Remarks At Ohio State Law Journal Symposium 2024, Gurbir S. Grewal, SEC Director, Division Of Enforcement, Washington D.C., Feb. 23, 2024

Good afternoon, everyone.

Dean Rose, thank you for the kind introduction.

And thank you to the Ohio State Law Journal for the invitation to share brief remarks and participate in this afternoon’s fireside chat.

As is customary, my remarks today are in my official capacity as Director of the Securities and Exchange Commission’s Division of Enforcement, and do not necessarily reflect the views of the Commission, the Commissioners, or other members of the staff.

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It is also important for me to note at the outset that the Commission is not an environmental regulator. Its three-part mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. This work requires us to use all the tools at our disposal to stand up for the investing public. And a central theme in our efforts – and a recurring theme in many of my public remarks -- has been restoring public trust in our institutions and financial markets, which has been on the decline.[1]

I have discussed elsewhere at length what we in the Division of Enforcement are doing to reverse this trend, and why it is so important to do so.[2] But briefly, we are doing this by holding bad actors accountable no matter who they are, or how well-resourced they are – to dispel that notion held by some that there may be two sets of rules: one for the big and powerful and another for everyone else. 

That is why over the last several fiscal years, we have brought more enforcement actions than in the prior years.[3] And that is why over the same period, nearly two-thirds of our actions have included charges against individuals, including corporate executives.[4]

And it’s also why our enforcement actions over the same period have included penalties and remedies that actually deter misconduct and hold bad actors accountable – to ensure that they are viewed as more than just the cost of doing business.[5]

And on this score, in fiscal year 2022, the total money ordered – penalties, disgorgement, and prejudgment interest – in Commission actions was over $6.4 billion, the highest amount in Commission history.[6] Last fiscal year, it was nearly $5 billion – the second highest amount in Commission history.[7]

And when it comes to other remedies, recent Commission actions have also included more bars keeping bad actors out of the industry,[8] as well as more cases involving admissions,[9] than in prior years – all powerful tools to further protect the public, enhance accountability and restore trust.

But promoting trust is not about enforcement alone. It can’t be. It also requires working with market participants to promote a culture of proactive compliance. So that instead of reading about compliance failures, the public understands that companies and investment firms are proactively doing what they can to be compliant.[10]

We are doing this by crediting parties that self-report their potential securities law violations and proactively cooperate with our investigations. Such parties may face substantially reduced civil penalties or even no penalties at all.[11]

We are also promoting a culture of proactive compliance by including pathways to compliance in our public orders — that is, examples of real, concrete steps that market participants can take to help ensure that they comply with the federal securities laws.[12]

One of the things that speaks powerfully to trust in the securities industry is ESG – the umbrella term for environmental, social, and governance issues – and that is because ESG speaks to what investors care about in terms of how they make money; in short, it speaks to their values.

But just as we are not an environmental regulator, we are also not the values police. We are merit neutral.[13] We are not here, for example, to judge whether a company’s operations contribute to climate change or are otherwise harmful, or beneficial, to the environment. Nor are we here to make judgments about companies based on their environmental impact. We are here to protect investors, and if they care, then we care. And in that case, we have a duty to ensure that companies speak truthfully on these topics.

And studies show that investors do care. By significant margins, they want companies to incorporate ESG considerations into their corporate strategy, even if doing so reduces short-term profitability.[14] This reflects the long-view that many investors are taking when thinking about how ESG fits into their investment approaches.

It is therefore not surprising that we have seen an explosion in public companies disclosing ESG-related information to investors. In fact, nearly all of the largest public companies in America now publish ESG reports.[15] We have likewise seen tremendous growth in investment firms offering ESG-branded products and strategies over the last several years.[16]

As these trends continue, two things can happen that may implicate the federal securities laws. First, companies have more incentives to exaggerate or make misleading statements about their perceived positive ESG activities or products. For example, public companies may disclose that their operations satisfy certain ESG-criteria or investment firms may market investment strategies as ESG-focused, when that’s not the case. 

Second, the investor focus on these issues may make it more tempting for companies to downplay or omit disclosures about negative ESG-related information. For example, they may make misleading statements about these events, or may omit them from their disclosures altogether, making the disclosures materially misleading.

So how do we analyze such misstatements or omissions in the ESG space?

The same as we do everywhere else.

We apply long-standing principles to evaluate whether disclosures or statements are materially false or misleading under the general anti-fraud and other provisions of the federal securities laws.[17]

For example, the SEC recently charged Vale, a publicly traded Brazilian mining company, with making false and misleading claims about the safety of one of its dams which collapsed in 2019, killing 270 people in one of the worst mining disasters in history.[18]

The SEC’s complaint alleged that, before the collapse, Vale regularly represented in SEC filings and in sustainability reports and ESG webinars that the dam was safe and stable. But as alleged in our complaint, the company concealed signs that the dam was not stable and manipulated dam safety audits that it touted to investors.

The complaint further alleged that Vale’s concealment of the true condition of the dam caused its sustainability reports, filings, and other ESG disclosures to be materially false and misleading.[19] Vale agreed to pay over $55 million to settle the SEC’s charges.[20]

Corporate governance is of course another important aspect of ESG. And this is another area where we have seen companies downplay or fail to disclose material information to investors that may draw unflattering attention.

Let me give you an example. Last year, the SEC charged McDonald’s after it fired its CEO for exercising poor judgment and having an inappropriate personal relationship with a McDonald’s employee in violation of corporate policy.[21] McDonald’s disclosed to investors that it had terminated the CEO “without cause” and described the terms of his separation agreement, which included his right to tens of millions of dollars in stock-based compensation. But here’s what McDonald’s did not disclose. It did not tell investors that it had exercised discretion in terminating the CEO “without cause,” and that its exercise of discretion is what allowed him to retain stock-based compensation that would have otherwise been forfeited if the company had terminated him “for cause,” which it had the ability to do under the circumstances.

That’s an example of what I mentioned earlier. Where you see how pressure to downplay ESG issues works. If you’re running a public company, it’s a lot easier to let investors think that you were contractually obligated to pay the CEO a lot of money than it is to own up to the fact that you decided to pay the executive who had an inappropriate personal relationship with a co-worker a lot of money on the way out the door. 

Investors obviously care about the difference between those two things.

These examples involved public company disclosures about their own operations. As I mentioned, investor interest in ESG has also led to significant growth in investment advisers offering ESG-branded investment products. This can also lead to situations where a firm’s desire to capitalize on investor interest in ESG exceeds its actual creation and maintenance of an ESG product.

After all, saying you have an ESG-investment strategy is pretty easy; creating one and sticking to it is another matter.

Let me give you an example. The SEC recently charged a Deutsche Bank subsidiary with making materially misleading statements about its ESG products.[22] According to the SEC’s order, the firm marketed itself as a leader in ESG that adhered to specific policies for integrating ESG considerations into its investments – it even advertised that ESG was in its “DNA.” But as it turned out, the firm did not ensure that its investment professionals actually followed all aspects of the ESG investment processes that it marketed. The firm paid a $19 million civil penalty to settle those claims.

Here’s the simple takeaway from the examples I’ve shared and from our work in this space: ESG issues are increasingly material to investors. It is therefore crucial that when companies speak about the host of issues that may fall under the rubric of ESG – whether climate, social, corporate governance or others – they do so in a way that’s not materially false or misleading.

This has obviously been just a brief foray into a very significant topic. I want to once again thank the Ohio State Law Journal for not just the invitation, but also for hosting this important conversation. Dean Rose and I will touch on some additional topics and I look forward to your questions.

Thank you.