Paul A. Lieberman
Partner
732-568-8366 plieberman@sh-law.comKey Findings from the SEC’s Annual Enforcement Report
Author: Paul A. Lieberman|December 6, 2019
The SEC Recently Issued its Fiscal Year 2019 Annual Enforcement Report
Key Findings from the SEC’s Annual Enforcement Report
The SEC Recently Issued its Fiscal Year 2019 Annual Enforcement Report
The Securities and Exchange Commission (SEC) recently issued its fiscal year 2019 Annual Enforcement Report. The Annual Enforcement Report provides valuable insight into the agency’s enforcement priorities.
SEC Chairman Jay Clayton said in a press statement: “The results depicted in this report reflect the division’s focus on rooting out misconduct that can do significant harm to investors and our markets, and the focus the division places on identifying wrongdoing and taking prompt action to effectively help harmed investors.” “Across a broad array of cases, the Enforcement staff has continued to show determination, sophistication, and thoughtfulness in detecting and deterring violations and crafting meaningful remedies.”
Metrics of SEC Enforcement
While the SEC cautions against judging its performance strictly by the numbers, the agency’s enforcement statistics are valuable because they give an overall picture of how “busy” the SEC was in 2019, and provides data to compare 2019 results to prior years.
In fiscal year 2019, the SEC brought 862 enforcement actions, including 526 standalone actions (actions brought in federal court or as administrative proceedings). By comparison, the SEC brought 490 standalone actions in fiscal 2018. The seven percent increase in enforcement actions is notable given that the SEC’s efforts were impacted by the 35-day federal government shutdown that occurred last winter, as well as decreased staffing levels due to a two-year hiring freeze that was lifted in April.
The SEC’s 2019 enforcement actions addressed a diverse range of issues, including issuer disclosure/accounting violations, auditor misconduct, investment advisory issues, securities offerings, market manipulation, insider trading, and broker-dealer misconduct. The majority of the SEC’s 526 standalone cases concerned investment advisory and investment company issues (36%), securities offerings (21%), and issuer reporting/accounting and auditing (17%) matters. The SEC continued to bring actions relating to broker-dealers (7%), insider trading (6%), and market manipulation (6%), as well as FCPA (3%) and Public Finance (3%) matters.
The SEC enforcement actions obtained judgments, disgorgement orders and penalties totaling more than $4.3 billion. The agency also returned approximately $1.2 billion to harmed investors. The SEC’s report notes that its recovery efforts were handicapped by the Supreme Court’s 2017 decision in Kokesh v. SEC, which held that disgorgement is a penalty and thereby subject to a five-year statute of limitations. “The Kokesh decision has had a significant impact, as many securities frauds are complex, well-concealed, and are not discovered until investors have been victimized over many years,” the report states. “The Division estimates that the Kokesh ruling has caused the Commission to forgo approximately $1.1 billion dollars in disgorgement in filed cases.”
SEC Enforcement Priorities
The Annual Report, also highlights how SEC enforcement actions furthered its priorities. Under SEC Chair Jay Clayton, the SEC has been guided by five “core principles”: (1) focus on the retail investor; (2) focus on individual accountability; (3) keep pace with technological change; (4) impose remedies that most effectively further its enforcement goals; and (5) constant assessment of the allocation of the Division’s resources. This year was no different.
With regard to retail investors, the SEC highlighted the success of its Share Class Selection Disclosure Initiative. Under the Initiative, the Division of Enforcement agreed to recommend standardized settlement terms for investment advisory firms that self-reported failures to disclose conflicts of interest associated with the selection of fee-paying mutual fund share classes when a lower- or no-cost share class of the same mutual fund was available. In total, 95 investment advisory firms that voluntarily self-reported to the Division were ordered to return a total of over $135 million to affected mutual fund investors, most of whom were retail investors.
The SEC also took action against several well-known public companies, including Facebook, Inc., Nissan and Hertz Group. The enforcement actions involved a range of misconduct, including fraud, deficient disclosure controls, misleading risk factor disclosures, and misleading presentation of non-GAAP metrics.
