On November 6, 2019, the Enforcement Division (Division) of the U.S. Securities and Exchange Commission (SEC or Commission) released its annual report, which detailed the agency’s enforcement efforts during fiscal year 2019 (October 1, 2018 — September 30, 2019).
The Division reported that it brought a total of 862 enforcement actions in 2019, up from 821 in the previous year and the highest number since 2016. The volume of standalone enforcement actions also rose, from 490 in 2018 to 526 in 2019. This 7 percent year-over-year increase in actions, though small, is notable in light of this year’s month long government shutdown and the Commission’s hiring freeze, which extended through the first half of fiscal year 2019.
The Division achieved its 2019 results in significant part because of the Mutual Fund Share Class Selection Disclosure Initiative. The initiative encouraged investment advisers to self-report certain violations of the Investment Advisers Act (Advisers Act) relating to the selection of mutual fund share classes paying Rule 12b-1 fees. During the fiscal year, the Commission brought cases against 95 firms that had self-reported as part of that initiative, and these firms were ordered to return a total of over $135 million to affected retail investors. Largely as a result of the initiative, 191 of the agency’s 526 cases in fiscal 2019 were against investment advisers and investment companies (36 percent of the total, up from 22 percent of cases in fiscal 2018 — in both years the largest single category of cases).
The Division reported that it brought a total of 862 enforcement actions in 2019, up from 821 in the previous year and the highest number since 2016. The volume of standalone enforcement actions also rose, from 490 in 2018 to 526 in 2019. This 7 percent year-over-year increase in actions, though small, is notable in light of this year’s month long government shutdown and the Commission’s hiring freeze, which extended through the first half of fiscal year 2019.
The Division achieved its 2019 results in significant part because of the Mutual Fund Share Class Selection Disclosure Initiative. The initiative encouraged investment advisers to self-report certain violations of the Investment Advisers Act (Advisers Act) relating to the selection of mutual fund share classes paying Rule 12b-1 fees. During the fiscal year, the Commission brought cases against 95 firms that had self-reported as part of that initiative, and these firms were ordered to return a total of over $135 million to affected retail investors. Largely as a result of the initiative, 191 of the agency’s 526 cases in fiscal 2019 were against investment advisers and investment companies (36 percent of the total, up from 22 percent of cases in fiscal 2018 — in both years the largest single category of cases).
The report reflects other shifts in priorities. The number of broker-dealer and insider trading cases were both down by about 40 percent from last year. Insider trading cases decreased from 51 actions filed in fiscal 2018 to 30 actions filed in fiscal 2019, and the number of cases against broker-dealers fell to 38 in fiscal 2019 compared with 63 in fiscal 2018. The decline in broker-dealer enforcement cases may be a result of the SEC Office of Compliance Inspections and Examinations staff’s 2017 decision to shift examination resources toward investment advisers and away from broker-dealers.
By contrast, in 2019, 21 percent of the Commission’s 526 standalone cases concerned securities offerings, and 17 percent concerned issuer reporting/accounting and auditing (17 percent) matters. This volume of public company, accounting and auditing-related cases is consistent with industry observations — there has been a shift in the Commission’s priorities away from financial services investigations and toward public companies. The issuer reporting/accounting and auditing cases in fiscal 2019 (92 cases) are an increase over the number brought in fiscal 2018 (79 cases).
The report also indicates that the Division is attempting to bring its cases more promptly, with an average case being brought within 24 months after the start of an investigation. However, this statistic is skewed by cases where the Division pursues temporary restraining orders, such as Ponzi schemes or other ongoing fraud cases. The Division acknowledges that its investigations of public companies on average take more than 36 months to complete, and it states it would like to bring down this statistic.
The results indicate that individual accountability continues to be a priority for the agency’s enforcement staff. Excluding the Share Class Initiative actions (which, as part of the initiative, did not charge individuals), 69 percent of the Commission’s standalone actions in fiscal 2019 included charges against individuals.
