Buckle Your Seatbelt, It's Going to Be a Bumpy Ride … or Is It?

Readers, thank you for journeying with us through all nine (and this, our 10th and final!) installments of Season's Readings. In this final piece, we turn from the past and look ahead to what may be in store from the SEC's Division of Enforcement in 2025 and beyond. But never fear, dear reader, we are switching it up a bit and sharing this outlook through our own real-time conversation, wrapped up with a bow (only slightly edited), and presented to you in this, the giving season.

Allison Kernisky (AK): Jessica, greetings from Virginia. No snow yet but it would not surprise me (OK, maybe a little) if we saw some before too long. If you had to pick one SEC case or action that surprised you in fiscal year (FY) 2024, what would it be?

Jessica Magee (JM): Hola from Dallas! It was cold today – only got up to 61 degrees but it felt warmer in the sun. One statistic that I thought was interesting this year was the number of whistleblower tips the SEC reported – it received 24,000, as discussed by our colleague Megan Mocho. What really caught my eye is that the SEC noted 14,000 of those tips came from two individuals. Also, of the 18,000 tips the SEC received in FY 2023, nearly 7,000 of those came from the same two individuals. The average number of whistleblower tips without those was 10,000 to 12,000 per year since 2021, which reflects a slight decrease since the 12,300 whistleblower tips the SEC announced in FY 2022. As we've discussed many times, whistleblowers play an integral role in Enforcement's lead generation and even in the development of its investigations at times, and I don't expect this to change much in 2025, though I will be interested to see how the pace and focus of investigations compares with the volume and subject matter of tips received from whistleblowers.

JM: Tell me, Allison, you've written at length this year about the SolarWinds case alongside our fantastic cybersecurity partner and former AUSA, Shardul Desai (most recently here and here). That case clearly did not go the SEC's way. What do you think was the main takeaway from the court's decision dismissing most of the SEC's case, and do you foresee cybersecurity enforcement continuing to play a significant role in upcoming SEC Enforcement?

AK: SolarWinds is a really important case for several reasons, but I think one of the most notable of the court's holdings is how it shut down the SEC's efforts to expand internal accounting controls to include cybersecurity access controls and its complete rejection of the SEC's novel interpretation of Exchange Act Section 13(b)(2)(B). What this means practically is that the staff likely will face significant challenges utilizing perceived failures in internal accounting and similar controls as a basis for cyber enforcement actions, and the SEC will need go back to the drawing board on similar sorts of claims.

AK: Jessica, let's talk crypto. Stare into your crystal ball (which I know you have, just saying), and tell us what you think will happen. Is this the end of crypto enforcement as we know it?

JM: Somewhere in the distance I hear R.E.M. faintly playing as, for some, "[i]t's the end of the world as we know it …" Listen, the SEC's laser focus on crypto in recent years – staffing up its specialty unit and leaning in on alleged failure-to-register cases and pursuing other alleged violations such as insider trading claims while assuming security-status of underlying tokens – has been, well, intense. And, of course, the SEC hasn't spoken with one voice on these cases, and notable dissents from within the Commission have underscored the tension between the call for increased guidance and clarity on one hand and the Howey-says-it-all way of doing things on the other. Now, I don't think the absolute end of crypto enforcement is nigh – certainly, where securities are actually involved and investors are being misled, the staff will enforce the law. But I do expect the SEC to move away from the pace and position of enforcement taken under Chair Gary Gensler. When likely incoming Chair Paul Atkins was an SEC commissioner between 2002 and 2008, crypto was not yet on anyone's radar screen, but since then he has been a strong voice in the industry. As he onboards and we wait to see what the rest of the five-person Commission will look like, we will also be tracking litigation against the SEC focused on whether the agency has jurisdiction in the first place. I expect we'll still be writing about crypto in 2025 and beyond, one way or another, along with our fantastic colleague Andrew Balthazor, who regularly writes, speaks and works on such matters.

