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SEC Spotlight: Enforcement and Regulatory Developments in Q2 2022: A Comprehensive Analysis

Introduction

The U.S. Securities and Exchange Commission (SEC) has been on a relentless mission to protect investors and maintain fair markets. Under the leadership of Chair Gary Gensler, the SEC has been particularly active in the second quarter of 2022. This article aims to provide a comprehensive analysis of the SEC's enforcement and regulatory activities during this period, with a focus on key areas such as insider trading, cryptocurrency, ESG disclosures, and more.

Enforcement Activities

Division of Enforcement's Actions

The Division of Enforcement has been instrumental in bringing actions against various market participants. The division has not only focused on traditional areas like insider trading and investor fraud but has also ventured into emerging sectors like environmental, social, and governance (ESG) disclosures.

Insider Trading and Investor Fraud

The SEC has been vigilant in cracking down on insider trading activities. The division has settled numerous actions involving insider trading, sending a strong message to market participants about the consequences of such illegal activities. The SEC's approach has been to not only penalize the individuals involved but also to ensure that companies have robust internal controls to prevent such incidents.

ESG Disclosures

The SEC has been proactive in ensuring that companies provide accurate ESG disclosures. The division has nearly doubled the headcount of the Commission’s Cryptocurrency unit, signaling a clear intent to bring crypto and other digital assets into the regulatory framework.

Accountants’ Liability Conference

The American Law Institute’s Accountants’ Liability Conference, co-sponsored by Arnold & Porter, was a significant event that highlighted the SEC's focus on auditor independence, cooperation in investigations, and the role of auditors as gatekeepers. The conference served as a precursor to the SEC's enforcement actions against a national accounting firm and its partners for improper conduct related to audits.

Cryptocurrency Regulation

Crypto Assets and Cyber Unit

Chair Gensler has been vocal about treating cryptocurrency markets like other markets. The SEC announced in May that it had nearly doubled its Crypto Assets and Cyber Unit, growing the section to 50 dedicated positions. This is a clear indication that the SEC is gearing up to regulate the burgeoning cryptocurrency market.

Fraud Charges and Investigations

The SEC has been active in bringing crypto-related actions, including fraud charges related to unregistered offerings and fraudulent sales. The Commission is also reportedly investigating digital assets involved in Terraform Lab’s project Mirror Protocol to determine whether they should be considered securities.

ESG Misstatements and Omissions

ESG Task Force and Settlements

The SEC announced a $1.5 million settlement with BNY Mellon Investment Adviser for misrepresenting their ESG quality review process. This action is part of the SEC's broader strategy to hold investment advisers accountable for inaccurate ESG disclosures.

Greenwashing

The SEC is increasingly focusing on "greenwashing," where companies make misleading claims about their environmental practices. Companies need to adopt robust policies to mitigate the risk of including inaccurate or misleading statements related to ESG in their documents.

Whistleblower Protections

Rule 21F-17 and Settlements

The SEC settled a case with The Brink’s Company over an alleged violation of whistleblower protections. The Commission determined that Brinks had required employees to sign restrictive confidentiality agreements that violated Rule 21F-17 of the Securities Exchange Act of 1934. This is an area of active focus for the SEC, and companies should update their internal policies accordingly.

Anti-Money Laundering

The SEC settled charges against a broker-dealer and investment adviser for failing to file Suspicious Activity Reports (SARs) in a timely manner. The firm agreed to pay a $7 million penalty, highlighting the SEC's commitment to enforcing Bank Secrecy Act record-keeping requirements.

Foreign Corrupt Practices Act (FCPA)

The SEC announced a $78 million settlement with a global manufacturer for paying bribes to Brazilian government officials. This settlement underscores the SEC's active focus on FCPA violations and the need for companies to have robust internal reporting mechanisms.

Municipal Bond Violations

The SEC charged a Louisiana town and its former mayor with misleading investors in a $5.8 million bond offering. This action indicates the SEC's intent to ensure transparency and accountability in the municipal bond market.

Insider Trading

The SEC continued its aggressive stance on insider trading, settling actions against individuals and companies. The Commission also collaborated with the U.S. Attorney’s Offices to bring criminal charges, emphasizing the seriousness with which insider trading is viewed.

Important Court Decisions

Administrative Proceedings

The constitutionality of SEC administrative proceedings has been a subject of debate. Cases like Lucia, Cochran, and Jarkesy could reshape how SEC enforcement actions are instituted and litigated.

Gag Orders

The Supreme Court declined to hear a case challenging a Commission settlement

practice that includes gag orders, thereby preserving the SEC's ability to include such provisions in settlements.

Rulemaking Activities

Climate Disclosures

The SEC has proposed rules requiring companies to disclose climate-related risks and greenhouse gas emissions. The Commission has laid out an ambitious timeline for finalizing these rules, with a vote expected in October 2022.

ESG Metrics

The SEC is also working on rules that would require companies to disclose ESG metrics, including diversity and inclusion data. These rules are expected to be finalized by the end of 2022.

SPACs

The SEC has proposed new rules for Special Purpose Acquisition Companies (SPACs) to enhance disclosure requirements and protect investors. The rules are expected to be finalized in the first quarter of 2023.

Conclusion

The SEC's activities in Q2 2022 indicate a proactive and comprehensive approach to enforcement and regulation. Companies, board members, and other market participants should be on high alert and consider taking preemptive measures to align with the SEC's evolving regulatory landscape.