Priorities, Trends and Developments in Enforcement and Compliance

January 11, 2021

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The tumultuous events of 2020, including the ongoing pandemic and the election of a new U.S. President, will have direct and lasting impacts on white-collar and regulatory enforcement in the years to come. As we enter 2021, we anticipate that white-collar and regulatory enforcement will be more active under the Biden administration, as policy priorities shift toward financial and corporate fraud, as well as ESG issues, environmental and social justice, more generally. At the same time, we expect the already-visible pandemic and recession-related enforcement trends to continue, with a sustained focus on financial statement and accounting fraud. Finally, we expect that the increased reliance on whistleblowers will continue (and potentially grow) in 2021.

Transition to the Biden Administration

New leadership at the DOJ, U.S. Attorney’s Offices, SEC, CFTC and other regulatory agencies will lead to changes in priorities consistent with those associated with prior Democratic administrations.[1] While the DOJ under President Trump placed significant emphasis on confronting violent crime and immigration offenses, we are likely to see under President Biden’s administration a greater emphasis on financial and corporate frauds. The Obama-Biden administration oversaw historically high levels of regulation, investigations and corporate fines, all in the wake of a worldwide financial crisis with significant economic impacts.

We face different challenges today, but now, as then, we expect economic dislocation from the global pandemic as well as a philosophical bent toward white-collar enforcement to result in a more aggressive enforcement climate. Former CFTC Commissioner Gary Gensler’s leading role in helping to populate agency heads is a harbinger of a more muscular approach to enforcement.[2] This approach will likely include an increased focus on the prosecution of individuals responsible for corporate wrongdoing as pressure at key agencies will once again ratchet up to bring individual prosecutions when possible and appropriate.

Some areas of white-collar enforcement that remained relatively active during the Trump administration are likely to continue as a focus for authorities. For example, surprisingly to some, the DOJ under President Trump continued to actively pursue FCPA cases and impose significant fines, with the number of new enforcement actions following an upward trend since 2015.[3] The Trump-era DOJ codified and applied the FCPA Corporate Enforcement Policy first piloted under President Obama’s administration, and a revised 2020 FCPA Resource Guide provided updated guidance on the FCPA’s accounting provisions – all encouraging self-reporting and cooperation (both of which drive much of the FCPA caseload).[4] These policies involved no significant departures from Obama-era interpretation and enforcement of the FCPA, and we expect this will continue.[5] The DOJ’s commitment and approach to FCPA investigations is likely to remain steady going forward and, indeed, we can expect that cross-border cooperation between the DOJ and authorities abroad will only continue to increase.[6] Similarly, while we believe the enforcement of sanctions violations and international anti-money laundering investigations will continue to be robust, we expect the Biden administration to take a more multilateral approach to sanctions cooperation and enforcement.[7]

In addition to returning to pre-Trump priorities, the new administration has signaled that it will take an innovative approach in certain areas of its policy priorities. President-elect Biden announced during his campaign that he plans to create an Environmental and Climate Justice Division within the DOJ, signaling a new and historic enforcement approach to climate change and other environmental issues. The appointment of Christopher Schroeder, a professor at Duke Law School who specializes in environmental law and policy, to lead the DOJ transition team signals the administration’s commitment to this ESG focus.[8] President-elect Biden has stated that the proposed Environmental and Climate Justice Division will pursue criminal anti-pollution charges against corporations and individual corporate executives, strategically support plaintiff-driven climate litigation against polluters and bring affirmative cases under Title VI of the 1964 Civil Rights Act to address racial discrimination in practices that affect health or the environment.[9] The SEC has demonstrated a complementary focus on the accuracy of ESG disclosures and compliance policies, which may become a more prominent subject of enforcement investigations in 2021.[10]

Finally, the CFPB, which was dormant under the Trump administration, will reassert its role as a powerful consumer watchdog.[11] Because of the U.S. Supreme Court’s decision in Seila Law LLC v. CFPB that the CFPB Director is removable by the President at will, the new administration will replace the existing leadership.[12] We expect a Biden-led CFPB to be more assertive in bringing enforcement actions, in particular with respect to pandemic-related claims, which have already seen a sharp increase,[13] and discriminatory actions by financial institutions.[14] As it did in the past, we also anticipate that the CFPB will closely coordinate and collaborate with other law enforcement agencies, including by making referrals to criminal authorities.