JM: We agree that Enforcement is not just packing up and going away despite a lot of coverage of what might happen under new SEC leadership. I'm reminded that during the previous administration under Chair Jay Clayton – who is now in line to become the U.S. Attorney for the Southern District of New York – the SEC placed a focus on "Main Street" investors and, in fact, the pace of enforcement actions was not significantly slower, nor was the amount of overall financial remedies dramatically less than compared with Gensler-era enforcement or earlier Commissions. What do you see as the impact of the next administration on the kinds of actions we're likely to see, and do you expect the pace to change?

AK: First, I don't think the pace of enforcement actions will change much. Despite what felt like an onslaught the past few years, it turns out that Enforcement stats regarding the number of actions brought have remained relatively steady the past few administrations – though in FY 2024, total year stats and financial remedies were buoyed by significant and repeat sweeps including the agency's much-discussed off-channel sweep and other initiatives relating to insider transactions, Marketing Rule compliance and other subjects. Now, the types of actions the SEC brings this year may swing back toward more meat-and-potatoes types of enforcement, i.e., more traditional types of offering fraud, market manipulation and actions focused on helping retail investors and, conversely, fewer novel theory cases (e.g., shadow trading, charging chief information security officers (CISOs) and aggressive use of disclosure controls as a basis for liability).

AK: There are some things that we've written about during these past two weeks that seem likely headed for a long winter's nap – the off-channel communications sweep for one. And other areas that seem destined to grow as they take a larger piece of market share, such as artificial intelligence (AI) washing and other AI-related enforcement actions. Agree?

JM: Totally agree – but I won't be surprised if we still see an off-channel charge make its way through to an enforcement action in 2025. Off-channel enforcements brought in $600 million for the SEC in 2024, as detailed by our colleague Brian Briz, and these sorts of recordkeeping violations are easy to detect and charge. Now, I don't expect the prior sweep to continue nor to see stand-alone off-channel violation cases, but where the staff identifies a regulated entity engaging in conduct harmful to investors – fraud, fiduciary duty breaches and the like – the fact that the entity may also have demonstrable off-channel violations seems to me easy for the staff to include in charges to bolster its case and its path to securing financial remedy. As for AI, it's here to stay and, as it becomes ever more prevalent, I would expect to see Enforcement bringing more actions around entities' disclosure (or lack of disclosure) about the use of AI technology in operations that are impactful to investor and client interests. The handful of so-called AI-washing actions to date really strike at the heart of what the SEC's role is in regulating companies and what and how they disclose use of emerging technology to the market. It will be interesting to see if, when and how the focus shifts under the new administration to more nuanced investigation into companies' actual use of AI – which will require subject matter expertise within the SEC's staff. I'm also keeping my eye on private funds and how Enforcement continues to evolve in this area. As our colleague Jennifer Connors noted, although the SEC's recent Private Fund Rules were vacated by the U.S. Court of Appeals for the Fifth Circuit earlier this year, this is an area with a heavy concentration of wealth. So I agree with Jennifer that enforcement activity is likely to continue when the staff believes wrongdoing has occurred.

JM: Allison, you and I spent a lot of time following the SEC's case against Matthew Panuwat this year, and we and our colleagues Hunter Bezner and Michael Jones covered the case here on the blog. I think the case really stood out as a panel-discussion darling for a debate about whether it was really "novel" or not. Will you argue both sides? And as you do, give us your thoughts on whether you expect to see Enforcement staff pursuing novel theories in 2025 as meaningfully as they have in recent years – both in insider trading and other areas of enforcement.

