approaching inflection points should consider opportunities for additional advocacy, outreach to senior leadership, or requests to view the investigative file before moving forward.

Division of Investment Management Holds Roundtable on Private Market Valuation and Retail Investor Access

Summary: The Division of Investment Management held a roundtable on March 4 to discuss private market valuations and responsible retailization. In announcing the roundtable, Director of Investment Management Brian Daly said: “With retail exposure to alternative investments becoming more common, we want to help everyday investors understand the different valuation approaches used in these products.” The roundtable consisted of two panel discussions. The first considered how “asset classes historically offered in the private markets continue to migrate into publicly offered vehicles” and addressed opportunities, challenges, and considerations for investors. The second focused on fund governance as it relates to providing exposure to private market assets through retail funds.

Takeaway: The roundtable builds on the Administration’s and the SEC’s focus on expanding access to alternative investments for retail investors. IM’s focus on private market valuations is in itself notable, as valuation has been a perennial enforcement priority across administrations.

Best Practice Tip: Retailization presents a generational market opportunity but comes with the potential for increased scrutiny in light of a retail investor base. In the context of turbulent markets, advisers should step up their review of existing valuation policies and procedures and benchmark against industry best practices.