SEC Enforcement Stats: Less Issuer Cases; More Individuals Charged
Cornerstone Research and the Pollack Center for Law and Business at NYU published a report on SEC Enforcement activity for the first have of fiscal year 2018, focused largely on actions involving public companies and their subsidiaries (here). Overall the statistics chronicle a significant drop in the number of those cases and the dollar amounts involved in the resolutions. The statistics also at least suggest other possible emerging trends and issues.
Filings: The Report begins with the number of filings. For the first half of FY 2018 there were 15 actions brought against public companies and or their subsidiaries. That compares to 17 for the second half of 2017, 45 in the first half of FY 2017 and 47 in the second half of FY 2016.
The number of actions brought against public companies and their subsidiaries in the first of FY 2018 is the lowest for any half year since 2010 with the exception of the beginning of 2013 when only 12 cases were brought. It is also well below the average for that same period of 29 cases for the period of the Report – 2010 through the first half of FY 2018 — and the median of 26. Administrative proceedings accounted for about 80% of the actions brought in the first half of FY 2018 against public companies and their subsidiaries, the lowest percentage since the first half of FY 2014. That number may well have been impacted by the fact that Luchia is pending decision before the Supreme Court on the appointment of administrative law judges.
Individuals: The statistics regarding the number of individuals named in actions involving corporations and their subsidiaries suggests a different trend. In the first half of FY 2018 about 33% of the actions included an individual. That compares to 16% for all of 2017, 20% for 2016, 15% for 2015 and 20% for 2014. If the percentage of individuals named in corporate and subsidiary actions continues at the current rate, FY 2018 will have the highest percentage of individuals named in corporate and subsidiary actions since 2013 and 2012 when it was 38% in each year. Nine of the individuals named in an action in the first half of 2018 were either a CEO, CFO or Controller.
Type of allegation: In each year covered by the Report the most prevalent allegations brought against public companies and their subsidiaries involved issuer reporting and disclosure. The sole exception was 2015. In the most recent half year period, for example, 27% of the actions fell in this category. In 2017 39% of the actions for public companies and their subsidiaries involved allegations of issuer reporting and disclosure while in 2016 about 26% were based on these allegations. In 2015 however, the largest single category was municipal securities/public pensions at 40%.
Typically over the period covered by the Report the remaining cases brought by SEC Enforcement centered on a range of allegations involving investment advisers/investment companies, broker-dealers, FCPA, securities offerings, municipal securities/public pensions and market manipulation. In 2016 and 2017 the second largest category of cases brought by Enforcement involved investment advisers and investment companies at 20% and 21%, respectively. In the first half of FY 2018 the percentage of actions involving investment advisers and investment companies equaled the percentage of those for issuer reporting and disclosure allegations at 27% for the first time and only time during the period analyzed in the Report.
Timing of settlement: The vast majority of cases involving corporations and their subsidiaries are settled at the time of filing. The Cornerstone-NYU statistics for the period clearly demonstrate this trend. Yet the first half of fiscal 2018 reflects a deviation. During that period 13% of the cases were not settled at the time of filing. That is one of the higher percentages since 2010 and clearly the largest since 2014 when 14% of these actions remained unsettled at filing.
Cooperation: The level of cooperation in cases involving public companies and their subsidiaries in the first half of FY 2018 is consistent with the prior year but slightly lower than in 2015 and 2016. In the first half of FY 2018 56% of the defendants cooperated compared to 55% in the year before, 65% in 2016 and 71% in 2015 which was the high water mark for the 2010 through the first half of FY 2018 period. The percentage for 2015, however, may be skewed because of the Municipalities Continuing Disclosure Cooperation Initiative or MCDCI which was very successful. If that year is eliminated the percentage of actions involving cooperation is not out of line with other years since 2010.
Monetary settlement: For the first half of FY 2018 the amount of the monetary settlements decreased significantly compared to other years since 2010. The largest monetary settlement in the first half of 2018 was $14 million, the lowest amount for the largest settlement for any half year during the period. Over the period of the Report the largest monetary settlement was $551 million in 2010 while the lowest in the top ten was $236 million. Seven of the largest monetary amounts were in civil injunctive actions while three were in administrative proceedings.