AK: One of the most interesting takeaways from Panuwat for me is not so much that the SEC introduced this new flavor of insider trading known as "shadow trading" (which, if you missed Mike Jones' article on it, is when someone uses material nonpublic information about one company to profit in the securities of another company) but that the agency pressed forward on its case under three different theories, each of which the court found valid: that the defendant violated 1) the company's insider trading policy, 2) his own confidentiality agreement and 3) under agency law, his duty to his employer – all even though he didn't trade in his employer's stock but in a competitor's securities. It will be really interesting to see if the court's decision buoys the agency to be even more aggressive against so-called "shadow traders" going forward. Given the U.S. Supreme Court's elimination of the SEC's ability to use its own in-house courts to adjudicate fraud actions in the Jarkesy decision, future shadow trading cases will need to be brought in federal court, which comes with a hefty price tag even for defendants who prevail. Notwithstanding Panuwat, the SEC has a mixed record on novel theory cases, so it may be inclined under new leadership to keep more in traditionally established lanes but, as with everything, time will tell.

JM: Allison, talk to me about self-reporting and cooperation. As our friend and partner Eddie Jauregui explained, the U.S. Department of Justice (DOJ) has a robust – and well-defined – self-reporting and cooperation program compared to the SEC's long-standing Seaboard Factors. Do you think the SEC will keep up its focus on self-reporting and cooperation and, relatedly, do you think considerations for companies thinking about self-reporting will change under new agency leadership? Has the juice been worth the squeeze so far and, if so, will it be next year and beyond?

AK: Over the last several years, the SEC has really been banging the drum on the benefits of self-reporting and cooperation, and this emphasis has borne some notable fruit. I don't think the SEC is going to reverse course under new management, especially where self-reporting can yield such tangible benefits. My short answer here is that I think this is one area that, due to its buildup over the last couple of administrations, will remain the status quo. What do you think?

JM: I think it is always good to assess whether (and, if so, when and to whom at SEC to make first contact with) to self-report, and I think there will always be clear-cut issues that ought to be self-reported. But here's something I have been and will continue noodling on: The SEC does not publish stats on the investigations it closes without any enforcement action and it generally credits self-reporting and cooperation by either reducing the amount of a civil penalty or declining to impose a penalty altogether. I think most folks expect fewer corporate penalties and maybe lower penalties overall going forward – so I think there is a fair question to be asked about what the benefit will be for self-reporting and going full throttle on cooperation (reporting out on internal investigations, creating key event timelines, turning over key document binders, translating foreign language documents and making witnesses available). Now, we have certainly had great experiences self-reporting and/or cooperating in matters where the staff closed an investigation without any charge, which is the best possible outcome. Will such "declination" become a formal, or at least more frequent, outcome for rewarding self-reporting and cooperation? Who knows. If so, I would love to see the SEC start to message and publicize it somehow.

AK: Speaking of self-reporting … yes, it can sometimes be the obvious and objectively correct action to take. Often, companies also consider whether it's smart to do it sooner than they might otherwise plan to if they think a whistleblower may be in the mix. Jessica, given the importance of whistleblower leads in the SEC's enforcement toolkit and the number of cases – and sizes of rewards – it brought either protecting whistleblowers' rights or awarding them on the backend for righteous referrals, do you expect the same level of activity around whistleblowers in 2025?

JM: Well, as we discussed earlier, the SEC's reported whistleblower activity was not all that it seemed at first blush as far as the volume of tips. But I expect whistleblower tips to remain steady, particularly given the size and frequency of awards the SEC has granted. However, as described by our colleagues Megan Mocho (see above) and Madeline Tansey in posts (most recently here), the SEC has taken serious interest in penalizing public and even private companies that attempt to, in the SEC's eyes, stifle whistleblowers from coming forward and/or retaliate against them when they do. The high level of activity in those types of enforcements may cool down. For one, Enforcement announced the results of its sweep earlier this year and, although it is common for settlements procured as part of a sweep to be announced in waves, there is chatter that this particular sweep may be winding down. Also, I don't expect there will be as much of an appetite to penalize companies for how they contract with employees and others, especially because I think at this point it is fair to argue the market has received the message that companies should not take steps to chill individuals from exercising their whistleblower rights without altogether gutting the mutual interest all parties frequently have in, for instance, ensuring confidentiality of severance, separation, settlement and other contractual terms.

