What You Can Learn from the SEC Annual Enforcement Report
The SEC Recently Published its Second Annual Enforcement Report
The Securities and Exchange Commission’s (SEC) enforcement division recently published its second annual report. Because it highlights where the Division of Enforcement is focusing its enforcement-related efforts, the report serves as a valuable compliance resource and should be mandatory reading material for professionals whose businesses fall under the SEC’s purview.
Importantly, the five Principles established in the FY 2017 Annual Report will continue to be followed. These Principals are: Focus on Main Street Investor, Focus on Individual Accountability, Keep Pace with Technical Change, Impose Remedies that Further Goals of Enforcement, Assess Resource Allocation.
SEC Enforcement by the Numbers
In Fiscal Year 2018, the SEC brought 821 enforcement actions, including 490 stand-alone actions. The agency obtained judgments and orders totaling more than $3.945 billion in disgorgement and penalties and also recouped $794 million on behalf of harmed investors. A large majority (63 percent) of the SEC’s stand-alone cases involved investment advisory issues, securities offerings, and issuer reporting/accounting and auditing.
“As stewards of the SEC’s Division of Enforcement, our goal is to continue to protect investors, deter misconduct, punish wrongdoers and keep our markets the safest and strongest in the world,” Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement, said in a press statement. “This year’s report again shows a broad range of significant enforcement actions, a thoughtful approach to remedies and relief, and the return of substantial sums to investors,” added Steven Peikin, Co-Director of the SEC’s Enforcement Division.
Noteworthy Enforcement Actions are highlighted on pages 15-18 of the Annual Report, and the Summary Chart is an effective tool for the industry and defense counsel.
Enforcement Report Reveals Five Key Trends
The SEC Division of Enforcement’s Annual Report revealed several key trends briefly summarized here:
- Individual accountability: In FY 2018, the SEC charged individuals in more than 70 percent of the stand-alone enforcement actions it brought. Individuals charged were at the top of the corporate hierarchy, including numerous CEOs and CFOs, as well as accountants, auditors, and other “gatekeepers.”
- Cyber-security: Cyber-security remains a top priority. The agency brought its first case against a public company for failing to properly inform investors about a cyber breach, with its enforcement action involving Yahoo’s massive 2014 data breach. The SEC also brought its first action against a firm for violations of the Identity Theft Red Flags Rule, that requires certain SEC-regulated entities to develop and implement a written program designed to detect, prevent, and mitigate identity theft in connection with certain accounts.
- Crypto-currency: The SEC’s newly formed Cyber Unit is working with the Enforcement Division to police initial coin offerings (ICOs) and make the public aware of the risks. In FY 2018, the SEC brought more than a dozen enforcement actions related to ICOs and cryptocurrency, with additional investigations currently ongoing. The SEC’s annual report highlights the use of its trading suspension authority to halt fraudulent ICOs, such as obtaining a court order to stop a fraudulent ICO that targeted retail investors to fund what it claimed to be the world’s first “decentralized bank.” In addition to publicizing such actions, the Enforcement Division has also issued public statements to educate market participants about the regulations governing ICOs.
- Non-monetary penalties: The Enforcement Division is increasingly turning to non-financial penalties. Two examples cited in the report include the agency’s settlements with the CEO of Theranos, and Tesla’s Chairman and CEO. In the case of Theranos, the SEC’s settlement stripped CEO Elizabeth Holmes of her super-majority voting control and ensured that she would not benefit from any future sale or other liquidation event until other shareholders had first been made whole. In the case of Tesla, the SEC alleged that Chairman and CEO Elon Musk had engaged in fraud through a series of false and misleading tweets about a purported take-private transaction. The resulting settlement required Tesla to adopt substantially enhanced corporate governance—including requiring the appointment of two new independent directors, a new committee of independent directors, and the CEO to step down as the company’s Chairman—as well as oversight of the CEO’s communication practices.
- Protecting Main Street and retail investors: More than 50 percent of the SEC’s stand-alone actions in FY2018 involved wrongdoing against individual investors. The agency also launched the Share Class Selection Disclosure (SCSD) Initiative, which is intended to quickly bring relief to investors who may have been harmed by failures to disclose conflicts of interest related to marketing fees and expenses associated with the selection of mutual fund share classes. The Division’s Retail Strategy Task Force (RSTF) made contributions to this focus through lead-generation initiatives built on collaboration with data analytics.
Finally, the annual report also notes that the Division of Enforcement has been forced to do more with less. The Division’s total headcount is down approximately 10 percent from its peak in FY 2016. To more effectively allocate its resources, the SEC is prioritizing market segments presenting emerging risks, including cyber threats and ICOs. The Enforcement Division is also more focused on opening and pursuing investigations that are likely to have the most meaningful impact for investors and the integrity of markets.
Given the growing divide between appellate courts, the U.S. Supreme Court may ultimately decide whether a party can contractually waive the right to arbitrate before FINRA without express language in the agreement. Additionally, more explicit contract draftsmanship in customer agreements could play a role in future decisions. The Scarinci Hollenbeck Business Law and Litigation Practice Group will continue to follow this issue and post updates as they become available.
If you have questions, please contact us
If you have any questions or would like to discuss the matter further, please contact me, Paul Lieberman, at 732-586-8366.
AboutPaul A. Lieberman
Paul A. Lieberman has a distinguished legal practice devoted to client-centric representation in the financial services industry, including broker-dealers, investments advisers, public and private investment companies, insurance companies, registered representatives, financial advisers, agents and associated staff.Full Biography
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