The angst and discontent that’s been stirred up for lawyers and their corporate clients in the wake of a flurry of rulemaking initiatives at the U.S. Securities and Exchange Commission isn’t lost on SEC Regional Director David Peavler.
“The one thing I’ll say about rulemaking — I know there’s a lot of dissatisfaction because there’s so much of it — but the other complaint I’ve heard over my career is ‘Well, the SEC does a lot of rulemaking by enforcement. You’re not telling us what the rules are, you’re just bringing cases,’” he told an audience gathered at a continuing-legal-education program last week. “Well, now we’re actually doing rulemaking by rulemaking and everyone’s still mad.”
“So, I kind of think they just don’t want to be regulated,” he said, drawing laughs from the audience of about 75 lawyers who were either present at Holland & Knight’s Houston office or watching online.
But despite the lingering uncertainty and what that will mean for compliance requirements, there’s some simple advice attorneys can give their clients to help them navigate, said Holland & Knight partner Scott Mascianica, who’s also a former SEC assistant regional director for enforcement.
“Right now, it’s if you don’t do what you say and say what you mean, then you’re going to get charged,” he said specifically addressing concerns about environmental, social and governance rulemaking. “It’s kindergarten-rule type enforcement right now, which is the same type of enforcement we’ve seen for generations from the SEC.”
That sentiment was echoed by another panelist, Rebecca Fike, former senior counsel for enforcement at the SEC who now is a partner at Vinson & Elkins. She said now being on the other side of the table, she’s developed a new appreciation for how difficult it can be for companies to “scale up and to take the resources they already have for reporting and create this ESG-focused reporting line.”
“It’s interesting being on the outside and seeing the practical effects of it,” she said. “The companies that I’m talking to really want to do this right, and we’re trying to figure out how to do that while we’re also unsure of what the rules are going to be. Right now, I would say ESG enforcement is classic fraud enforcement and don’t say things you’re not really doing or don’t say things that aren’t true.”
During an hourlong panel discussion, Peavler, Mascianica, Fike and David Rassin, the general counsel, secretary and chief compliance officer at SAExploration, shared their thoughts on key developments and enforcement trends at the federal agency and what that’s meant for day-to-day operations.
Rassin keyed in on Fike’s comments about some companies hiring ESG staff and said while that may be true for some larger companies with more resources, it’s not true across the board.
“Everybody is frustrated with their BMW and everyone hates their Range Rover,” he began, explaining the difference. “No, that’s just the circle you run in. The others are just trying to get gas.”
“We went private because being public comes with a lot of obligations and it comes with a lot of payroll — it’s really, really expensive,” he said. “And more and more companies that have every good reason to be publicly traded are getting priced out of the market when you take something that, sure, they have to do, but now they also have to show their work.”
Rulemaking and its impacts dominated much of the conversation, but so too did discussion of recent Fifth Circuit rulings.
Gregg Costa, who recently stepped down after about eight years as a judge on the Fifth Circuit Court of Appeals and is now practicing at Gibson Dunn & Crutcher, was also present for the discussion and fielded a question about what recent Fifth Circuit rulings could mean for the future of the SEC’s enforcement role.
In May a panel of that court ruled that the SEC’s use of administrative law judges violates the Seventh Amendment right to trial by jury, and in July two judges from a different panel issued a concurring opinion inviting defendants who are accused of financial fraud, insider trading and securities fraud to challenge the federal agency’s use of “no admit, no deny” settlement agreements.
Costa said the ruling reflects that “there’s a ton of administrative-state skepticism” and pointed to an Oct. 19 ruling from a Fifth Circuit panel that vacated the Consumer Financial Protection Bureau’s payday lending rule to bolster his point, calling that holding “much more monumental than the ones we’re talking about for the SEC.”
“I think with Jarkesy, it’s almost certain the three-judge opinion Judge [Jennifer] Elrod wrote is not the last word,” he said referencing the ruling about the SEC’s use of administrative law judges. “The U.S. Supreme Court almost always takes a case where a federal statute has been held unconstitutional, which is what the court did.”
He said there’s additional “chaos” that comes with that ruling.
“In the sense that the SEC and the parties being charged don’t know if this is a proper procedure anymore,” he said. “The Fifth Circuit has said it isn’t, but all 10 of the other circuits plus the D.C. Circuit haven’t said that. I think the Supreme Court will certainly take it. They may well agree with the Fifth Circuit’s decision, but I think the Supreme Court is going to get the last word on that.”
He cautioned those in attendance though from assuming that the “administrative-state skepticism is bleeding over into run-of-the-mill issues that come up in SEC enforcement cases,” noting that a majority of those types of appeals from SEC actions have been affirmed by the court.
Peavler, who has about one year left in his term as head of the regional office, said one thing he’s focused on during his tenure is beefing up the commission’s trial capabilities. He shared with attendees that at a senior management conference in D.C. a judge “chided” the agency, saying it wasn’t viewed as a “credible litigation threat.”
“So, one thing we’ve focused on in Fort Worth was to strengthen our trial capabilities and change how we approach cases and the enforcement process,” Peavler said. “We’re prepared and capable of taking it all the way through. We’ve had a number of trial victories. We’ve had some losses. That’s part of it. If you’re a federal regulator and you’re not losing a case here and there, you’re not doing the cases you should be.”