JM: Earlier, we mentioned that former SEC Chair Jay Clayton is teed up for appointment to serve as the next U.S. Attorney for the Southern District of New York – an office that frequently works alongside the SEC in parallel investigations and enforcement actions. Tell me, do you think staff in both agencies will continue working in parallel to bring cases and, if you can, do you think there will be any increase or decrease in Foreign Corrupt Practices Act (FCPA) activity – an area where parallelism is particularly beneficial to the government?

AK: As with anything, I believe it is the conduct and agency priorities that matter most, but I think parallel investigations are here to stay and will continue into 2025 and beyond, particularly in an area as ripe for dual enforcement as FCPA. We're fortunate to work with Barbara Martinez, who is a North Star when it comes to all things FCPA. As she explained in her very popular post, FCPA investigations take time and, given DOJ's new whistleblower policies coupled with the SEC's robust whistleblower program and the force multiplier of more law enforcement and prosecution resources, it shouldn't be long before some of those percolating investigations bubble to the surface and result in sharing of information between the two agencies, all of which suggests a higher risk of criminal liability in this area.

AK: Jessica, if you could have one thing off your wish list that the SEC would take up next year and make happen, what would it be?

JM: I mean, you know what my wish is – I would love it if the staff would report on the number of investigations it closes without recommending an enforcement action. This is an extremely useful metric that would benefit companies and individuals alike and, I believe, could help shape enforcement, too. But I can also see how this could backfire, I suppose, and how that data could lead to unintended outcomes and less seriousness by some respondents under investigation. But I think Enforcement could benefit from following a model like the SEC's Division of Examinations, which discloses its annual priorities and also publicizes broad stroke observations from its exams and packages them into messages to the market about priorities, concerns and areas of expected improvement by registrants. This would enable Enforcement to put a touch on the market and provide broad and practical guidance without engaging in so-called "regulation by enforcement," which is often anecdotal and of limited applicability where facts and circumstances vary widely across industries, sectors and individuals.

JM: So, Allison, what do you think are some of the lessons the SEC learned the hard way in 2024 and, conversely, were there any bitter pills to swallow for defendants and the defense bar? In other words, what are some cautionary tales or issues to consider or avoid when folks reemerge as their very best selves in 2025?

AK: By all accounts, this was not an easy year for the SEC with adverse decisions in Jarkesy, Loper Bright, Corner Post and even the Supreme Court dropping the Nvidia case it heard oral argument on, as discussed by our Securities Litigation Partner Martin Seidel, which could have altered pleading standards for securities fraud class action plaintiffs. The SEC takes a risk when it insists on going to trial in cases where it may be advancing novel arguments or stretching statutory construction, and I would not expect the current Supreme Court's inclinations to change much for the foreseeable future. On the SEC's plus side, it secured a victory in Panuwat, and it prevailed in each of the five trials it conducted in 2024, highlighting the fact that the SEC goes to trial in a narrow set of cases that it seems to believe are sure things. Defendants who do not see the benefits of cooperation, or who are unable or unwilling to settle, will continue to seek their day in court, and we'll be here for them and for our readers.

AK: Jessica, co-editing SECond Opinions with you this year has been a blast! I think it's time we call it a year, though, and as we do, let's be sure to thank our readers again (thanks, readers!), as well as our phenomenal colleagues around the firm who put time and effort into sharing their insights and observations all year long.

JM: Absolutely – our team is the best team, and this all works thanks to the good folks we are lucky to call colleagues. So, a big thanks again to this year's authors, and cheers to a happy and healthy 2025!

Andrew W. Balthazor | Hunter Bezner | Brian A. Briz | Jasmine S. Chean | Jennifer A. Connors | Shardul Desai | Shaun G. Goodfriend | Eddie A. Jauregui | Michael T. Jones | Kayla Joyce | Daniel Levisohn | Barbara A. Martinez | Megan Mocho | Paul Monsour | Martin L. Seidel | Stacy Byrd Thomas | Bradley Van Buren