On November 15, the Securities and Exchange Commission’s Enforcement Division issued its annual report highlighting its priorities for the upcoming year and reviewing the enforcement actions for its fiscal year 2017. The SEC reported a total of 754 actions for the year — including 446 standalone actions, 196 follow-on actions, and 112 actions for delinquent filings — resulting in nearly $3.8 billion in monetary penalties and disgorgements. As a result of the transition in leadership, these numbers are down slightly from prior years: in FY 2016, the SEC filed 868 actions (resulting in $4 billion in penalties and disgorgements), and in FY 2015, the SEC filed 807 actions (resulting in $4.2 billion in penalties and disgorgements). These actions involved a number of substantive areas, with a significant portion being actions related to (1) Issuer Reporting/Audit & Accounting and (2) Securities Offerings. The SEC also noted that individuals were charged in 73% of the standalone actions.
SEC Chairman Jay Clayton praised the “excellent work” of the Enforcement Division, saying, “Through their tireless efforts to uncover wrongdoing and hold bad actors accountable, they defend our Main Street investors and support the integrity of our capital markets.” Co-Directors of the Enforcement Division, Stephanie Avakian and Steven Peiken, explained that their decision making is guided by five core principles: focus on the Main Street investor; focus on individual accountability; keep pace with technological change; impose sanctions that most effectively further enforcement goals; and constantly assess the allocation of resources.
At the end of FY 2017, the SEC also announced the creation of a Cyber Unit and a Retail Strategy Task Force with the goals of protecting retail investors and combating cyber-related threats. The Cyber Unit will focus primarily on market manipulation schemes that use social media platforms to spread false information, hacking efforts to obtain material nonpublic information, misconduct on the dark web, and violations involving distributed ledger technology. The Retail Strategy Task Force will focus on identifying large-scale wrongdoing with the potential to cause harm to retail investors, including misconduct implicating the microcap market, Ponzi schemes, and offering frauds.
The SEC’s announcement highlighted a number of areas of enforcement focus that we expect will continue to be of priority going forward. Those of note include:
- Individual Accountability: 73% of the standalone enforcement actions in FY 2017 involved charges against individuals – a statistic that has risen to 80% in the six months since Chairman Clayton took office.
- Issuer Reporting, Disclosure Issues, and Auditor Misconduct: The Commission continued to focus its efforts on audit firms, as well as individual partners, for improper auditing practices. The Commission settled actions against two of the “Big 4” accounting firms related to failed audits of oil companies. The Commission also touted its action against an oil & gas company and three of its former top financial executives for a multi-year accounting fraud.
- Market Manipulation and Cyber-Related Misconduct: The SEC brought charges against individuals for allegedly trading on nonpublic, market-moving information stolen from prominent law firms. The SEC also brought an action against a mechanical engineer for allegedly scheming to manipulate stock prices by making a phony regulatory filing.
- Insider Trading: As in FY 2016, the SEC continued to pursue insider trading cases using its advanced technology and investigative tools. The SEC brought actions against multiple individuals, including a former government employee who traded on nonpublic information about government plans to cut Medicare reimbursement rates, as well as a partner at a private equity firm who reportedly made nearly $30 million in illegal profits by trading in advance of a merger.
- FCPA: The SEC continued to bring actions for bribery of foreign officials and violations of the statute’s books and records provision. The SEC attained a number of large settlements in this area, including a $957 million settlement with a petrochemical manufacturer and a $956 million with a foreign telecommunications provider.
FY 2017 saw a slight decline in the total number of enforcement actions pursued by the SEC, but we expect the Commission to ramp up efforts in FY 2018 as the Enforcement Division’s new cyber and retail initiatives gain traction. Companies can prepare for an active SEC Enforcement Division by focusing on internal controls and fostering a culture of compliance.