SEC enforcement head focusing on insider trading, off-channel chatter, AI washing

The Securities and Exchange Commission’s director of the division of enforcement, Gurbir Grewal, said the regulator isn’t letting up on insider trading and off-channel communications cases and will also be focused on artificial intelligence washing moving forward.

“We at the Commission don’t take a narrow view of insider trading. We’re looking at all the different ways in which people can abuse MNPI (material nonpublic information), ways in which they could profit,” Grewal said in New York on May 2 at the Managed Funds Association’s Legal & Compliance conference.

The Managed Funds Association is the trade body representing the global alternative asset management industry. The MFA for the first time in its history sued the SEC and has three lawsuits pending against the SEC targeting four different rules, president and CEO Bryan Corbett said in opening remarks.

Grewal has led the SEC’s the enforcement division since 2021. He discussed the recent case of the SEC v. Matthew Panuwat. The Panuwat case involved using confidential information about an impending Pfizer acquisition to trade ahead of the news.

Grewal said the SEC would remain “laser-focused” on insider trading in equities markets, the fixed income space, as well as firms trading complex financial instruments such as derivatives and swaps, and will also continue looking at formal or informal relationships people may have with companies that gives them access to information the general public does not have.

Another SEC focus has been off-channel communications, unapproved communications methods, such as messaging applications, and the retention of that data. Grewal said to date the SEC has brought nearly 60 actions accounting for approximately $1.8 billion in penalties.

“(The actions) they’re intended to send the message that these requirements matter, regardless of what type of registrant you are,” Grewal said, adding that the SEC would “remain focused here.”

In a recent move targeting a new and growing area, two investment advisers agreed to pay the SEC $400,000 to settle charges that they made false and misleading statements regarding their use of artificial intelligence.

Grewal said that the “fear of missing out” is real around AI. A lot of market participants are marketing their use of AI which presents risks of AI washing, or exaggerating the use of AI. Risks around hallucinations with generative AI, where models generate misleading information, is another area of concern. Grewal said having guardrails in place for conflicts of interest and checking marketing materials generated by AI are other areas to watch.

“Right now, the risk is presenting most acutely in the AI washing cases,” Grewal said. “And that's why we brought a series of those over the last couple of months.”