The Securities and Exchange Commission (the “SEC”) released a review of its FY2016 enforcement efforts, which featured a single-year record 868 enforcement actions through the end of September.
The annual recap of financial reporting-related misconduct by executives and firms, as well as misconduct by registrants and gatekeepers, revealed a busy year for the securities regulator. It included the largest-ever number of cases involving investment advisers or investment companies at 160, as well as a record number of independent or standalone cases involving investment advisers or investment companies at 98.
The 868 total actions were more than the 807 filed in 2015, an increase of more than 7.5% from year to year, and the 755 in 2014. The 2016 enforcement actions resulted in disgorgements and penalties of over $4 billion, compared to the previous year’s $4.19 billion. The report details the SEC’s investigations, settlements and prosecutions related to a broad range of wrongdoing, which highlights the regulator’s ongoing focus across an extensive number of areas.
In enforcement actions generated pursuant to the whistleblower program, 13 individuals received $57 million in total awards for providing information regarding wrongdoing, another record amount for a single year and more than in all previous years combined. The SEC also prosecuted its first stand-alone action for retaliation against a whistleblower during the past year for the firing of an employee who reported improper financial reporting practices to senior management and the SEC, resulting in a $500,000 penalty.
Several other companies were charged under Securities Exchange Act Rule 21F-17, which prohibits the use of confidentiality agreements to silence or discourage potential whistleblowers from contacting the SEC. This volume of activity underscores the significant increase in whistleblower tips enabling the SEC to investigate and successfully resolve a greater number of enforcement actions.
Another emerging theme is the SEC’s continued prosecution of so-called “gatekeepers,” including attorneys, accountants and others, who actively participate in wrongdoing. Two of the largest auditing firms in the country were charged for violating auditor independence rules, while a private fund administrator was charged with missing or ignoring clear indications of fraud while it was retained to keep records and prepare financial statements and investor account statements for two client funds, resulting in a $352,449 fine. These actions reinforce the SEC’s ongoing focus on gatekeepers, and their willingness to pursue gatekeepers for participating in wrongdoing or even failing to identify wrongdoing.
Other Areas of Interest
The SEC also brought 21 enforcement actions under the Foreign Corrupt Practices Act (“FCPA”) – the highest number of FCPA enforcement actions in a single year. Significantly, two companies that both self-reported misconduct and cooperated extensively with the SEC were granted non-prosecution agreements.
Similarly, the 78 insider trading charges leveled during the year demonstrates the SEC’s continued focus in that area. Those charged with insider trading in 2016 included two hedge fund managers and their source, who was a former U.S. Food and Drug Administration employee, as well as a former employee at an investment bank accused of stealing non-public information in the firm’s email system so he could trade illegally in advance of client mergers.
Use of Data and Analytics
The overall increase in enforcement activity comes as the agency continues to increase its use of data to detect illegal activity and aid investigations, something SEC Chair Mary Jo White highlighted.
“Over the last three years, we have changed the way we do business on the enforcement front by using new data analytics to uncover fraud, enhancing our ability to litigate tough cases, and expanding the playbook bringing novel and significant actions to better protect investors and our markets,” she said.
For example, the SEC indicated that a number of the insider trading cases involved “complex insider trading rings” that were investigated and charged through “innovative uses of data and analytics to spot suspicious trading.”
The use of large quantities of data and analytics tools gives the SEC a significantly enhanced ability to identify and investigate instances of such wrongdoing. As a result, elevated numbers of enforcement actions are likely to continue into FY 2017 and investment advisers should remain vigilant to ensure their ongoing compliance as the regulator is able to expand the scope of its investigations.