The report, “SEC Enforcement Activity: Public Companies and Subsidiaries—Midyear FY 2018 Update,” was published by the Pollack Center for Law & Business at New York University and Cornerstone Research. The findings are based on data collected by the Securities Enforcement Empirical Database (SEED), which identifies 476 SEC enforcement actions initiated against 428 public company defendants and their subsidiaries between October 1, 2009, and March 31, 2018.
According to the report, the downward trend in enforcement that began when President Donald Trump took office is continuing. Fines are also down. In the first half of FY 2018, the maximum monetary settlement of $14 million was by far the lowest maximum monetary settlement in any half year in the database. Similarly, the average monetary settlement in 1H FY 2018 was $4.3 million, significantly below the next-lowest semiannual average of $13.3 million in 2H FY 2015.
Of course, the statistics don’t necessarily mean that the SEC is going soft. More accurately, the agency’s new leadership is shifting its priorities. For instance, actions involving issuer reporting and disclosure, or investment adviser/investment companies were the most common types, reflecting the SEC’s stated goal of pursuing actions involving harm to so-called Main Street investors.
SEC Abandoning “Broken Windows” Policy
Under the leadership of SEC Chair Jay Clayton, the Commission has made it clear that it has abandoned the “broken windows” policy of the past. Under Chair Mary Jo White, the SEC adopted a policy of pursuing minor violations in an attempt to discourage the more egregious ones. While the agency’s enforcement statistics skyrocketed, the impact on compliance was less clear.
In a recent speech, SEC Commissioner Hester Peirce detailed why the “broken windows” approach doesn’t work. She highlighted that pursuing every minor violation diverts resources from high priority issues. “The unsurprising result of the broken windows approach — one that aligned perfectly with our metrics of choice — was that the SEC brought a lot of enforcement actions with lots of penalties. But the end goal is better functioning markets and investor protection, and I worry that, for fear of depressing the numbers, we might have avoided important matters that would have been time-consuming to pursue,” Peirce said.
She also questioned how the policy impacted compliance. “An enforcement-first approach sends the message to regulated entities and others that picking up the telephone to ask the SEC a question about how to comply is risky,” she said. “[W]hy draw attention to yourself by asking a compliance question of an agency that thinks every foot fault is enforcement-worthy?”
Peirce also noted that the SEC’s prior approach hindered capital formation environment. “Companies considering an initial public offering (IPO) have one more reason not to conduct an IPO,” she stated. “Why should companies expose themselves to a potential enforcement action based on a slight misstep in complying with the extensive public company ruleset?”
The bottom-line is that the SEC will continue to pursue public companies for securities violations. However, it will be more focused on the quality of the enforcement actions rather than the sheer quantity. “Our goal is not to investigate for the sake of investigating, but to protect the capital markets by focusing our efforts on the enforcement actions with the biggest impact,” Peirce said.
If you have any questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.
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