SEC Enforcement 3Q22, A “Cop on Every Corner” Presence in the Market – Conclusion
Part I of this series presented basic statistics for the third quarter of this year – the number of cases filed as well as the largest areas of concentration (here). Part II presented examples of the cases in each of the largest areas of concentration (here). Part III of the series presents presented select cases initiated during the third quarter of 2022 that are significant but not included in one of the four largest categories of actions initiated (here). This is the concluding segment of the series.
This series has only charted the path of the first three quarters of 2022. Yet key trends for the year are emerging and certain points are clear. First is the number of cases filed. While the number of new enforcement actions initiated in the first two quarters of the year was generally consist with those in earlier periods, the 202 cases filed in the third quarter is noteworthy. That number are remarkable, and in probably, a record. While the number of cases initiated is not, in and of itself, a complete measure of an effective enforcement program, as noted in the initial segment of this series, the effort required to initiate the large number of cases filed to date does reflect the efforts of the Division to police the markets.
Some may argue that 3Q22 was the fourth quarter of the Government fiscal year when SEC Enforcement typically initiates increased numbers of cases. Clearly that is correct. Even by past standards for those periods however, the effort is quite remarkable. This is particularly true since the pandemic continues to impact the investigative efforts of the Division.
Second, the cases brought during the first three quarters of 2022 are the result, at least in part, of the increasing use of data analysis by the agency. While the staff has long used this approach, 2022 is the first time the agency has claimed that insider trading was uncovered by the approach. Unfortunately, the release stating this fact does not discuss how data analytics was employed in uncovering the cases. It appears, however, that it was used to help uncover trading trends that tie to the practice. No doubt the staff will continue to employ and refine this approach.
Third, while the four areas in which most actions were filed are traditional areas of focus for SEC Enforcement, the cases discussed in Part III of this series reveal a much different story. Those cases represent 18 different areas, in addition to the four largest categories of case. They include a range of areas and theories such as municipal bonds, Regulation BI, transfer agents, identity theft, complex products and free riding. Collectively, this paints a picture of a Division reaching not just traditional areas of focus, but pushing out to police the edges of the market place to protect investors. The approach also builds on one that appears to have been initiated in the second quarter of last year.
Finally, the results from the first three quarters of 2022 should be welcomed by all investors while serving as a caution to some. In one sense reassures investors that the markets are being effectively policed.
At the same time, it should serve as a caution to all to carefully consider and evaluate their actions. Regulated entities, for example, typically have compliance programs keyed to certain areas. The breath of the enforcement activities evidenced by the cases brought in the first three quarters of 2022 should serve as a cautionary note to all CCOs, prompting and examination of existing programs to ensure effectiveness.
The same is true of all other investors in the markets. To be sure, not every firm has the kind of compliance programs typically maintained by regulated entities. Clearly individual investors and traders do not. Yet the expanding reach of SEC Enforcement as reflected in the results from the first three quarters of calendar year 2022 should serve as notice that the Division is intent on bringing the new ethics to the market place envisioned by the federal securities laws. Those effort should be welcomed all. They should also serve as a caution to carefully adhere to the fundamental principles on which the federal securities laws are based, a result which can only serve to improve overall effectiveness of the markets for all.