United States: SEC enforcement and COVID-19 - How Lessons from the financial crisis apply today

In brief

Based on public statements, including a recent speech discussing the operation of the Division of Enforcement’s COVID-19 Steering Committee (Enforcement speech), it is clear that the SEC Enforcement Staff (the Staff) is already thinking ahead to the types of enforcement investigations and actions that may follow the COVID-19 Crisis. In doing so, the Staff likely will draw on its experience following the 2008 global financial crisis (2008 Crisis) to identify potential patterns of misconduct that occur during periods of extraordinary market volatility and financial stress. Below we discuss the various areas that the SEC Enforcement Division is currently focused on, as well as our analysis of the enforcement actions arising out of the 2008 Crisis, with a particular focus on the asset management industry.


As discussed below, a key lesson from the 2008 Crisis is that public companies and asset managers, even in the midst of tackling the immediate problems of a crisis, should develop the situational awareness to identify conduct or deficiencies that may be subject to hindsight scrutiny by the SEC. And when issues are identified, firms should take reasonable steps to document their processes and analyses, augment or amend their policies and/or disclosures and make necessary adjustments to their business and plans to protect clients and/or investors, so when the SEC comes knocking after this crisis, they can demonstrate their good faith judgment and efforts.

Enforcement actions arising from the 2008 Crisis may inform COVID-19 cases

When we reviewed prior enforcement actions from the 2008 Crisis, we found they generally shared one or more of the following themes:

  • Failure to adequately disclose “bad news” in the face of red flags, including a variety of valuation and liquidity issues
  • Crisis, as a form of real life stress test, with the result that certain products or investments are exposed as riskier than represented (either at sale or in subsequent reporting or disclosures) or certain financial operations or controls are proven to be deficient
  • Actual “bad acts” taken in response to the crisis, such as insider trading, market abuse, risky trading strategies, and mismanagement of redemption requests

With these themes in mind, we expect that SEC enforcement investigations coming out of the COVID-19 Crisis will cover: (i) public companies with operations or finances impaired by the crisis; (ii) investment vehicles with underlying assets affected by the current crisis; and (iii) investment advisers and broker-dealers with business operations impacted by this crisis, or whose sales practices will be reviewed with the benefit of hindsight in the wake of market impacts from the crisis. These categories are not mutually exclusive, and some of the enforcement risks discussed below may apply to varying degrees for all market participants.

Download full publication

*Originally published on Investment Adviser Association1


1 https://www.investmentadviser.org/iaatoday/compliance-corner/compliance-corner-may-27-2020


Contact Information

© 2021 Baker & McKenzie. Ownership: This site (Site) is a proprietary resource owned exclusively by Baker McKenzie (meaning Baker & McKenzie International and its member firms, including Baker & McKenzie LLP). Use of this site does not of itself create a contractual relationship, nor any attorney/client relationship, between Baker McKenzie and any person. Non-reliance and exclusion: All information on this Site is of general comment and for informational purposes only and may not reflect the most current legal and regulatory developments. All summaries of the laws, regulation and practice are subject to change. The information on this Site is not offered as legal or any other advice on any particular matter, whether it be legal, procedural or otherwise. It is not intended to be a substitute for reference to (and compliance with) the detailed provisions of applicable laws, rules, regulations or forms. Legal advice should always be sought before taking any action or refraining from taking any action based on any information provided in this Site. Baker McKenzie, the editors and the contributing authors do not guarantee the accuracy of the contents and expressly disclaim any and all liability to any person in respect of the consequences of anything done or permitted to be done or omitted to be done wholly or partly in reliance upon the whole or any part of the contents of this Site. Attorney Advertising: This Site may qualify as “Attorney Advertising” requiring notice in some jurisdictions. To the extent that this Site may qualify as Attorney Advertising, PRIOR RESULTS DO NOT GUARANTEE A SIMILAR OUTCOME. All rights reserved. The content of the this Site is protected under international copyright conventions. Reproduction of the content of this Site without express written authorization is strictly prohibited.