The SEC this year will turn away from more expansive or novel enforcement tools used in the Biden administration, and double down on bread-and-butter fraud cases, attorneys say.
“Expect less appetite for corporate penalties and lower penalty amounts,” said Jessica Magee a former SEC enforcement officer now with Holland & Knight LLP. That anticipated shift raises the question of how the Securities and Exchange Commission will create incentives for self-reporting and cooperation, she told Bloomberg Law.
Gregory Baker of Patterson Belknap Webb & Tyler LLP, who was at the SEC during the transition from the Obama administration to the first Trump administration, agreed. “If the past is any prologue, there’s definitely more of a focus on individual accountability rather than corporate accountability,” he said. Broadly speaking, the agency won’t bring cases in crypto and other “new hot-button areas,” he said.
Where the Biden SEC had focused on cyber security and financial firm recordkeeping, the agency under President-elect Donald Trump is likely to revert to the approach it took toward corporate wrongdoing its first term but with an added interest in artificial intelligence-tied wrongdoing that emerged during the intervening four years.
The SEC will likely maintain its interest in misrepresentations about artificial intelligence, charged under standard theories so far, according to several attorneys who practice in the area.
“It certainly got sleepier under Trump,” said Howard Fischer of Moses & Singer LLP. He was also at the SEC under President Barack Obama and then Trump. “On the other hand, under Obama, we were attacking all of the post-credit crisis misconduct. So that automatically created some urgency,” he said.
The SEC declined to comment for this story. Sanjay Wadhwa, acting director of its enforcement division, made public comments Nov. 15 defending the commission’s relationship with regulated companies and urging that the division continue “to enforce compliance across the industry, addressing investor risk wherever and in whatever context it arises.”
“Enforcement doesn’t go away,” said Anand Sithian of Crowell & Moring LLP. “Fraud is fraud.”
“The commission has a mandate to root that out through enforcement actions,” said Sithian, a former federal prosecutor with a white collar and regulatory enforcement defense practice. He said he anticipates more of a “retail focus” on investor protection.
Initiatives’ Fate
The SEC, in a Nov. 22 report on enforcement results for fiscal year 2024, touted 583 enforcement actions—a 26% decline from 2023—and a financial remedies totaling a record $8.2 billion. It listed initiatives in a variety of areas, including recordkeeping cases about “off-channel,” or personal device, communications—pulling in more than $600 million in civil penalties during the fiscal year—and emerging technologies, including AI, cybersecurity, and crypto.
The commission’s attack on “AI-washing,” in which a company or financial firm overstates its deployment of artificial intelligence to optimize its work, includes a suit against adviser QZ Asset Management Ltd. for promising “100%” protection via AI. The initiative will likely persist into the new administration, attorneys said, though others have indicated rulemaking in the area may be blocked.
Regulators and prosecutors will use traditional fraud theories, but apply them to keep up with technology changes, including AI, said Sidhardha Kamaraju of Pryor Cashman LLP.
The SEC’s AI cases have used “standard fare disclosure theories,” said Magee. Its investor-protection mission in enforcement isn’t expected to change, she said.
“It will be interesting to see how much the SEC invests in hiring subject matter experts throughout the agency” to adapt to technological progress and the implementation of AI “in our daily lives,” she said.
The initiative needs to continue, said Benjamin Schiffrin, director of securities policy at Better Markets, an investor and social advocacy group. “We’ll only see increasing use of artificial intelligence, both by public companies and by registered entities like brokers and investment advisers, and that just leads to lots of different ways that investors, clients, customers can be misled,” he said.
People hear a firm tout AI and think it’s “going to make my broker-dealer or my investment adviser more intelligent”—and they end up being duped, he said.
Compliance Sensitivity
The SEC may well take a different approach to off-channel communications; crypto companies; and cybersecurity.
Republican SEC Commissioners Hester Peirce and Mark Uyeda “have voiced concerns about the effectiveness of off-channel communications cases where—in their view—firms have no ‘achievable path’ to comply given the ubiquity of text and other off-company-server communications platforms,” Magee said by email.
“It seems unlikely that the SEC will continue to focus on off-channel enforcement under new leadership,” she said.
Cryptocurrency enforcement, the subject of so much legal interest because of questions about whether digital assets are securities, is likely to change course, according to Kamaraju. “It’s very possible that, as the administration appoints people at the SEC” and the Commodity Futures Trading Commission, “you’re going to see a turn from that kind of thing,” he said.
Fischer said the SEC will probably stop bringing such suits and might drop the ones already filed, awaiting congressional authorization to draft crypto-specific rules. “This doesn’t mean that digital assets will operate in a rule-free environment—just that these rules will be developed through the traditional regulatory process, with significant input from the industry, as opposed to being developed through judicial decisions,” he said.
In cybersecurity cases, suits over failures to disclose incidents may give way to a focus “on the more really substantial, misleading disclosures in the cybersecurity space where there is actual investor harm,” said Sithian.
“Each chair and each enforcement director has their priorities,” said Schiffrin of Better Markets, who worked at the SEC for 18 years. “Undoubtedly, you’ll see new areas crop up.”
“Ultimately, law enforcement is reactive,” said Fischer. “If tomorrow a major bank collapses, or a major crypto exchange, or multiple crypto exchanges have significant problems, that’s going to be the priority, regardless of what the political issues are,” he said.