“Partners of Honest Business and Prosecutors of Dishonesty”: Remarks Before the 2023 Securities Enforcement Forum

I am pleased to join you at the 2023 Securities Enforcement Forum. As is customary, I’d like to note that my views are my own as Chair of the Securities and Exchange Commission, and I am not speaking on behalf of my fellow Commissioners or the SEC staff.

When I spoke with you two years ago, I shared what the SEC’s first chair, Joseph Kennedy, said in his first speech: “The Commission will make war without quarter on any who sell securities by fraud or misrepresentation.”[1]

In a subsequent speech, just four months later, Kennedy emphasized: “We are not prosecutors of honest business, nor defenders of crookedness. We are partners of honest business and prosecutors of dishonesty. We shall not prejudge, but we shall investigate.”[2]

These words remain just as true today.

I am appearing here today in front of an audience of lawyers, accountants, and compliance officials. While you serve your clients, you also have a responsibility to the law and to the public.

William O. Douglas—before serving as the SEC’s third chair and a Supreme Court Justice—once said to an audience of lawyers: “Service to the client has been the slogan of our profession. And it has been observed so religiously that service to the public has been sadly neglected.”[3]

Thus, as Felix Frankfurter said in advising President Franklin Roosevelt on staffing the newly formed SEC: “You need administrators … who have stamina and do not weary of the fight, who are moved neither by blandishments nor fears, who in a word, unite public zeal with unusual capacity.” [4]

That’s why we’re so fortunate to have the remarkable staff at the SEC. Every day, they work to advance our mission and ensure the markets work on behalf of investors and issuers, not the other way around.

In fiscal year 2023, our staff once again “[did] not weary of the fight.”

We filed more than 780 actions, including more than 500 standalone cases. We obtained judgments and orders totaling $5 billion. Our work led to $930 million distributed to harmed investors.

These numbers, though, tell only part of the story. Our philosophy behind them tells a fuller one.

Again, I think of our enforcement program through five themes: Economic Realities, Accountability, High-Impact Cases, Process, and Positions of Trust.[5]

Economic Realities

First, economic realities. In thinking about economic realities, I once again will quote a Supreme Court Justice: Thurgood Marshall.

“Congress’ purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.”[6] This is not just a talking point. This is the law of the land, as Justice Thurgood Marshall wrote in the Supreme Court’s famous Reves decision.

Thus, to effectuate Congress’s purpose, we don’t enforce the securities laws based on a product’s label. Rather, we look to the underlying economic realities.

This is true across all of the securities markets, but let me focus on one of its sectors.

There is nothing about the crypto asset securities markets that suggests that investors and issuers are less deserving of the protections of our securities laws.[7]

Congress could have said in 1933 or in 1934 that the securities laws applied only to stocks and bonds. Yet Congress included a long list of items in the definition of a security, including “investment contract.”

Let me ask with a show of hands—how many of you in the audience have clients in the crypto markets?

For those of you who raised your hand, I’m presuming that you entered into an engagement agreement with them. That you know who they are. That most of them have websites. That there’s some identifiable person that you’re relying on to retain you and pay for the services you provide.

In most cases, that’s the economic reality at hand. As the Supreme Court said in the famous Howey decision: An investment contract exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.[8]

As I’ve previously said, without prejudging any one asset, the vast majority of crypto assets likely meet the investment contract test, making them subject to the securities laws.[9]

Further, it follows that most crypto intermediaries—transacting in these crypto asset securities—are subject to the securities laws as well.

With wide-ranging noncompliance, frankly, it’s not surprising that we’ve seen many problems in these markets. We’ve seen this story before. It’s reminiscent of what we had in the 1920s before the federal securities laws were put in place. This is a field rife with fraud, scams, bankruptcies, and money laundering. While many entities in this space claim they operate beyond the reach of regulations issued before Satoshi Nakamoto’s famous white paper, they also are quick to seek the protections of the law, in bankruptcy court and litigating their private disputes.[10]

We have brought numerous enforcement actions against actors in this space—some settled, and some in litigation. [11]

Accountability

Second, nothing motivates individuals and firms quite like accountability.

We use all of the tools in our toolkit to hold bad actors accountable—including bars, penalties, injunctions, undertakings, and litigating where appropriate.

Accountability starts with a robust set of allegations or findings of fact. The public benefits and justice benefits. The allegations and findings of fact convey to market participants—many of them, your clients—what about the action crosses the line.

While the press often reports on the monetary remedies, accountability also is about the undertakings or the commitments of firms to update their procedures or retain independent compliance officers.

As just one example, the Options Clearing Corporation (OCC).[12] As a systemically important clearinghouse, the OCC provides critical services for market stability. Yet the OCC violated its own rules, putting the markets the OCC serves at risk. This is unacceptable. In holding the OCC accountable, we not only penalized the firm but required it to revamp its risk management.

For sure, monetary remedies geared and appropriate to the circumstances are important—as large last fiscal year as $413 million involving Danske Bank.[13]

Accountability also is about individuals, not just firms. Last year, fully two-thirds of the matters we brought charged individuals.