Pandemic-Related Financial Statement and Accounting Fraud

The Biden administration’s probable increase in focus on financial crimes will reinforce and intensify pandemic and recession-related enforcement trends. The pandemic has had a widespread economic impact across industries and jurisdictions, creating a volatile environment conducive to potential accounting and disclosure violations, including fraud. The DOJ, SEC and other regulators have increasingly prioritized actions related to overly optimistic accounting judgments and estimates, with a particular focus on revenue recognition, channel-stuffing, fair value and impairment considerations, and the use of non-GAAP financial measures.[15]

The SEC has stated on a number of recent occasions the importance of high-quality financial reporting in response to the impacts of COVID-19.[16] With this goal in mind, the SEC has explained that year-end disclosures will receive additional scrutiny and that it is closely monitoring public filings from issuers in industries highly impacted by the pandemic to identify disclosures that appear to be significantly out of step with the rest of the industry.[17] Of course, accounting judgments and disclosures will be reviewed in hindsight, and in the context of an economic downturn companies can expect regulators to look at whether a company appropriately considered what qualifying language should have been included in its risk factors. On December 4, 2020, the SEC announced its first such settlement against the Cheesecake Factory, which agreed to pay $125,000 for its allegedly overly rosy disclosures concerning the impact of the COVID-19 pandemic on its business.[18]

The SEC and other regulatory agencies have also increased their scrutiny of the dissemination of material non-public information (MNPI) and possible insider trading violations given the heightened risks created by the pandemic as (i) corporate insiders are regularly learning new MNPI that may hold an even greater value than under normal circumstances, (ii) a greater number of people may have access to MNPI and (iii) many of these people are working from home.[19] The SEC’s focus on MNPI has extended to stock buyback initiatives. For example, in October 2020, the SEC settled with Andeavor LLC for allegedly failing to ensure it did not have MNPI related to takeover negotiations when repurchasing its own shares.[20]

Massive federal and state stimulus packages will continue to generate fraud investigations, including under the False Claims Act, which also allows for qui tam actions by private plaintiffs on behalf of the government. The targets of these investigations have included the gatekeepers for stimulus funds, such as banks issuing Paycheck Protection Program loans.[21] This focus on pandemic-related fraud and the passage of the CARES Act (with its $500 billion corporate relief fund) has led to the establishment of a Special Inspector General for Pandemic Recovery, which promises to be active for years to come given that it is modeled after a similar program that continues to investigate fraud cases stemming from the TARP program more than 12 years after its creation.[22]

Focus on Whistleblower Programs

The SEC’s whistleblower program, which relies on individuals to report possible violations of the federal securities laws, has grown in scope and payouts every year since its inception in 2010. In fiscal year 2020, the SEC awarded approximately $175 million to 39 individuals, new highs for both the dollar amount and number of recipients in a given year.[23] On October 22, 2020 (after the end of fiscal year 2020), the SEC issued a $114 million award to a whistleblower, its largest award to date.[24] Domestic and foreign whistleblower tips continue to increase significantly, totaling over 6,900 in fiscal year 2020, as the existence of the program and magnitude of potential awards become more publicly well-known, including to potential whistleblowers.[25] The SEC will continue to leverage the program as a source of new investigations to strengthen its enforcement efforts.

The success of the SEC’s whistleblower program may also lead other regulatory agencies to step up similar efforts, particularly those seeking a pipeline of cases after limited enforcement activity over the last four years. For example, the CFTC has also increased its reliance on whistleblowers. More than 40% of the CFTC’s orders granting awards to whistleblowers since the program’s inception in 2010 were issued in fiscal year 2020, with 16 individuals receiving a total of approximately $20 million.[26] CFTC whistleblower tips also reached a new high of 1,030, a 36% increase from the previous high-water mark.[27]

Key Takeaways

  • Boards of directors should be attuned to shifts in enforcement priorities that will accompany the Biden administration and recalibrate risk accordingly.
  • Financial institutions should expect increased regulatory scrutiny of Wall Street activity, while companies in the oil and gas, mining, automotive, aerospace and industrial sectors should be prepared for potential environmental investigations.
  • Issuers need to be particularly attuned to the accuracy of their ESG disclosures.
  • Board members should take additional precautions regarding adherence to financial reporting standards and compliance with internal policies and procedures in the course and aftermath of the COVID-19 pandemic, including by maintaining and strengthening their internal whistleblower programs.
  • Companies should mitigate heightened insider trading risk through robust and tailored policies and trainings to address information flow and the use of MNPI.

[1] See Cleary Gottlieb, “What to Expect from the Biden Administration” (November 9, 2020), available here.

[2] The Federal Reserve, Banking, and Securities Regulators group led by Gensler covers the transition for the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Federal Reserve, the National Credit Union Administration, and the Securities and Exchange Commission.

