The SEC brings enforcement actions when broker-dealers, investment advisers, public companies, accountants, or others violate the securities laws. Review a sample of those enforcement actions, and you might conclude that the agency has a limited toolkit for sanctioning misconduct: censures, penalties, disgorgement of ill-gotten gains, injunctions against future misconduct, and bars or suspensions. But federal law in fact authorizes the agency to seek “any equitable relief that may be appropriate or necessary for the benefit of investors,” 15 U.S.C. § 78u(d)(5), if the relief is not “punitive.”
The SEC has flexible authority to seek novel and bespoke sanctions
In run-of-the-mill cases, the SEC typically uses this equitable authority in limited ways. The agency might seek “conduct-based injunctions” to prohibit defendants from participating in certain securities transactions, or require “undertakings” that require defendants to hire independent compliance consultants. In some cases, however, the SEC has embraced the flexibility that federal law affords, pursuing bespoke sanctions tailored to address case-specific misconduct or circumstances. For example:
- In August 2023, the SEC settled charges against an investment advisory firm, its parent, and the person who controlled them, alleging that they breached fiduciary duties to a client ETF when using the ETF’s securities lending revenue to obtain litigation-related financing. The SEC settlement included an undertaking requiring the control person to resign from various positions with the adviser and its affiliates and to communicate with employees only about selling and winding down the business.
- In March 2023, the SEC settled charges alleging that a trust and its principal had failed to register as a securities dealer, or to associate with a registered dealer, despite engaging in the business of “buying shares of private companies and selling them for profit to private funds.” The settlement included an undertaking requiring, among other things, that the trust and principal use “best efforts” to comply with the dealer-registration requirement. If the trust did not register within two years, the undertaking required in part that the trust and principal “take all steps necessary to effect an immediate transfer of all shares and forward contracts for shares…without profit to [the trust or principal], to . . . another registered broker-dealer not unacceptable to the Commission….”
- In September 2024, the SEC settled charges that a fantasy sports and gambling company allegedly violated Regulation FD, which prohibits public companies from selectively disclosing material non-public information. The settlement order included an undertaking requiring the company’s communications employees to attend training about Regulation FD and the company’s Regulation FD policy.
- In September 2023, the SEC settled charges that a public accounting firm’s former National Assurance Services Leader was responsible for quality-control failures. The settlement included a three-year undertaking forbidding him from holding a leadership, management, oversight, or supervisory position at a registered public accounting firm. The undertaking also forbade him from having a decision-making role in certain matters, including any registered public accounting firm’s quality control system.
The agency will likely use its flexible-sanctions authority more often
For multiple reasons, I expect the SEC to pursue case-specific remedies more frequently.
First, recent SEC Enforcement leaders have championed such remedies. In an October 2018 speech, for example, former SEC Enforcement Co-Director Steven Peikin cited examples of conduct-specific sanctions and said that “carefully tailored undertakings serve the Commission’s investor protection mission by specifically addressing the misconduct at issue.” More recently, in 2021, former SEC Enforcement Director Gurbir Grewal said that “conduct-specific relief is key to preventing bad actors from repeating misconduct.”
Second, in some cases Republican Commissioners (who will likely have majority control over the SEC in the next Administration) may prefer sanctions that work like a scalpel rather than a sledgehammer. For example, in October 2023 Republican SEC Commissioner Hester Peirce dissented from an order that barred respondents from participating in penny-stock offerings (a common SEC sanction), arguing that there was an insufficient “link between the facts and the need for the broad penny stock bars.” She added that “narrower penny stock bars” that are “tailored” to the facts of a given case might be more appropriate.
Third, the SEC appears to be turning to the agency’s flexible-sanctions authority as a way to obtain remedies in federal district court that the SEC previously would have sought in the agency’s embattled administrative proceedings. This new focus might ultimately lead the agency to think more expansively about the types of remedies it seeks, including by seeking more tailored sanctions.
Defendants may sometimes benefit from sanctions flexibility
Defendants and their counsel may be wary of the SEC’s use of flexible sanctions authority to seek novel remedies. But when flexibility leads to more tailored remedies, defendants may benefit. One example is when a tailored remedy limits a defendant’s future business or work but stops short of the complete bars or suspensions that the agency often imposes on defendants like brokers, investment adviser representatives, or corporate executives. For instance, in 2018 the SEC sued a public company CEO for securities fraud related to statements about the company’s potential sale. In the original complaint, the SEC sought a bar prohibiting the executive from acting as a corporate officer or director. Days later, the SEC announced a settlement with the executive requiring him step down as board chairman for 3 years, and imposing other corporate reforms, but not imposing a full officer-and-director bar.
A multi-year injunction or undertaking not to perform certain work, in place of a multi-year bar, might also allow some defendants eventually to return to that work without having to re-apply to a self-regulatory organization or the SEC for permission.
As for financial sanctions, in most cases the SEC will likely resist foregoing penalties and disgorgement in favor of a tailored injunction or undertaking. The agency underscores its aggregate financial sanctions when reporting annual enforcement results. In some cases, however, the SEC might be willing to negotiate financial sanctions down, or away altogether, in exchange for meaningful tailored remedies. In his 2018 speech, former Co-Director Peikin (who co-led SEC Enforcement during the first Trump Administration) said that “not every case warrants a penalty.” He cited an example in which SEC Enforcement had not recommended a penalty because the company at issue had made “extensive remedial efforts” and agreed to an undertaking.
In some cases, tailored remedies may even present a win-win for the SEC and defendants alike. Less burdensome, tailored remedies could make enforcement actions easier to resolve, while still protecting against future misconduct. This result would reduce taxes on the agency’s and defendants’ resources, enabling SEC enforcement staff to open new matters, rather than engage in protracted settlement negotiations or litigation in old ones
