Securities and Exchange Commission (SEC) Enforcement
Director Gurbir Grewal spoke to the importance of proactive compliance in
building public trust in the nation’s financial institutions in prepared
remarks at the New York Bar Association Compliance Institute.
Grewal explained his contention that the erosion of public
trust in financial institutions poses significant challenges to the financial
sector and all parties connected to it by hampering investor confidence and hindering
the functionality of financial markets. To address the dwindling trust issue, institutions
must adopt a culture of proactive compliance, he argued.
“Regardless of whether you are a regulator, financial
professional, or an attorney who counsels large entities, you should all be
concerned,” Grewal said. “This decline in trust is bad for everyone. It
undermines the investor confidence needed for the fair, efficient, and orderly
operation of our markets and for capital formation. It is simple really. If the
public doesn’t think the system is fair, at a minimum, they are not going to
invest their hard-earned money. This hurts all those companies, professionals,
and other market participants who are playing by the rules and doing the right
thing.”
To achieve the level of proactive compliance Grewal believes
is essential to rebuild trust, financial entities must adhere to three critical
components:
Education: He recommends institutions educate
themselves about the law and external developments relevant to their
businesses, particularly emerging and heightened risk areas. He noted when the
SEC recommends a new enforcement action, it puts a lot of thought into making
sure charging documents, whether settled or litigated, clearly communicate the
basis of the alleged misconduct to industry participants.
Engagement: Proactive compliance requires institutions
to engage with company personnel within different business units and to learn
about their activities, strategies, risks, financial incentives, counterparties
and sources of revenues and profits, Grewal explained.
Execution: Noting many firms have good policies, but
fall short on implementation, Grewal said the SEC continually seeks to ensure
regulated entities, including broker-dealers and investment advisers, comply
with the agency’s rules and regulations, such as those pertaining to proper
recordkeeping, as an example. Since December 2021, these supervisory activities
have resulted in charges against 40 firms and more than $1.5 billion in civil
penalties for failures to maintain and preserve electronic communications, he
said.
Grewal went on to say compliance should be part of an
ongoing effort, adapting to changing circumstances, risk areas and enforcement
priorities. Additionally, he noted when a violation of securities law is
detected, self-reporting and cooperation can lead to reduced penalties and
rewards.
Other types of behaviors which have resulted in reduced or
zero penalties have included:
·
“preemptively remediating and ceasing the
unlawful behavior;
·
“proactively providing compensation to victims;
·
“providing detailed financial analyses,
explanations, and summaries of factual issues to the staff;
·
“proactively identifying key documents and
witnesses that the staff has not yet identified; and
·
“facilitating interviews of former employees.”
In rare cases, enforcement actions may be taken against
compliance officers, primarily in instances where they participate in
misconduct unrelated to compliance, mislead regulators or fail to fulfill their
compliance responsibilities, Grewal said.
He listed three situations in which the SEC typically brings
enforcement actions against compliance personnel:
·
“where compliance personnel affirmatively
participated in misconduct unrelated to the compliance function;
·
“where they misled regulators; and
·
“where there was a wholesale failure by them to
carry out their compliance responsibilities.”
However, regulators emphasize that good faith efforts and
reasonable analysis are not subject to second-guessing. By fostering proactive
compliance, financial professionals and regulators aim to enhance public trust
and confidence in the markets and institutions.