As technology advancements, corporate strategies, and political pressures transform the financial securities space at a rapid pace, the Division of Enforcement at the Security Exchange Commission (“SEC”) has been forced to change along with it. On September 21st, three past directors of the division visited Temple Law for a roundtable discussion of their personal experience and developments within the SEC, moderated by Professor Tom C. W. Lin. All three panelists, Richard Walker (’75), Stephanie Avakian (’95), and William McLucas (’75), are alumni of Temple Law and were eager to graciously share their wisdom and expertise with faculty and students of their alma mater.
The Division of Enforcement, created in 1972, is responsible for investigating and prosecuting possible violations of federal securities law in both civil and administrative courts. In doing so, the division aims to protect investors and promote a fair-trading market. Directors of the division are responsible for developing strategy, establishing enforcement priorities, and managing investigation and litigation in tandem with wider SEC goals and trends in financial markets.
The panelists directed the Division of Enforcement throughout different eras of the agency—McLucas served as director in the early 1990’s, followed by Walker in the late 1990’s, and later Avakian joined the division in 2017. As such, they had to respond to very different financial and corporate trends. Federal securities law is well-suited to adapt to these trends because it is drafted broadly to cover a wide variety of fraudulent conduct, though adaptations in rulemaking and interpretation can be clumsy. Prior to McLucas’ tenure, the 1980s saw a boom in merger and acquisition transactions and subsequent rise in insider trading. With that, the SEC agency profile and budget shot up, becoming one of the most preeminent enforcement agencies in the federal government. The misappropriation theory of insider trading expanded the scope of Rule 10b-5 during McLucas’ tenure as director, allowing the agency to respond to these violations with adequate enforcement. The Supreme Court ruling in O’Hagan affirming the misappropriation theory has proved critical to SEC enforcement in the years since the 1997 ruling.
More recently, Avakian oversaw the enforcement division as securities regulation struggled to keep up with changes in technology, specifically regulation of the cryptocurrency market. Walker, McLucas, and Avakian all expressed concern about the potential for rampant fraudulent behavior without adequate regulatory framework governing the cryptocurrency market. However, while the agency has struggled to keep up with technology in some respects, it has leveraged technological advances to its benefit in others. The SEC has developed impressive technological solutions to insider trading to detect and monitor potential violations of federal securities law. Furthermore, omnipresent use of email and text has made enforcement easier for the government while often creating obstacles for defendants.
Along with transformations in the technology and corporate space, hyper-partisan changes in politics have forced cultural changes within the SEC. There are five commissioners appointed to vote on rulemaking and enforcement decisions, consisting of a 3/2 partisan split. The panelists bemoaned partisan rulemaking in recent years, no longer tethered to investor protection but to political motivations. Legal challenges to SEC actions have also faced new obstacles with drastic changes in the makeup of the federal judiciary. As the makeup shifts towards the right-wing, Chevron deference has become a thing of the past creating external challenges for rulemaking in an agency already dealing with internal partisan conflict. In response, the division has largely stopped using the administrative forum for enforcement proceedings outside of settlements.
It remains to be seen how the Division of Enforcement will evolve to further changes in technology, politics, and corporate trends. With new rules under consideration for fraud relating to environmental, social, and governance claims, pleas for a coordinated response to the rise of cryptocurrency, and transformational decisions in the federal judiciary, the agency certainly will face challenges in the years to come.
In addition to their comments on the evolution of the department, the panelists shared that, interestingly, none of them ever expected to become directors of the SEC enforcement division. Instead, they remained open to opportunities and viewed their respective appointments as the result of both a strong work ethic and sheer luck and timing. They stressed to student attendees the importance of nurturing personal relationships made at school while building a professional network with those in the wider community.
BIO: Therese Gildea (LAW ’23) is a Content Editor for the Temple 10-Q.