On October 12, 2016, the Securities and Exchange Commission (the SEC), announced its enforcement results for the 2016 fiscal year. For all but the most dedicated followers of the SEC’s recent uptick in enforcement activities, the results are eye opening.
In 2016, the SEC filed a record 868 enforcement actions against a wide-range of actors. This represents a jump of over 7.5% from 2015 and 15% from 2014. The Wall Street Journal linked the record-breaking year to SEC Chair Mary Jo White’s “broken windows” strategy of pursuing “the smallest legal violations” as well as the serious, headline-grabbing frauds. The effect, Chair White says, “makes you feel like we are everywhere.”
Not only was the SEC able to increase the number of enforcement actions filed in 2016, it also was successful in obtaining over $4 Billion in disgorgements and penalties through favorable orders, settlements, and judgements.
Several of the highlighted enforcement actions for the year involve a point of perpetual emphasis for the SEC: insider trading. In 2016, nearly 10% of all enforcement actions brought were related to insider trading. Several of those stemmed from what the SEC described as “complex insider trading rings” uncovered through “innovative uses of data and analytics.”
One illustration of a complex insider trading ring involves two hedge fund managers and a former government official. The former government official allegedly used deception, concealing his role as a hedge fund consultant, to obtain confidential information about upcoming approvals of generic drug applications from former colleagues at the Food and Drug Administration. The SEC alleged that one of the hedge fund managers made unlawful profits of nearly $32 million by insider trading on tips he received from the scheme.
The SEC also revealed that investment advisers were a primary target of SEC enforcement actions in 2016. In fact, nearly 20% of enforcement actions brought during the year, were brought against investment advisers and investment companies. This was another SEC record.
Those who have been following the SEC under Chair White are not surprised by the surge in enforcement actions against investment advisers. Chair White has moved examiners from the broker-dealer unit to the investment adviser unit of the Office of Compliance Inspections and Examinations in recent years. Chair White has directed the enlarged staff to examine issues that generate conflicts of interest, such as cybersecurity policies and financial incentives.
In a special section of the press release, the SEC highlighted some of its enforcements actions against advisers. Among the highlights are eight actions related to private equity fund advisers. Some of the entities and individuals involved are giants in the private equity industry: Blackstone Group, Fenway Partners, and WL Ross & Co. Each paid fines related to its failure to adequately disclose certain fee arrangements.
The SEC also brought an enforcement action against three AIG affiliates which earned fees for steering clients into share classes of mutual funds that charged 12b-1 fees when the clients were eligible for share classes that did not charge such fees. In a release announcing the settlement of those claims, the SEC warned that “investment advisers must be vigilant about conflicts of interest when selecting mutual fund share classes.” This mix of actions against investment advisers is an example of how the SEC’s broken windows approach creates the appearance of comprehensive enforcement.
In reviewing the results of this record-setting year, industry participants should note what the SEC credits for its success. Chair Mary Jo White states that the SEC is “using new data analytics to uncover fraud, enhancing [the SEC’s] ability to litigate tough cases, and expanding the playbook bringing novel and significant actions to better protect investors and our markets.”
Analytical technology is something that the SEC has been developing for several years. The Market Information Data Analytics System (MIDAS), introduced in 2013, gives the SEC greater ability to reconstruct market data time-stamped to the micro-second. Efforts to build the Consolidated Order Trail are still ongoing. However, once that is on-line, the SEC should become even better at selecting and winning enforcement actions.
It is understandable if securities professionals reading these results do, in fact, feel that the SEC is everywhere these days. These results should trigger a recommitment to regulatory compliance that includes doing the little things right. We’re here to help.