As for individual accountability, 69 percent of the SEC’s standalone actions, excluding actions brought as part of the Share Class Initiative (which applied only to entities), involved charges against one or more individuals. As highlighted by the SEC, “The individuals charged in our actions include those at the top of the corporate hierarchy—such as chief executive officers, chief financial officers, and chief operating officers—as well as gatekeepers such as accountants, auditors, and attorneys.”
In terms of evolving technology, cybersecurity remains a top priority. In FY 2019, the SEC brought an enforcement action under Regulation Systems Compliance and Integrity (Reg SCI), which seeks to safeguard the security and capabilities of the technological infrastructure of the U.S. securities markets. The SEC also issued a Report of Investigation following an investigation concerning business email compromise (BEC) scams in which cybercriminals posed as company executives or vendors and used emails to dupe company personnel into sending large sums to bank accounts controlled by the perpetrators. The Division investigated whether those issuers may have violated the federal securities laws by failing to have a sufficient system of internal accounting controls. While the Division ultimately did not recommend enforcement action, the SEC issued a report to caution issuers and other market participants that these cyber-related threats of spoofed or manipulated electronic communications exist and should be considered when devising and maintaining a system of internal accounting controls.
The SEC also maintained its intense scrutiny of initial coin offerings (ICOs). While it continued to pursue ICO fraud, the Division of Enforcement also pursued a number of non-fraud matters, some of which ended in resolutions designed to bring issuers into prospective compliance with the registration requirements of the Securities Act. As noted by the SEC, three resolved cases included “innovative undertakings that establish a framework for future resolutions in this space.”
More specifically, the settling ICO issuers “agreed to establish claims processes for harmed ICO investors, to notify the investors of their right to file claims, to register their tokens with the Commission under Section 12(g) of the Exchange Act, and to comply with applicable registration and reporting requirements.” In FY 2019, the SEC also filed its first contested litigation against a digital asset issuer alleging solely non-fraud, registration violations, further reinforcing the seriousness with which the Commission views registration violations in the ICO space.
Key takeaway for Issuers, Broker-Dealers and Investment Advisers
The FY 2019 Annual Report established that the Enforcement Division’s efforts have kept pace with improper activities even with reduced staff and technological challenges.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Paul Lieberman, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.
Key Findings from the SEC’s Annual Enforcement Report
Author: Paul A. Lieberman
The Securities and Exchange Commission (SEC) recently issued its fiscal year 2019 Annual Enforcement Report. The Annual Enforcement Report provides valuable insight into the agency’s enforcement priorities.
SEC Chairman Jay Clayton said in a press statement: “The results depicted in this report reflect the division’s focus on rooting out misconduct that can do significant harm to investors and our markets, and the focus the division places on identifying wrongdoing and taking prompt action to effectively help harmed investors.” “Across a broad array of cases, the Enforcement staff has continued to show determination, sophistication, and thoughtfulness in detecting and deterring violations and crafting meaningful remedies.”
Metrics of SEC Enforcement
While the SEC cautions against judging its performance strictly by the numbers, the agency’s enforcement statistics are valuable because they give an overall picture of how “busy” the SEC was in 2019, and provides data to compare 2019 results to prior years.
In fiscal year 2019, the SEC brought 862 enforcement actions, including 526 standalone actions (actions brought in federal court or as administrative proceedings). By comparison, the SEC brought 490 standalone actions in fiscal 2018. The seven percent increase in enforcement actions is notable given that the SEC’s efforts were impacted by the 35-day federal government shutdown that occurred last winter, as well as decreased staffing levels due to a two-year hiring freeze that was lifted in April.
The SEC’s 2019 enforcement actions addressed a diverse range of issues, including issuer disclosure/accounting violations, auditor misconduct, investment advisory issues, securities offerings, market manipulation, insider trading, and broker-dealer misconduct. The majority of the SEC’s 526 standalone cases concerned investment advisory and investment company issues (36%), securities offerings (21%), and issuer reporting/accounting and auditing (17%) matters. The SEC continued to bring actions relating to broker-dealers (7%), insider trading (6%), and market manipulation (6%), as well as FCPA (3%) and Public Finance (3%) matters.
