On November 6, 2019, the Securities and Exchange Commission's (SEC) Division of Enforcement (Division) published its annual report for fiscal year 2019. The report highlights the Division’s efforts and initiatives to address a wide range of alleged misconduct, consistent with the scope of the SEC’s oversight and the Division’s mandate. The Division continued to focus resources on retail investor protection, combating cyber threats and individual accountability, which included executives, registered individuals, accountants and auditors.
Upon review of the report, Duff & Phelps noted the following:
- Contrary to the perception of “softer enforcement” under the current administration, as well as the government shutdown, both the number of enforcement actions and the amount of monetary relief increased in fiscal year 2019.
- Individual accountability was a major theme, with over 50% of cases involving individuals—including those in the C-suite and gatekeepers (lawyers, auditors and accountants).
- The number of bars and suspensions for industry professionals increased.
Certain themes noted in the report include the following areas:
Focus on the Retail Investor
In its continuing effort to protect retail investors, the Division launched a number of initiatives:
- Share Class Selection Disclosure Initiative where it agreed to recommend standardized settlement terms against investment advisory firms that self-reported their failures to disclose conflicts of interest associated with the receipt of certain fees by the adviser, its affiliates or its supervised persons for placing advisory clients in a 12b-1 fee-paying share class when a lower-cost or no-cost share class of the same mutual fund was available for the clients.
- The Division’s Retail Strategy Task Force (RSTF) led the Chairman’s Teachers’ Initiative and the Military Service Members’ Initiative, which focus enforcement and investor education resources on teachers, veterans and active-duty military personnel.
Focus on Cyber-Related Misconduct
- The Division’s Cyber Unit and other staff throughout the Division investigated and recommended several cases involving distributed ledger technology and digital assets as well as non-fraud matters. These established a framework for future resolutions in the space and further reinforced the seriousness with which the Commission views registration violations in the Initial Coin Offering (ICO) space.
- The Cyber Unit and the Division continued to focus on cyber security threats to regulated entities and filed an enforcement action against the Options Clearing Corporation related to violations of Regulation Systems Compliance and Integrity (Reg SCI), which is a set of rules designed to monitor the security and capabilities of U.S. securities markets’ technological infrastructure.
- The SEC issued reports related to business email compromises and spoofed or manipulated electronic communications to caution issuers and other market participants to consider these cyber-related threats when devising and maintaining a system of internal controls for purposes of risk management and protection of investors.
- The SEC continued to use technological resources to analyze voluminous amounts of data, including trading data and communications metadata, to unravel complex unlawful trading schemes.
Fiscal year 2019 Overall Enforcement Results
- The SEC brought a diverse mix of 862 enforcement actions, of which primarily included standalone actions and follow-on proceedings based on the outcome of SEC actions or actions by criminal authorities.
- Most of the standalone cases concerned investment advisory and investment company issues, securities offerings, and issuer reporting/accounting and auditing matters.
- The SEC noted an increase in standalone enforcement actions since Fiscal Year 2018 which is attributed, in part, to the self-reporting nature and accelerated resolution process of the Share Class Initiative.
- In Fiscal Year 2019, 57% of the SEC’s standalone actions, involved charges against one or more individuals. The individuals charged include those at the top of the corporate hierarchy—such as chief executive officers, chief financial officers and chief operating officers—as well as gatekeepers such as accountants, auditors and attorneys.
- The total monetary relief ordered in fiscal year 2019 was 10% higher than in fiscal year 2018 and included a total of $3.248 billion in disgorgement of ill-gotten gains and penalties imposed of $1.101 billion. The SEC returned nearly $1.2 billion to harmed investors.
- The SEC utilized non-monetary remedial relief such as undertakings, the appointment of independent compliance consultants, conduct-based injunctions to protect the investing public on a going-forward basis, bars, suspensions, trading suspension and court-ordered asset freezes to protect investors.
- Enforcement actions resulted in 595 bars and suspensions of wrongdoers in fiscal year 2019.
- The SEC suspended trading in the securities of 271 issuers including trading in several digital assets.
- The SEC obtained 31 court-ordered asset freezes.
For further information, you can find the entire report here.