Key trends detailed by the Report are the continued drop in actions against public companies and their subsidiaries and the increase in those involving individuals for the first half of FY 2018. The significant drop in the number of actions brought against public companies and their subsidiaries in the first half of FY 2018 is not new. Rather, it is consistent with earlier trends as well as the shift in Enforcement priorities announced in November 2017 from an any and all, broken windows approach to one centered on retail investors, cyber, meaningful remedies and efficiency. As the Report illustrates, the high point for actions against public companies and their subsidiaries since 2010 was the second half of 2015 when 54 such actions were brought. In the next half year period – the beginning of 2016 — the number dropped to 44, rebounded slightly to 47 in the second half of that year and dropped again to 45 in the first half of 2017 before plummeting to 17 in the second half of that year.
While the decline in the number of actions against public companies and their subsidiaries in recent periods is apparent, that trend does not explain the precipitous drop in such actions in the second half of 2017. At the same time, the end of broken windows and the initiation of the new Enforcement approach in November 2017 could not have caused such a drop. This seems apparent even if recently the Commission is being much more selective in bringing actions as Commissioner Hester Peirce indicated in her recent comments at the 50th Annual Rocky Mountain Securities Conference (here). Indeed, given the lengthy time to complete most enforcement investigations – particularly those involving issuers – it is likely that most, if not all of the cases brought in 2017, and perhaps in the first half of 2018, are the product of investigations that began years ago.
One explanation for the drop that emerges from a study of the Report is the shift in enforcement priorities not just in November 2017 but earlier. That shift actually appears to have begun by 2016. In that year for the first time the second largest category of cases brought by enforcement were those involving investment advisers and investment companies. The trend continued into 2017 and may have benefitted from the new retail investor focus announced late that year. In the first half of 2018 the same trend at least continued and may have accelerated since it is the first and only year during the period of the report in which the percentage of investment adviser/investment actions equaled that of issuer reporting and disclosure cases. Viewed in this context, the drop in actions involving issuers and their subsidiaries may have resulted at least in part from the clear shift in focus to investment advisers and investment companies that began at least as early as 2016 and perhaps accelerated with the announcement of new Enforcement priorities in November 2017.
The increased number of enforcement actions involving issuers and their subsidiaries that named an individual in the first half of FY 2018 is also consistent with the new Enforcement priorities. While the cases reflecting this trend are in probability the product of those which have long been in the pipeline, the revamped Enforcement priorities may have had more of an impact on this aspect of the cases being brought since the charging decisions and Wells processes for those actions would take place at the end of the investigations in wake of the new Enforcement priorities rather than the beginning.
Two additional points from the Report involve cooperation. The Report shows that the percentage of issuers cooperating with the Commission has remained essentially constant in recent years while the number of firms settling at the time of filing decreased. At the same time in the second half of 2015 there was a record number of actions brought. That number undoubtedly ties to the highly successful MCDCI which began the year before and ultimately resulted in about 85 cases. The success of that initiative can be traced to the same element that the DOJ found aided its highly successful FCPA Pilot program – predictability.
Predictability was the hallmark of the SEC’s MCDC initiative and the DOJ’s FCPA Pilot Program. Those who self-reported and cooperated were offered up front a defined, more favorable resolution in return for their cooperation than that typically obtained from not cooperating. That approach contrasts sharply with the SEC’s typical approach to cooperation which is essentially a “black box.” Stated differently, typically an issuer or a person is told that if they cooperate there will be consideration at the end of the process based on a large number of factors which may or may not yield some tangible results. This may well be the reason the number of firms cooperating with the Commission – absent special initiatives – remains essentially static which the number of cases settling on filing declined.
Yet the path to increased cooperation which can facilitate investigations and their resolution is clearly crafting more predictable cooperation standards. The Commission’s current Share Class Selection Disclosure Initiative recognizes this point. If the Commission is going to bring a new approach to Enforcement that type of cooperation initiative should be expanded. Increasing cooperation should speed investigations and the resolutions of actions by promoting efficiencies. Such an approach will benefit not just retail investors but all investors. Increased efficiency may also permit the Commission to bring more actions with better calibrated remedies and achieve the goals of its announced in November 2017.