The SEC enforcement actions obtained judgments, disgorgement orders and penalties totaling more than $4.3 billion. The agency also returned approximately $1.2 billion to harmed investors. The SEC’s report notes that its recovery efforts were handicapped by the Supreme Court’s 2017 decision in Kokesh v. SEC, which held that disgorgement is a penalty and thereby subject to a five-year statute of limitations. “The Kokesh decision has had a significant impact, as many securities frauds are complex, well-concealed, and are not discovered until investors have been victimized over many years,” the report states. “The Division estimates that the Kokesh ruling has caused the Commission to forgo approximately $1.1 billion dollars in disgorgement in filed cases.”
SEC Enforcement Priorities
The Annual Report, also highlights how SEC enforcement actions furthered its priorities. Under SEC Chair Jay Clayton, the SEC has been guided by five “core principles”: (1) focus on the retail investor; (2) focus on individual accountability; (3) keep pace with technological change; (4) impose remedies that most effectively further its enforcement goals; and (5) constant assessment of the allocation of the Division’s resources. This year was no different.
With regard to retail investors, the SEC highlighted the success of its Share Class Selection Disclosure Initiative. Under the Initiative, the Division of Enforcement agreed to recommend standardized settlement terms for investment advisory firms that self-reported failures to disclose conflicts of interest associated with the selection of fee-paying mutual fund share classes when a lower- or no-cost share class of the same mutual fund was available. In total, 95 investment advisory firms that voluntarily self-reported to the Division were ordered to return a total of over $135 million to affected mutual fund investors, most of whom were retail investors.
The SEC also took action against several well-known public companies, including Facebook, Inc., Nissan and Hertz Group. The enforcement actions involved a range of misconduct, including fraud, deficient disclosure controls, misleading risk factor disclosures, and misleading presentation of non-GAAP metrics.
As for individual accountability, 69 percent of the SEC’s standalone actions, excluding actions brought as part of the Share Class Initiative (which applied only to entities), involved charges against one or more individuals. As highlighted by the SEC, “The individuals charged in our actions include those at the top of the corporate hierarchy—such as chief executive officers, chief financial officers, and chief operating officers—as well as gatekeepers such as accountants, auditors, and attorneys.”
In terms of evolving technology, cybersecurity remains a top priority. In FY 2019, the SEC brought an enforcement action under Regulation Systems Compliance and Integrity (Reg SCI), which seeks to safeguard the security and capabilities of the technological infrastructure of the U.S. securities markets. The SEC also issued a Report of Investigation following an investigation concerning business email compromise (BEC) scams in which cybercriminals posed as company executives or vendors and used emails to dupe company personnel into sending large sums to bank accounts controlled by the perpetrators. The Division investigated whether those issuers may have violated the federal securities laws by failing to have a sufficient system of internal accounting controls. While the Division ultimately did not recommend enforcement action, the SEC issued a report to caution issuers and other market participants that these cyber-related threats of spoofed or manipulated electronic communications exist and should be considered when devising and maintaining a system of internal accounting controls.
The SEC also maintained its intense scrutiny of initial coin offerings (ICOs). While it continued to pursue ICO fraud, the Division of Enforcement also pursued a number of non-fraud matters, some of which ended in resolutions designed to bring issuers into prospective compliance with the registration requirements of the Securities Act. As noted by the SEC, three resolved cases included “innovative undertakings that establish a framework for future resolutions in this space.”
More specifically, the settling ICO issuers “agreed to establish claims processes for harmed ICO investors, to notify the investors of their right to file claims, to register their tokens with the Commission under Section 12(g) of the Exchange Act, and to comply with applicable registration and reporting requirements.” In FY 2019, the SEC also filed its first contested litigation against a digital asset issuer alleging solely non-fraud, registration violations, further reinforcing the seriousness with which the Commission views registration violations in the ICO space.
Key takeaway for Issuers, Broker-Dealers and Investment Advisers
The FY 2019 Annual Report established that the Enforcement Division’s efforts have kept pace with improper activities even with reduced staff and technological challenges.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Paul Lieberman, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.
