The Securities and Exchange Commission’s enforcement efforts are expected to get a jolt of energy based on two recent events: the nomination of Gary Gensler to chair the SEC and the commission’s decision to grant senior enforcement staff stronger investigative authority.
Those changes combined with the effectiveness of the SEC whistleblower program could supercharge SEC enforcement.
Gensler, who was the Commodity Futures Trading Commission’s chair from 2009 to 2014, was regarded as a forceful regulator.
During that time, the CFTC overhauled the regulation of derivatives, a financial product that caused the 2008 financial crisis, following the passage of the Dodd-Frank Act. The CFTC also pursued investigations that led to many significant enforcement actions, including those related to the manipulation of foreign currency rates and the rate-rigging of Libor, the benchmark that money center banks used to make short-term, unsecured loans to each other.
Gensler knows firsthand how Wall Street works. He was a partner at Goldman Sachs, where he worked for 18 years.
In addition, he will come to the SEC with a solid understanding of digital currencies and Fintech, based on his recent work at the Massachusetts Institute of Technology, at a time when the agency is wrestling with the regulation of both.
Gensler’s record and experience bode well for a reinvigorated enforcement effort at the SEC, especially with respect to the biggest players on Wall Street. The White House announced his nomination Feb. 3, but the Senate has not yet held hearings on the matter.
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Meanwhile in another promising sign, the SEC empowered its senior enforcement staff to issue subpoenas and take sworn testimony, an important step for ramping up enforcement and an encouraging move for SEC whistleblowers.
“This delegation of authority will enable investigative staff to act more swiftly to detect and stop ongoing frauds, preserve assets and protect vulnerable investors,” said SEC Acting Chair Allison Herren Lee in a statement issued Feb. 9. “Returning this authority to the division’s experienced senior officers … helps to ensure that investigative staff can work effectively to protect investors in an era when the pace of fraud – like the pace of markets themselves – is ever more rapid.”
Senior enforcement officials were stripped of the authority to issue subpoenas and take sworn testimony by the previous administration. Instead, the authority was limited to the director of the SEC Enforcement Division.
With the change made last week, there are an estimated three dozen senior SEC officials who can move ahead with investigations using these critical investigatory powers.
During the Trump administration, the number of new investigations progressively dropped every year, according to The Wall Street Journal. The SEC undertook 1,063 investigations in 2016, the newspaper said, but only about 640 in fiscal year 2020.
The new delegation of investigative powers should enable enforcement officials to respond more rapidly to credible reports of fraud or misconduct.
The rule change “empowers the senior officers closest to the facts of the case to authorize formal orders, improving the process,” Acting Enforcement Director Melissa R. Hodgman told The Wall Street Journal.
The developments at the SEC should inspire whistleblowers’ confidence in the SEC, encouraging more to come forward. They are an indispensable driver of SEC investigations and enforcement.
With expanded authority and a more enforcement-oriented outlook, whistleblowers’ reports may now develop into SEC investigations more frequently and more quickly, and yield more enforcement actions.
Under Dodd-Frank and the rules of the SEC whistleblower program, SEC whistleblowers are entitled to protection against job retaliation, confidentiality and rewards.
SEC whistleblowers may receive 10% to 30% of the amount collected in sanctions as a result of the whistleblower’s information and assistance, if sanctions exceed $1 million. The SEC calculates the reward percentage based on many factors, including the value of whistleblowers’ information and their level of assistance in an investigation.
The SEC’s whistleblower program issued a record $175 million in awards to 39 whistleblowers in fiscal year 2020. Since issuing its first whistleblower award in 2012, the SEC has awarded a total of more than $738 million to 134 individuals. (The money for SEC whistleblower rewards comes from a special fund that is financed entirely through monetary sanctions paid to the SEC by securities law violators.)
As of Oct. 1, whistleblower information and assistance resulted in more than $2.7 billion in total monetary sanctions by the SEC.