SEC Enforcement: A New Approach – A Year in Statistics

The SEC reiterated the new retail investor/cyber focus for its Enforcement Division while publishing the statistics for the Division’s work for the last fiscal year. The report attempts to put a group of statistics showing that overall fewer stand-alone enforcement actions were brought last year compared to the prior year in the context of the new focus. The approach differs significantly from the last several years which centered on increasing numbers of enforcement actions being brought based on a “broken windows” approach. Division of Enforcement Annual Report: A Look Back at Fiscal Year 2017 (here).

Five principles guide the work of the Division and the allocation of its scarce resources, according to the Report.

Principle 1: Focus on the Main Street Investor. The Division intends to do this through the recently announced Retail Strategy Task Force which is charged with developing effective strategies to protect retail clients. The taskforce will work closely with OCIE and the Office of Investor Education, building on its past work. Cases in areas such as offering frauds and selling investors high priced mutual funds shares when less expensive shares are available are examples of the kind of work that will be undertaken since it is retail investors who are the victims of this kind of misconduct.

Principle 2: Focus on Individual Accountability. In language which in some ways is reminiscent of the DOJ’s Yates Memo, the Report states that the “vigorous pursuit of individual wrongdoers must be a key feature of any effective enforcement program.” In the six months since Chairman Clayton was appointed 80% of the stand-alone enforcement actions have charged an individual.

Principle 3: Keep Pace with Technological Change: Rapidly changing technology has transformed the way wrongdoers operate. To counter this the Division formed the Cyber Unit to consolidate the Commission’s cyber-related expertise. This will permit the Division to focus on matters such as cyber intrusions, the dark web and other technology driven misconduct.

Principle 4: Impose Sanctions That Most Effectively Further Enforcement Goals. The Division has a wide range of tools. The key is to tailor the relief to specific situations to ensure effectiveness.

Principle 5: Constantly Assess The Allocation of Our Resources. Since the Commission’s resources are limited it is critical to constantly reassess their use.

In assessing effectiveness the Report stresses the point that statistics do not tell the entire story. For example, in fiscal 2016 there were a total of 548 stand-alone enforcement actions compared to 446 in fiscal 2017. When the 84 actions tied to the Municipalities Continuing Disclosure Cooperation Initiative or MCDCI are eliminated the results show a different picture. In fiscal 2016 464 stand-along enforcement actions were brought compared to 446 in fiscal 2017.

A review of the number of actions brought over the last two fiscal years by category paints a somewhat different picture. The two largest areas for each year were what the Report calls 1) issuer reporting/audit & accounting actions and 2) securities offerings. In those two areas a slightly greater number of actions were brought in 2017 compared to 2016. In other areas such as investment adviser/investment company, broker-dealer, and FCPA there were significantly more actions brought in 2016 than 2017. Those numbers, plus the actions brought as part of the MCDCI appear to account for most of the differences between the two years.

Similar results are seen when the amounts of money are compared. In 2017 a total (in millions) of $ 3,789 in disgorgement was ordered compared to $4,083 in 2016. In both years, however, the totals are largely the product of a few cases. Specifically, in 2017 disgorgement orders over $100 million accounted for 44% of the total amount, paid in five cases. In 2016 disgorgement orders over $100 million accounted for 45% of the total, paid in six cases. The results differ when the amount of penalties is considered. In 2017 penalty orders over $50 million accounted for 27% of the total and were paid in three cases. In 2016 penalty orders over $50 million accounted for 55% of the total and were paid in four cases. Overall the Report presents a good comparison of the two years while discussing the new focus of the Division.

Program: The Fourth Annual Dorsey Federal Enforcement Forum will be held on December 6, 2017. There will be panel discussions and presentation on EPA enforcement, SEC enforcement, investment advisers, international sanctions, FinTec, and FBI international corruption investigations, followed by a holiday party. Attend in person, listen on the web or watch a live stream; CLE available. For a detailed program and free register click here.

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