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SEC Signals Pullback From Prosecutorial Approach to Enforcement

The Securities and Exchange Commission on Thursday signaled a pivot away from the prosecutorial approach to enforcement that the agency pursued after the financial crisis.

By

Dave Michaels

WASHINGTON—The Securities and Exchange Commission on Thursday signaled a pivot away from the prosecutorial approach to enforcement that the agency pursued after the financial crisis.

Steven Peikin, co-director of the SEC’s enforcement division, indicated the regulator would drop the “broken windows” strategy of pursuing many cases over even the smallest legal violations, and may also pull back from trying to make some companies admit to wrongdoing as a condition of settling with the SEC.

Trump appointee Jay Clayton took over as SEC chairman earlier this year, naming Mr. Peikin to a top enforcement role.

The SEC in recent years piled up record numbers of enforcement cases and corporate penalties as it pursued both major Wall Street frauds and scores of picayune filing violations. A dogged sweep of areas where firms or individuals often fell short on compliance, but didn’t merit civil fraud charges, helped push the number of cases ever higher.

Now, under the direction of Mr. Clayton, and with its budget essentially frozen, the SEC is cueing that “broken windows” won’t continue.

“It may be the case that we have to be selective and bring a few cases to send a broader message rather than sweep the entire field,” Mr. Peikin told a securities conference Thursday. He said the enforcement division, which had about 1,400 employees in 2016, might have 100 fewer investigators and supervisors by next September by not replacing those who leave.

Mr. Peikin cast doubt about the future of a signature element of the SEC’s enforcement program over the past four years: admissions of wrongdoing. Under former Chairman Mary Jo White, an Obama appointee, the SEC sought admissions of fault by firms and individuals in select cases, rather than allowing defendants to resolve probes by paying penalties but neither admitting nor denying the allegations.

“When I heard about the admissions policy, it didn’t really knock me down,” said Mr. Peikin, who was formerly a white-collar defense lawyer at Sullivan & Cromwell LLP. “I think when people resolve cases with the commission [and] neither admit nor deny but agree to all the points of relief, I don’t think most people in the world say, ‘Boy, they really got away with that.’”

Andrew Ceresney, who oversaw SEC enforcement until January and is now partner at Debevoise & Plimpton LLP, said at the same event that the admissions policy has been an effective weapon for the regulator. “It sounds like there may not be as many admissions coming down the pike in the future,” he said.

Mr. Peikin said the SEC would continue to run a tough enforcement program, with the goal of rooting out intentional wrongdoing that results in losses for investors. He signaled the SEC could still seek admissions of wrongdoing in certain cases, including those where a defendant admitted guilt in a related criminal case.

In 2013, under Ms. White’s leadership, the SEC announced it would make companies and individuals admit wrongdoing as a condition of settling civil charges in certain cases. Critics of the SEC’s practice of settling cases without fault admissions, including U.S. District Court Judge Jed Rakoff, said it made enforcement cases look like the “cost of doing business” for Wall Street.

During Ms. White’s tenure, few settlements involved admissions of wrongdoing. Only about 2% of 2,063 cases filed from 2014 through 2017 involved admissions, according to research by David Rosenfeld, a professor at the Northern Illinois University College of Law. Just 22 entities admitted fault in the most serious type of fraud cases, according to Mr. Rosenfeld’s paper, which is slated to appear in the Iowa Law Review.

“It’s used so infrequently that it smacks of being somewhat unfair,” said Linda Chatman Thomsen, a partner at Davis Polk & Wardwell LLP who defends companies and individuals targeted in SEC enforcement probes.

A move away from seeking more admissions of wrongdoing could expose the regulator to political criticism that it’s gone soft on Wall Street. Sen. Elizabeth Warren (D., Mass.) lambasted Ms. White in 2015 for not resolving more investigations with admissions of misconduct.

Mr. Peikin said that since he joined the SEC in June, the regulator hasn’t confronted a case where a settlement was held up by the SEC’s demand for a defendant to admit wrongdoing—and the party’s refusal to do so. If that happened, the SEC would have to choose whether to sue or settle without the admission.

“That will be a real fulcrum point for us to have to decide,” he said.

Write to Dave Michaels at dave.michaels@wsj.com

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