SEC Lightens Up on Enforcement

As any company served with a Wells notice knows, not all is well.

Still, the Securities and Exchange Commission, which has adopted a more industry-friendly approach under Chairman Paul Atkins than his predecessor Gary Gensler, is making the notices slightly easier to manage. The agency unveiled an update to its enforcement manual on Tuesday, doubling the amount of time (four weeks, rather than two) that companies, including ETF issuers, have to respond to Wells notices, which inform them they have been investigated and likely face enforcement actions for securities law violations. That will be a welcome change for financial services companies, which have likened the Wells process to a Kafka novel.

“This is a meaningful opportunity for Wells recipients to address key issues of fact or law before an enforcement recommendation is made,” Judge Margaret Ryan, director of the SEC’s Division of Enforcement, said during a speech earlier this month. “Wells recipients are also typically granted the opportunity to meet with division leadership to ‘make their case.’”

Changing Priorities

The SEC has changed its views on crypto during the new administration, and it now places less emphasis on white-collar infractions and more on cases of individual investors being defrauded:

• The agency had issued more than a dozen Wells notices to crypto businesses in 2024, alleging that Coinbase and others provided unregistered securities. 
• Last year, the Trump-era SEC dismissed many of the cases.

The enforcement manual changes the SEC just implemented focus on transparency and cooperation between the government and the securities industry. For example, Wells meetings (which happen after a company responds to a notice) will be attended by Division of Enforcement senior leadership. The agency also now considers waiver requests alongside settlement recommendations, which can protect parties “from automatic disqualifications and other collateral consequences that result from the underlying enforcement action,” the agency stated in its announcement.

Move Fast, Hopefully Don’t Break Things: With the changes, the SEC may be moving more expeditiously, Ryan told the Los Angeles County Bar Association. “Deliberate circumvention of the process, however, including tactical tardiness and other games, will not be tolerated,” she said.