The U.S. Securities and Exchange Commission (SEC) settled a long list of enforcement actions over the last two days of its fiscal year ending September 30, 2023. The enforcement actions covered a breadth of violations and give a good sense of the violations uncovered in exams that are likely to be referred to the Division of Enforcement. Regulated entities should pay particular attention to these areas during their year-end compliance review so that, if issues are found, they can be remediated in advance of a regulatory exam. We summarize key SEC actions below.
The SEC fined investment adviser D. E. Shaw & Co., L.P., $10 million for violating the Whistleblower Protection rules[1]. The SEC found that from 2011 to 2019, D. E. Shaw employees signed agreements preventing the disclosure of confidential information to individuals outside the company, unless required by law or court order. Furthermore, from 2011 through 2023, D. E. Shaw required employees to sign releases affirming that they had not filed any complaints with any governmental agency, department, or official. The SEC found that this impeded an individual from communicating with the SEC about any possible securities law violations under applicable whistleblower protection statutes.
The SEC brought an enforcement action despite the fact that D.E. Shaw took some mitigating steps to avoid a chill on reporting. In 2017, D.E. Shaw circulated an email notifying employees that they were not prohibited from speaking to regulators about possible violations. However, D.E. Shaw did not update the employment agreement or the releases during this time.
It is important to review existing contract terms to make sure they do not run afoul of whistleblower protection rules.
Anti-Bribery Violations
The SEC charged two firms with violations of the anti-bribery, recordkeeping, and internal accounting controls provisions of the Foreign Corrupt Practices Act (FCPA).
The SEC fined Albemarle Corporation $103.6 million for using agents in Vietnam, India, and Indonesia who paid bribes to local officials to secure sales of refinery catalysts[2]. Additionally, the SEC found that Albemarle failed to implement sufficient internal account controls system to ensure agents used payments for only legitimate purposes.
The SEC charged Clear Channel Outdoor Holdings Inc. for bribing Chinese government officials in attempts to obtain outdoor advertising contracts[3]. In addition to these bribes, the SEC also charged Clear Channel for failing to ensure sufficient internal accounting controls were in place. The bribes included expensive gifts and off-book consultants. Clear Channel agreed to pay more than $26 million to resolve the charges.
Note, it is not enough under the FCPA that no bribes were paid. Regulated entities need appropriate accounting controls and record keeping practices that are designed to prevent FCPA violations.
Off-Channel Communications
The SEC fined a number of broker-dealers, dually registered broker-dealers and investment advisers, affiliated investment advisers, and credit rating agencies for recordkeeping violations related to the preservation of electronic records and off-channel communications on personal devices[4][5]. These communications included information about the business, proposals, and recommendations for clients, determining credit ratings, and adjustments to predictive models made outside of official communication channels and were not collected and preserved.
Of note, the penalties reached as high as $35 million. However, Perella Weinberg Partners LP agreed to pay a $2.5 million penalty after self-reporting. The SEC noted that self-reporting, remediating and cooperating may benefit those who may have committed recordkeeping violations.
As part of your annual compliance training, it is important to alert all persons that business communications must be limited to approved devices and apps and that only devices and software that can monitor these communications are permissible for business communications.
Misleading Investors
The SEC fined Newell Brands Inc. over $12 million for misleading investors about the company’s core sales growth[6]. The SEC found that the company and the CEO used a non-GAAP financial measure that did not align with the company’s actual sales trends. The SEC order states that the company placed sales in earlier quarters in order to avoid shortfalls in sales and produced a misleading appearance that the sales were in line with targets.
All investor communication must comply with the anti-fraud standards of the federal securities law, including that such communications not mislead.
SPAC Revenue Projections
The SEC fined Spruce Power Holding Corporation for misleading revenue projections prior to a merger with a special purpose acquisition company (SPAC)[7]. Spruce Power Holding Corporation is the successor to XL Fleet Corp., which went public through a merger with a SPAC in 2020. XL Fleet’s long-term projections surpassed $1 billion, even though their sales pipeline consisted of potential customers with whom they had made little to no contact and customers who could not legally purchase the product. This violated antifraud, proxy, and reporting provisions of federal securities law. Spruce Power paid a civil penalty of $11 million.
All projection and hypothetical performance must contain detailed disclosures regarding assumptions included in the projections and risk disclosure regarding the failure of the projections.
