On November 2, 2018, the U.S. Securities and Exchange Commission (“SEC”) Enforcement Division issued its annual report (“Annual Report”) on enforcement efforts for its 2018 fiscal year. The SEC brought 821 enforcement actions, an approximately 8.9 percent increase over FY 2017. The Commission also collected over $3.9 billion in disgorgement and penalties and returned approximately $794 million to harmed investors. SEC Division of Enforcement, FY 2018 Annual Report (Nov. 2, 2018). By these metrics, the Commission’s enforcement activity level surpassed FY 2017, and fell just short of its all-time record of 868 enforcement actions in FY 2016. See Annual Report at 9. The Report also noted a focus on matters impacting retail investors and those involving cyber-related issues (such as blockchain technology).
As in prior years, Stephanie Avakian and Steven Peikin, the Co-Directors of the Enforcement Division, emphasized that the Division’s efforts in FY 2018 adhered to five main principles: “(1) focus on the Main Street investor; (2) focus on individual accountability; (3) keep pace with technological change; (4) impose remedies that most effectively further enforcement goals; and (5) constantly assess the allocation of our resources.” Annual Report at 1. The Report lists examples of matters that they believe best exemplify these principles, and also the overall results. Initiatives that received special attention in the report were the Division’s Retail Strategy Task Force, which has brought cases on disclosures regarding fees and expenses and conflicts of interest for managed accounts, the Division’s new Cyber Unit, which has brought a number of cases involving digital assets and other matters, and the Division’s Share Class Selection Disclosure Initiative, which the Annual Report described as targeting a practice that took advantage of retail investors.
Despite touting the various successes of the Enforcement Division in FY 2018, the Annual Report also emphasized the constraints that continue to be placed on the Commission’s resources. Among other things, the Co-Directors highlighted budgetary concerns, the loss of contracted legal support personnel, and an agency-wide hiring freeze. They also cited what they termed “challenging legal decisions,” including the Supreme Court’s opinion in Kokesh v. SEC, 137 S. Ct. 1635 (2017), that limited the SEC’s ability to obtain disgorgement in certain long-running frauds, and in Lucia v. SEC, 138 S. Ct. 2044 (2018), that clarified that the Commission’s administrative law judges are subject to the Appointments Clause of the Constitution, and which required the SEC to divert resources to rehear older matters.1
Particularly in light of these challenges, the Annual Report noted that the Division has sought to focus available resources on cases that deliver strong messages and have broad market impact, an approach that SEC Chair Jay Clayton described as “outcomes-oriented” and focused on keeping “the interests of our Main Street investors front of mind,” and which stands in contrast to the “broken windows” philosophy of prior years. Nothing in the Annual Report signals any reason to expect a shift in priorities in the year to come. Instead, we expect that FY 2019 will likely look very similar to FY 2018.