Alongside the increase in the number of cases, enforcement sanctions also increased in fiscal 2019. The Division reported that total monetary sanctions totaled $4.3 billion, which was up by about 10 percent from the previous year. The increase was primarily due to a jump in disgorgement orders, which reached $3.25 billion, up from $2.5 billion in 2018 (total penalties decreased in fiscal 2019 by over 20 percent). This increase in disgorgement occurred despite the Supreme Court’s decision in Kokesh v. SEC, 137 S. Ct. 1635 (2017), which held that the SEC’s claims for disgorgement are subject to a five-year statute of limitations. This year’s report described Kokesh as an ongoing challenge for the Commission’s efforts to seek disgorgement. Interestingly, the division reported that 70 percent of the total monetary sanctions came from just 5 percent of the cases, a statistic that has remained fairly consistent since 2015.
In sum, the Division’s report illustrates that there is a substantial amount of continuity in the SEC’s enforcement program over time. While the Commission’s enforcement priorities shift at the margins from year to year, the overall picture belies any argument that the Commission has diminished its overall commitment to enforce the federal securities laws. That being said, a one-time event (the Mutual Fund Share Class Selection Disclosure Initiative) boosted the fiscal 2019 results, and longer-term disruptions like government shutdowns and hiring freezes cannot fail to affect the Commission’s enforcement program. The full SEC Division of Enforcement 2019 Annual Report is available here.
By contrast, in 2019, 21 percent of the Commission’s 526 standalone cases concerned securities offerings, and 17 percent concerned issuer reporting/accounting and auditing (17 percent) matters. This volume of public company, accounting and auditing-related cases is consistent with industry observations — there has been a shift in the Commission’s priorities away from financial services investigations and toward public companies. The issuer reporting/accounting and auditing cases in fiscal 2019 (92 cases) are an increase over the number brought in fiscal 2018 (79 cases).
The report also indicates that the Division is attempting to bring its cases more promptly, with an average case being brought within 24 months after the start of an investigation. However, this statistic is skewed by cases where the Division pursues temporary restraining orders, such as Ponzi schemes or other ongoing fraud cases. The Division acknowledges that its investigations of public companies on average take more than 36 months to complete, and it states it would like to bring down this statistic.
The results indicate that individual accountability continues to be a priority for the agency’s enforcement staff. Excluding the Share Class Initiative actions (which, as part of the initiative, did not charge individuals), 69 percent of the Commission’s standalone actions in fiscal 2019 included charges against individuals.
Alongside the increase in the number of cases, enforcement sanctions also increased in fiscal 2019. The Division reported that total monetary sanctions totaled $4.3 billion, which was up by about 10 percent from the previous year. The increase was primarily due to a jump in disgorgement orders, which reached $3.25 billion, up from $2.5 billion in 2018 (total penalties decreased in fiscal 2019 by over 20 percent). This increase in disgorgement occurred despite the Supreme Court’s decision in Kokesh v. SEC, 137 S. Ct. 1635 (2017), which held that the SEC’s claims for disgorgement are subject to a five-year statute of limitations. This year’s report described Kokesh as an ongoing challenge for the Commission’s efforts to seek disgorgement. Interestingly, the division reported that 70 percent of the total monetary sanctions came from just 5 percent of the cases, a statistic that has remained fairly consistent since 2015.
In sum, the Division’s report illustrates that there is a substantial amount of continuity in the SEC’s enforcement program over time. While the Commission’s enforcement priorities shift at the margins from year to year, the overall picture belies any argument that the Commission has diminished its overall commitment to enforce the federal securities laws. That being said, a one-time event (the Mutual Fund Share Class Selection Disclosure Initiative) boosted the fiscal 2019 results, and longer-term disruptions like government shutdowns and hiring freezes cannot fail to affect the Commission’s enforcement program. The full SEC Division of Enforcement 2019 Annual Report is available here.
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