The SEC owes an apology to firms targeted by overzealous prosecutions

• Key insight: Securities and Exchange Commission Chair Paul Atkins' effort to rein in the agency's bureaucrats is a welcome move. However, hundreds of firms damaged by unconstitutional prosecutions deserve public exoneration.
• Supporting data: Justice Neil Gorsuch noted that the SEC prevailed in roughly 90% of its contested administrative proceedings.
• Forward look: If the SEC wants to permanently discourage career staffers from overzealous enforcement actions that burden investors and chill risk-taking, agency leaders will have to actually make amends for past overreach.

Soon after his Senate confirmation last year, Securities and Exchange Commission Chair Paul Atkins pledged a lighter regulatory touch and an end to the overreach that characterized the agency under his predecessor.

A little over 12 months on, he has largely succeeded at reining in overzealous bureaucrats and improving the regulatory climate. Now, he needs to address the agency's past sins — and formally apologize to those who were targeted unfairly and unconstitutionally by the old SEC.
Public apologies would force a cultural shift among the agency's rank and file and reorient its enforcement focus toward the financial behemoths that routinely get away with misconduct, rather than smaller industry players who don't typically have the resources to fight back.

My own story is instructive. For more than two decades of my long career on Wall Street, I co-managed an investment advisory firm. In 2014, the SEC charged my firm with violating the custody rule — a regulation governing how investment advisors safeguard client assets.

The agency never alleged fraud, theft or deceiving investors. Rather, it accused us of a simple timing violation: We were late delivering audited financial statements to our investors, because our auditors took longer than expected to evaluate the fund's portfolio of private companies.

The SEC's enforcement response was wildly disproportionate.

The agency initiated an in-house action — the same sort used against Ponzi schemers and people who engage in insider trading — in which the SEC was both prosecutor and judge. There was no right to a jury. Discovery was limited. An administrative law judge disqualified my original counsel from the case, forcing me to retain new lawyers in the middle of the proceeding at great expense.

The experience felt Kafkaesque — confusing, lopsided and nonsensical.

Like hundreds of other small companies targeted over technicalities, we concluded that we couldn't afford to fight the SEC in its own forum. So, after a year of mounting litigation costs, my firm accepted a settlement — a civil penalty, a one-year suspension from raising new capital and a three-year compliance monitor — to avoid financial calamity.

The settlement even included a gag clause, an arguably unconstitutional provision the SEC frequently used to effectively prevent defendants from discussing their cases or working to clear their names.

At the time, former agency officials acknowledged that these in-house proceedings were stacked in favor of the SEC, and they were right. In June 2024, the U.S. Supreme Court ruled that the Seventh Amendment guarantees defendants a jury trial when the SEC seeks civil penalties for alleged misconduct.

In other words, the in-house tribunal that adjudicated my case, and hundreds like it, was functionally unconstitutional. Justice Neil Gorsuch noted that the SEC prevailed in roughly 90% of its contested administrative proceedings — an astonishing success rate, even for a forum in which the agency serves as prosecutor, judge and jury.

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The SEC has not brought a contested in-house enforcement action since that ruling — a tacit acknowledgement that those proceedings were constitutionally deficient.

That's good.

It's even better that, under Chairman Atkins, the agency has signaled a willingness to exercise prosecutorial discretion and welcome back individuals and issuers who have committed minor violations, rather than treating technical missteps as permanent marks against their records.

But merely proclaiming a fresh start isn't enough. If the SEC wants to permanently discourage career staffers from overzealous enforcement actions that burden investors and chill risk-taking, agency leaders will have to actually make amends for past overreach.

Sparking this internal cultural shift would strengthen our capital markets and particularly help entrepreneurs and small firms. An SEC enforcement action can destroy their businesses and reputations — even if they end up being vindicated or are never convicted of wrongdoing.

Big banks can write off fines for opening up millions of fake accounts or facilitating money laundering as the cost of doing business. Smaller actors cannot.

Other federal agencies have already apologized for past wrongs and pursued restitution.

The Department of Justice recently settled major First Amendment lawsuits while condemning its own past "unlawful government coercion of social media companies" to censor conservatives. The Department of Education issued guidance last year overturning prior school privacy policies and promised to rehear complaints from parents, who, by the Department's own admission, had been treated like "criminals."

The true measure of Chairman Atkins' SEC will not be the cases it declines to bring. It will be whether the agency has the institutional courage to revisit the cases it brought under a constitutionally defective process — and provide relief to victims of an enforcement culture that valued scalps and settlement revenue over proportionality.