Accountability includes protecting the public by barring individuals—whether from practicing before the SEC, association bars, or otherwise. Last year, we obtained 133 bars on individuals from serving as officers and directors—our highest in a decade.

That includes a five-year bar on the former CEO from McDonald’s, who made false statements about the circumstances that led to his termination.[14]

That also includes a permanent bar on a former Wells Fargo senior executive, whom we charged with misleading investors about the bank’s abusive sales practices.[15]

And don’t get me started on crypto.

I won’t even name all the individuals we’ve charged in this highly noncompliant field. [16]

High-Impact Cases

Third, we look at high-impact cases.

When you’re a victim of fraud, misconduct, and abuse, the highest-impact case is the one that affects you—whether you lost $20,000 due to affinity fraud or your life savings in a crypto-related scam.

We do not hesitate to protect investors, including vulnerable investors—such as by holding violators accountable for affinity fraud,[17] including through the critical work of our Fraud Against Minority Groups Initiative.[18]

All cases are important, and that’s why we work quickly to seek penalties and prophylactic relief to keep bad actors out of the markets. It’s important to us that you in the audience work with your clients to create a culture of proactive compliance.

There’s also those cases that will garner the attention of lawyers, compliance officers, and the like, far beyond this room—and yes, often get reported by the press. They help change behavior and bring greater compliance with the law.

Let me highlight just one such area.

Since the 1930s, recordkeeping obligations have been vital to market integrity and the SEC’s oversight. At a fundamental level, failures in recordkeeping—like those involving off-channel communications—obstruct such market integrity.

Since December 2021, in part through an ongoing sweep for potential violations, we have brought cases against 40 firms, required significant undertakings, and ordered more than $1.5 billion in penalties. In the last fiscal year alone, we settled recordkeeping-related charges with 23 firms.[19]

Our actions uncovered not only the widespread use of personal devices and non-official channels to discuss business, but a complete failure of financial firms to maintain or preserve those off-channel communications.

Further, last fiscal year, we brought in rapid succession three cases against both public and private companies that used employee exit agreements to impede an employee’s ability to file whistleblower complaints with the SEC.[20]

The exit agreements forced employees to choose between violating a separation agreement by providing information to the SEC or withholding information that could benefit victims of a securities law violation. That violates longstanding whistleblower protections.

Some may call high-impact cases regulation by enforcement. I call it enforcing the laws and the regulations that are on the books.

Process

Fourth, process.

Process is about fairness. We strive to be fair to those who have been wronged, those who we investigate, and the public at large.

Process also is about timeliness—working to bring matters to a thoughtful yet expeditious resolution.

Process is about working with our partners at the federal, state, and international levels, as well as with self-regulatory organizations. I thank all our partners involved in matters from the recent fiscal year. [21]

Process also is about working with our most important partners—the public. The public’s tips, complaints, and referrals (TCRs) are essential to our work as a cop on the beat. We received more than 40,000 TCRs in the previous fiscal year, including more than 18,000 from those critical whistleblowers.

Further, process is about meaningful cooperation. I’m talking about more than showing up for testimony or producing documents under subpoena. It means going above and beyond to self-report, cooperate, and remediate.

Across numerous actions last fiscal year, the Commission ordered zero or reduced penalties based on the respondents’ cooperation.[22] Keep these actions in mind as you in the audience advise clients on the benefits of self-reporting and cooperation.

Finally, process is about following the facts wherever they lead—whether it’s to close a case or, where appropriate, into court. We are not afraid to litigate matters, whether against the best-resourced founders, the oldest firms, the newest industries, and yes, the largest crypto exchanges. [23]

Positions of Trust

Finally, trust in the markets depends on gatekeepers like auditors, lawyers, underwriters, and others—gatekeepers like you.

When those in positions of trust abuse that trust, we will not hesitate to hold them to account.

One example amongst others[24] relates to Marcum. Marcum is an auditing firm that took on more than 600 new clients that were Special Purpose Acquisition Companies (SPACs), a sixfold increase in just one year. The strain of this growth exposed the firm’s widespread quality control and audit standard violations.[25]

Marcum neglected its role as a gatekeeper, putting its clients and the investing public at risk. On top of imposing a $10 million penalty on Marcum for the violations, we required undertakings limiting the firm’s ability to accept new clients.

In the last fiscal year, we also continued to hold credit rating agencies,[26] underwriters,[27] and lawyers[28] to account.

When we hold accountable those in positions of trust, that builds trust in the markets.

Conclusion

I started by quoting Kennedy, Douglas, Frankfurter, and Marshall—four individuals critical to creating, shaping, and interpreting the securities laws—laws that Congress established to protect the investing and issuing public.

I hope you all in this audience, when advising your clients, take these leaders’ words to heart.

I know that the dedicated staff of the SEC do. I couldn’t be prouder of what the staff do, in enforcement and beyond, every day to live up to the words and spirit of these quotes and the SEC’s mission.

I thank them for their work to maintain the trust on which our markets depend.

Thank you.