The Securities and Exchange Commission (SEC) has followed through on its much publicized intention of more aggressive enforcement. For instance, in June, the regulator brought an accounting fraud action that included a clawback of a CEO's compensation, notwithstanding that the CEO did not have a role in the stated misconduct. Through this action, the SEC has made it clear that when there is a restatement of a public company's financial statements, it will exercise its powers under the Sarbanes Oxley Act to claw back compensation, even if a CEO or CFO is not directly charged with misconduct. Such compensation includes equity-based incentives and the profits from sales of a company's stock during the restatement period. This is known as a SOX 304 clawback and this action signals a significant broadening of this remedy, as the SEC is not requiring misconduct by senior management.
Admissions have also become a focal point. In December, rather than settle on a "neither admit nor deny" basis, a broker-dealer admitted to certain record-keeping violations in an SEC settlement. In this matter, certain employees communicated about securities business over their personal devices using, for instance, text messages and WhatsApp without maintaining and preserving those communications. An admission is significant because it can sometimes be used by private securities litigation attorneys to get past the motion to dismiss stage and into discovery. Notably, there is no private right of action for the type of violation this broker-dealer admitted to. So, while the entity admitted to the failing, it could settle without a significant risk of private litigation. It remains to be seen, however, whether a company will admit to a regulatory breach that also leaves it exposed to private action.
Regarding the impact of enforcement on M&A activity specifically, SPAC markets have been especially sensitive to a more hawkish SEC. The heightened focus of the Enforcement Division on de-SPAC transactions has contributed to these deals slowing, as market participants in de-SPAC transactions digest their enforcement risk exposure and prepare for new SEC rules.
The Rise of ESG Disclosure Scrutiny
One of the biggest areas of ongoing development, meanwhile, is in ESG enforcement actions. In April, the Enforcement Division's Climate and ESG Task Force brought its first enforcement action against a mining company for making false and misleading statements in violation of the antifraud and reporting provisions of the US securities laws. The misleading statements were delivered at an investor presentation and made in the company's sustainability reports and SEC filings. They related to the safety and risk management of a dam prior to its fatal collapse.
The following month, the Enforcement Division's Climate and ESG Task Force brought a second action against an investment advisor for misstatements and omissions relating to ESG considerations when making investment choices for a number of mutual funds under its management. The investment advisor implied in various statements that all investments in the funds had undergone an ESG quality review, despite this being untrue. These enforcement actions underscore that the SEC is not waiting for the new ESG rules in order to start scrutinizing ESG related disclosures by public issuers and regulated entities.