One of our lead articles discusses a research report indicating that SEC enforcement activity has slowed in 2016. According to the article, the SEC has brought nearly ten percent fewer enforcement actions through the first three quarters of fiscal year 2016 (which runs from October 1, 2015, through September 30, 2016) than in fiscal year 2015. Moreover, the referenced report shows that to this point in FY 2016, the SEC has taken more actions related to previously filed cases than at the same point in FY 2015, while the number of new actions has declined.
It strains credulity to think that the SEC’s Enforcement Division is becoming lax or disinterested in pursuing wrongdoers, and the article does note that FY 2015 activity ran at a “record-setting pace.” The article also notes that there is typically an increase in SEC enforcement in the fourth quarter of the fiscal year, so it’s possible the SEC will ultimately reach or at least approach last year’s number of actions. According to the article, the reason for the decrease is not clear and the SEC declined to comment. A number of possibilities are suggested, but everything is speculation.
It goes without saying that the SEC and other financial regulators have been particularly active over the past decade. Armed with public and congressional mandates to ensure that the markets remain fair and provide a level playing field for all investors, the SEC has issued a myriad of new rules and regulations applied to broker-dealers, investment advisers and other financial services providers in an effort to clean up real and perceived shortcomings in the markets. Electronic surveillance of market activity has made detection of wrongdoing easier and concealment of bad deeds more difficult. And, as the article points out, 2015 saw a record number of SEC enforcement actions which, coupled with some high-profile prosecutions (some successful, others not) have made clear that the regulators and law enforcement are being anything but temperate in carrying out their mission.
Any number of factors could explain the decline. As the article points out, there are currently only three sitting commissioners; the nominees for the two other seats are still pending confirmation by the Senate. At a more macro level, this is a Presidential election year in which there is no incumbent running, and with two candidates having very different views on financial regulation. The Supreme Court is currently short one justice, and the remaining eight appear to be split somewhat evenly ideologically, while several important matters such as the constitutionality of the SEC’s administrative court process are still percolating at the Court of Appeals level. Any one of the foregoing factors, as well as many others, could be causing the Commission staff to take a wait-and-see approach.
The interesting thing about all this is that the statistical reduction discussed in the article seems to be viewed as a bit of a letdown. Now, the statistics cited in the article may be aberrant and, as the article notes, the SEC fiscal year isn’t over yet, but logic would dictate that with all of the efforts of Congress, the regulators, the enforcement community, and the financial services industry, at some point the number of enforcement cases will begin to decline. Of course, there will always be miscreants and scoundrels who view the financial markets as a good way to take advantage of the gullible and make a quick buck, but at some point it should become too difficult and expensive to do so, at which point the bad guys will move on and ply their trade in some other venue. Plainly put, eventually there should come a time when fewer actions are warranted.
Hopefully, when that point is reached (whether it is now or at some point in the future), it will not be portrayed as a failure of the regulatory community but as a success. After all, at some point the good guys did “clean up Dodge” and made it safe for the ordinary citizens. The securities regulators will still, of course, need to remain vigilant, but perhaps at some point there will simply be fewer bad guys to chase.
That might sound a bit Pollyanna but, as the saying goes, “hope springs eternal.” While it seems almost fashionable these days to bash Wall Street, the overwhelming majority of people working in the world of financial services, as providers or as those advising and supporting providers, are conscientious professionals who take their jobs seriously and honestly seek out the best investment opportunities for their clients and/or themselves. They look for legitimate advantages based on hard work and study - without cheating. They understand their responsibilities to their clients and are truly interested in acting in those clients’ best interests.
As much as anyone, the legitimate professionals abhor the actions of the charlatans and manipulators who see the financial markets as an opportunity to engage in clever schemes and outright crimes in order to profit at the expense of others. Not only do such actions give the profession a bad name and discount its members’ hard work, it also results in excessive and sometimes unwieldy regulations that make legitimate activity more difficult and expensive, but which are sadly necessary to keep the bad actors in check. The responsible professionals spend large sums on compliance and risk management efforts in order to remain true to their mission of providing financial services to their clients in an appropriate manner.
It would be nice to think that all of the regulation and compliance efforts will, at some point, pay off, and we will see a reduction in enforcement statistics simply because fewer actions are necessary.