SEC Enforcement Trends to Follow in 2023

SEC Enforcement Trends to Follow in 2023

The SEC has been ramping up enforcement actions in recent years, and we can expect this trend to continue in 2023. Here are some of the key areas that the SEC will likely focus its enforcement efforts on this year:

Crypto Assets

The crypto market saw major volatility and some high-profile collapses in 2022, like FTX and Celsius Network. This has drawn increased scrutiny from the SEC. We’ll likely see more enforcement actions related to registration failures, fraudulent schemes, and insider trading in the crypto space.

For example, in 2022 the SEC charged the founder of cryptocurrency exchange BitConnect with conducting a $2 billion fraudulent scheme. And in 2021, they charged Ripple Labs and its executives with conducting an unregistered securities offering worth over $1.3 billion. We can expect to see more big cases like these in 2023.

Environmental, Social, and Governance (ESG)

ESG investing has exploded in popularity in recent years. With this growth, the SEC is closely watching how funds market themselves as ESG-focused. There’s been some concern about “greenwashing,” where funds overstate their sustainability credentials.

In 2022, the SEC charged BNY Mellon Investment Adviser for misstatements about ESG considerations in its investment processes. More cases like this could be coming that tackle misleading ESG claims and ensure investors are getting accurate information.

Cybersecurity

Cyber attacks pose huge risks for investors, and the SEC is ramping up efforts to ensure firms have proper cybersecurity controls in place. In 2022, they proposed rules that would require funds and advisors to report cybersecurity incidents within 48 hours and disclose policies around cybersecurity risk management.

We may see the SEC bring enforcement actions against firms that fail to adequately protect customer data or respond to breaches. Cybersecurity preparedness will remain an examination priority for the SEC.

Private Fund Advisers

The SEC continues to emphasize greater oversight of private fund advisers like private equity and hedge funds. They are closely watching for compliance issues like preferential treatment of certain investors and conflicts of interest around fees and expenses.

In 2022, the SEC charged private fund adviser Apollo Global Management with misleading investors about fees and a conflict of interest. We’ll likely see more enforcement here as the SEC increases scrutiny of private fund advisers.

Individual Accountability

The SEC is focused on holding individuals accountable when misconduct occurs, not just institutions. We’ve seen some major cases recently charging executives for their roles in corporate wrongdoing.

In 2022, former Boeing CEO Dennis Muilenburg paid $1 million to settle SEC charges around misleading investors after two deadly 737 MAX crashes. Also in 2022, the SEC charged Mark Zuckerberg with making misleading statements about Facebook’s use of user data. Expect more charges against corporate executives in 2023.

Gatekeepers

“Gatekeepers” like auditors and attorneys play a critical role in the financial system. The SEC is closely watching them and will bring enforcement actions when these gatekeepers fail to fulfill their responsibilities.

For example, in 2021 the SEC charged Ernst & Young LLP with cheating on ethics exams and violating auditor independence rules. We may see more cases holding gatekeepers accountable for misconduct that threatens market integrity.

Climate and ESG-Related Disclosure

In 2022, the SEC proposed landmark new rules that would require public companies to provide detailed disclosures around climate risks and emissions. Once finalized, we’ll likely see the SEC target companies that fail to make accurate, robust disclosures.

They may also pursue companies for “greenwashing” in this area – making overly broad, unsubstantiated claims about sustainability. Companies should ensure they have strong processes in place for climate and ESG reporting.

Insider Trading

Insider trading has long been an enforcement priority for the SEC, and they are continually improving tools to detect illicit trading. In 2022, the SEC brought several insider trading cases involving NFTs and crypto assets as they apply greater scrutiny to emerging digital markets.

We can expect the SEC to continue leveraging data analysis and AI to identify abnormal trading patterns and bring timely insider trading cases. Firms should have robust controls around confidential information.

Disclosure and Reporting

Clear, accurate disclosures are critical for investors. In 2022, the SEC proposed rules to enhance disclosures around security-based swaps, bank securities lending, cybersecurity risk management, and more. They will likely bring enforcement actions against companies that file misleading or deficient disclosures.

For example, in 2021 the SEC charged AT&T and executives with selectively providing material nonpublic information to Wall Street analysts. Robust controls around disclosures continue to be an SEC focus.

Broker-Dealers and Investment Advisers

The SEC continues to prioritize oversight of broker-dealers and investment advisers (RIAs) to ensure they act in investors’ best interests. Areas of focus include compliance with Regulation Best Interest, proper disclosure of conflicts of interest, and supervision of representatives.

In 2022, the SEC charged 19 RIAs with violating the “advertising rule.” We can expect more enforcement around proper marketing and disclosure of fees, risks, and conflicts of interest in this space.

Conclusion

The SEC is aggressively pursuing enforcement in 2022, with areas like crypto, ESG, and cybersecurity emerging as hot topics. But they continue to prioritize issues that directly impact retail investors, like insider trading, misleading disclosures, and gatekeeper accountability. With additional funding and resources, the SEC will likely maintain an active enforcement agenda in 2023.

References

[1] Gibson Dunn 2023 Mid-Year Securities Enforcement Update

[2] EY – Four key SEC priorities in 2023

[3] SEC 2023 Examination Priorities

[4] Eight Noteworthy Investment Adviser Enforcement Actions From the First Half of 2023

[5] Top 5 SEC Enforcement Developments for January 2023

[6] Top 5 SEC Enforcement Developments for May 2023