House Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets

Oversight of the SEC’s Division of Enforcement

Tuesday, July 19, 2022

Topline

• Both Sherman and Huizenga highlighted the need for SEC Chair Gensler to testify before the Committee. Huizenga also admonished Grewal for what he implied were inadequate answers throughout the hearing.
• Sherman asked the SEC to define a “security” as applied to digital assets and define “ESG.”
• Republicans pressed Director Grewal on the Division’s enforcement of Scope 3 emissions disclosure.
• Grewal answered questions on Reg BI, digital assets, SAB121, and gamification.

Witnesses

• Gurbir S. Grewal, Director, Division of Enforcement, Securities and Exchange Commission

Opening Statements
Chairman Brad Sherman (D-Calif.)

In his opening statement, Sherman said he looked forward to Chair Gensler testifying before the full committee and said he would think the SEC Chair would testify before the full Committee or one of its subcommittees several times each year. He discussed the recent Supreme Court decision in Jarkesy v. SEC regarding SEC administrative law judges (ALJ), the SEC’s use of waivers, and challenges posed by cryptocurrency.

Ranking Member Bill Huizenga (R-Mich.)

In his opening statement, Huizenga said the hearing was long overdue given the length of time since the last SEC enforcement hearing and indicated he will not stop requesting these kinds of hearings. He said facilitating capital formation seems to have fallen off the SEC’s agenda and that Congress should not evaluate the true effectiveness of the SEC or its regulatory program solely based on how many rules it can generate. He criticized the SEC’s use of ALJs and highlighted the Jarkesy case. He then requested that Chair Gensler testify in future Committee hearings.

Representative Maxine Waters (D-Calif.)

In her opening statement, Waters touted the everyday work of the SEC’s enforcement division.

Testimony

Gurbir S. Grewal, Director, Division of Enforcement, Securities and Exchange Commission

In his testimony, Grewal described his plans to restore American’s trust in financial institutions through robust enforcement, remedies, and compliance. Additionally, he requested a fiscal year 2023 budget increase, citing a greater number of registered entities, complex crypto regulations, and resources needed to analyze overwhelming amounts of data. Grewal then stated that the budget request would also increase enforcement division staff to meet mounting regulatory challenges.

Question & Answer

Digital Assets

Sherman asked why the Commission is not enforcing against spring-loaded stock options. Grewal said some situations would implicate disclosure and accounting issues. Sherman asserted that certain large crypto exchanges were knowingly violating the law when they processed transactions with the XRB cryptocurrency. Rep. Jim Himes (D-Conn.) asked if the SEC has the resources and expertise to conduct enforcement on cryptocurrency. Grewal said additional resources in the crypto asset unit will help with enforcement and that more resources will be necessary moving forward. Rep. Warren Davidson (R-Ohio) asked if digital assets are exempt from the Division’s treatment of pump-and-dump schemes. Grewal said no.

Reg BI

Waters asked Grewal to describe enforcement of Regulation Best Interest (Reg BI) and how brokers have changed their practices as a result of the new standard. Grewal described a specific enforcement case and said that it remains to be seen whether Reg BI is having its intended effect but that he hopes it will through enforcement, education, and compliance.

Staff Accounting Bulletins (SABs)

Rep. Trey Hollingsworth (R-Ind.) asked about regulatory enforcement authority and SABs. Grewal said SABs are guidance from the Office of Chief Accountant (OCA) regarding questions that have been raised by staff and that the Division is not involved in enforcing violations of SABs because they are not law. Hollingsworth asked if SAB 121 legally requires counterparties that participate in the activities included in the bulletin to adhere to the bulletin. Grewal said the bulletin is guidance, so it is not within his Division, adding that it was promulgated by OCA. Hollingsworth asked how the SEC plans to address the implications of accounting firms that require organizations to adhere to SAB guidance. Grewal said that is a question for OCA.

Environmental, Social, and Governance (ESG)

Reps. Ann Wagner (R-Mo.), French Hill (R-Ark.), and Bryan Steil (R-Wis.) asked how the Division plans on handling enforcement cases involving an issuer’s disclosure of Scope 3 emissions. Grewal said the division will take the same approach they have taken to date, adding that they know ESG and climate issues are important to investors and that issuers are already making statements about their climate risks. Wagner asked how the SEC will verify whether an issuer has misstated its Scope 3 emissions. Grewal said the Division is relying on experts. Wagner asked what statute gives the SEC direct authority to regulate climate change. Grewal said as it relates to a litigated matter, there are anti-fraud provisions of federal security laws that provide that authority. Wagner asked how the SEC recruits and hires qualified staff who are both experts on climate change and securities law disclosure. Grewal said SEC attorneys are experts on securities law and consult with experts on climate change. Wagner asked Grewal how he envisions determining whether a fund has incorporated ESG factors into its investor selections process when the SEC has not defined what those factors are. He said they look to the anti-fraud provisions of the Investors Advisers Act and allege a breach of the advisor’s fiduciary duties. Wagner asked if the SEC has defined ESG yet. Grewal said no and that the rulemaking process is for that purpose. Rep. Juan Vargas (D-Calif.) asked how the SEC’s Enforcement Division will enforce the Commission’s ESG disclosure rule. Grewal said he cannot talk about enforcement because the rule is not finalized but that the Commission is using already available tools, like anti-fraud rules, to hold bad actors accountable.

Gamification

Rep. Sean Casten (D-Ill.) asked what the SEC is doing around gamification. Grewal said the SEC put out a request for information about gamification and hopes responses to the request will inform next steps. He added that if gamification crosses the line into recommendations, those firms will have to comply with Reg BI.

Proxy Advisors

Steil asked if the Division has taken any enforcement actions regarding proxy advisors within the last year. Grewal said he was unsure. Steil asked Grewal if it is his view that proxy advisors are not proxy solicited under the Exchange Act and whether Congress will need to take action on the issue. Grewal said that is a question for the policy making divisions.

SEC Security Breach

Huizenga asked about the 2017 SEC data breach and if Grewal can assure Congress that cases brought before ALJs during 2017 were fairly adjudicated. Grewal said as soon as the breach was discovered, it was publicly reported and that the matter is still under investigation internally. He also said that no division enforcement personnel were found to have access to case materials they were involved in.

Whistleblower

Rep. David Scott (D-Ga.) asked if the SEC’s Whistleblower Program is adequately funded to process its current number of complaints. Grewal said the SEC is dedicating the resources to ensure that the program remains successful.

General Enforcement Issues

Scott asked about funding for the SEC’s Enforcement Division for staff increases. Grewal said the added funding requested by SEC will be adequate for its enforcement efforts. Rep. Tom Emmer (R-Minn.) asked if the SEC Enforcement Division conducts industry sweeps. Grewal said yes. Emmer asked if there are currently any industry sweeps underway. Grewal said he could not discuss ongoing investigations. Emmer asked what the Division does if a company outside of the SEC’s jurisdiction does not respond to a sweep letter. Grewal said there is not much they can do besides exercise their subpoena power. Davidson asked what the current criteria are for targeting pump-and-dump schemes. Grewal said there is no selective prosecution.

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