Enforcement, arbitration proceedings move online

This article is part of a series of special reports appearing in the Sept. 14, 2020, edition of InvestmentNews.

Prior to the coronavirus pandemic, witnesses and Securities and Exchange Commission enforcement staff were in the same room for testimony and depositions.

For the last six months, the two sides have not faced off across a table. Instead, they’re looking at each other on a computer via vide conferencing. That arrangement can actually provide a better view of one another than an in-person sit-down because no one has to wear a mask during an online enforcement proceeding. 

That’s just one of the ways the new normal created by the COVID-19 outbreak has changed operations at the SEC, where the agency’s nearly 4,000 staffers are working remotely until at least Dec. 1.

So far, the SEC’s enforcement efforts haven’t skipped a beat, said David Gottesman, SEC deputy chief litigation counsel.

“We’re able to carry out our mission of investor protection even in this environment,” Gottesman said. “We’re adjusting and adapting.”

But there are serious drawbacks to virtual enforcement proceedings, said Kit Addleman, a partner at Haynes and Boone. One of the problems is the page-by-page presentation of sometimes voluminous documents.

“It’s painfully slow and it’s unfair to make witnesses testify on documents they only see one page at a time,” said Addleman, former director of the SEC’s Atlanta office. “That is simply unworkable.”

Gottesman said the SEC has found videoconferencing to be an efficient way to take depositions and other interviews. Respondents are getting the hang of it, too.

“Once they try it and see how it works, they’re pleasantly surprised,” he said.

Lawyers who represent brokerage customers in arbitration cases are warming up to the notion of remote hearings conducted through Zoom.

Recent statistics released by the Financial Industry Regulatory Authority Inc., which hosts the arbitration forum, show that in contested motions for virtual hearings through July, arbitrators have granted 24 and denied eight with 10 requests remaining open.

Sam Edwards, president of the Public Investors Advocate Bar Association, has argued a case via Zoom. He selected one that was straightforward and involved few documents.

“I personally liked it,” said Edwards, a partner at Shepherd Smith Edwards & Kantas. “I purposely picked a case to test it out. That doesn’t suggest it’s right for every case.”

Several aspects of the arbitration process had been done online before the pandemic, such as uploading documents, choosing arbitrators and scheduling hearings. The outbreak has been “a massive accelerant” to the next logical step of virtual hearings, said George Friedman, editor-in-chief of the Securities Arbitration Alert.

In the same way, SEC examinations of investment advisory firms for many years have had a strong online component when it comes to gathering and analyzing documents.

But since the pandemic started, the SEC Office of Compliance Inspections and Examinations has performed examinations “off-site through correspondence,” the agency said in a statement on its website.

That means SEC staff aren’t hanging around for a couple of days in advisory offices while they conduct probes.

“It’s less intrusive,” said David Tang, counsel at Seward & Kissel. “That’s a good thing for the firm.”

But it might be a disadvantage for the SEC, said Steven Thomas, chief operations officer at SGL Financial. As a South Dakota securities regulator, he found in-person interviews invaluable during the examination process.

“At least 60% of the violations I uncovered were uncovered with interviews and personal interactions … [rather than] just a paperwork review,” Thomas said. “There’s a lot more squirming that goes on when you ask an uncomfortable question in person. You’re not going to see that in Zoom meetings, where you [look at] half the body.”

Despite the challenges posed by digital regulation, some aspects are likely to become permanent.

“As we learn what things can be done remotely, some of that may carry over to the post-COVID-19 world,” Gottesman said.

More articles from the special issue:

Is working from home the new normal? — Jeff Benjamin

How advisers can use tech to attract assets — Nicole Casperson

Keeping an eye on chats — Bruce Kelly

Pandemic's financial, emotional toll prompts early retirements — Emile Hallez

The digital shift is here — and it’s uncomfortable — Sean Allocca

Home office deduction limited to self-employed — Mary Beth Franklin

10 unexpected ways COVID-19 is changing wealth management — Brittney Grimes