[3] Stanford Law School Foreign Corrupt Practices Act Clearinghouse, “DOJ and SEC Enforcement Actions per Year” (2020), available here; see Cleary Gottlieb, “The New DOJ FCPA Corporate Enforcement Policy Highlights the Continued Importance of Anti-Corruption Compliance,” (January 9, 2018), available here (noting questions in 2017 as to whether the Trump administration would continue to prioritize FCPA enforcement and the DOJ’s subsequent focus on maintaining FCPA enforcement).

[4] See Cleary Gottlieb, “DOJ and SEC Release Updated FCPA Resource Guide” (July 9, 2020), available here.

[5] Id.

[6] Id.

[7] Cleary Gottlieb, “What to Expect from the Biden Administration” (November 9, 2020), available here.

[8] Biden-Harris Transition, “Agency Review Teams” (2020), available here; see Duke Law, “Christopher H. Schroeder, Bibliography” (2020), available here.

[9] Biden for President, “The Biden Plan to Secure Environmental Justice and Equitable Economic Opportunity” (2020), available here.

[10] See Cleary Gottlieb, “Despite Disagreements, SEC Commissioners Emphasize Need for Clear Disclosure by ESG Funds” (September 24, 2020), available here.

[11] See Orla McCaffrey, “Financial Firms Gear Up for Biden and an Emboldened Consumer Watchdog,” Wall Street Journal, (October 21, 2020) (quoting a Biden administration spokesman that the former vice president “believes we need to reverse the Trump administration’s efforts to weaken the CFPB” and wants to “hold financial institutions accountable for discriminatory practices”).

[12] Seila Law LLC v. Consumer Financial Protection Bureau, 140 S. Ct. 2183 (2020).

[13] Consumer Financial Protection Bureau, “Complaint Bulletin: Complaints Mentioning Coronavirus Keywords” (July 2020), available here.

[14] Biden for President, “Lift Every Voice: The Biden Plan for Black America” (2020), available here.

[15] See Cleary Gottlieb, “From Government Shutdown to COVID-19: SEC Enforcement Division Releases Final Chapter of Jay Clayton-led SEC” (November 9, 2020), available here; Cleary Gottlieb, “SEC Chief Accountant Weighs in on Accounting Issues during the COVID-19 Outbreak” (April 9, 2020), available here.

[16] See U.S. Securities and Exchange Commission, “Statement on OCA’s Focus on High-Quality Financial Reporting during an Unusual Year and a Discussion of Our Upcoming Priorities” (December 7, 2020), available here; U.S. Securities and Exchange Commission, “SEC Charges the Cheesecake Factory for Misleading COVID-19 Disclosures” (December 4, 2020), available here; U.S. Securities and Exchange Commission, “Statement on the Continued Importance of High-Quality Financial Reporting for Investors in Light of COVID-19” (June 23, 2020), available here; U.S. Securities and Exchange Commission, “Statement on the Importance of High-Quality Financial Reporting in Light of the Significant Impacts of COVID-19” (April 3, 2020), here.

[17] In September, the enforcement division announced the first settled action resulting from its new initiative using risk-based data analytics to review quarterly earnings per share reporting and other data points to uncover potential accounting and disclosure violations. See U.S. Securities and Exchange Commission, “SEC Charges Companies, Former Executives as Part of Risk-Based Initiative” (September 28, 2020), available here.

[18] U.S. Securities and Exchange Commission, “SEC Charges the Cheesecake Factory for Misleading COVID-19 Disclosures” (December 4, 2020), available here.

[19] See Cleary Gottlieb, “Insider Trading Risk during the COVID-19 Outbreak” (March 27, 2020), available here; U.S. Securities and Exchange Commission, “Statement from Stephanie Avakian and Steven Peikin, Co-Directors of the SEC’s Division of Enforcement, Regarding Market Integrity” (March 23, 2020), available here.

[20] See Cleary Gottlieb, “SEC Internal Controls Case Demonstrates Agency’s Focus on MNPI Issues in the Stock Buyback Context” (October 19, 2020), available here.

[21] See Cleary Gottlieb, “The CARES Act and Mitigating False Claims Act Risk” (April 13, 2020), available here.

[22] Id.

[23] U.S. Securities and Exchange Commission, “2020 Annual Report to Congress: Whistleblower Program” (2020), available here.

[24] Id. at 2 n.2.

[25] Id. at 2.

[26] Commodity Futures Trading Commission, “Whistleblower Program & Customer Education Initiatives: 2020 Annual Report” (October 2020) at 2-3, available here.

[27] Id. at 7.