After a record-breaking fiscal year 2016, the Securities and Exchange Commission’s Enforcement Division had a somewhat quieter year, at least in terms of the number of actions filed. The Enforcement Division released its annual report on November 15, detailing the Division’s activities in fiscal year 2017, which ended September 30, 2017. The report also outlined the Division’s priorities for the coming year.
In FY 2017, the SEC pursued 13.1 percent fewer enforcement actions, and disgorgement and penalties orders dropped by 7.1 percent. The below chart illustrates the number of filings in the past four fiscal years:
|Standalone Enforcement Actions||413||507||548||446|
|Follow-on Administrative Proceedings||232||168||195||196|
|Disgorgement and Penalties Orders||$4.16 Billion||$4.19 Billion||$4.08 Billion||$3.79 Billion|
Why the Drop in the Number of Cases?
Several factors may have contributed to the decline. Some have attributed it to the change in presidential administrations, which resulted in a change in top SEC leadership. For instance, a recent Cornerstone Research publication noted that after SEC Chairman Jay Clayton’s appointment, the number of enforcement actions against public companies dropped precipitously.
On the other hand, the SEC believes the drop in enforcement actions is almost entirely due to the conclusion of the SEC’s Municipalities Continuing Disclosure Cooperation Initiative (MCDC). The program encouraged self-reporting of fraud in municipal bond offerings. If MCDC proceedings were excluded from FY 2016, the SEC only filed 30 more enforcement actions in FY 2016 than in FY 2017, making the drop in filed cases much less striking.
For public companies, the message is different. Although the absolute number of cases filed decreased, the number of issuer disclosure and accounting fraud cases increased as a percentage of the SEC’s caseload. In FY 2017, 21 percent of the filed enforcement actions involved issuer reporting violations or actions against public company auditors, compared with 17 percent of cases in FY 2016. The 2017 increase also represents a more than 50 percent increase from FY 2013 and evidences an ongoing trend of increased enforcement in this area. Clearly, the numerous SEC initiatives started a few years ago to focus resources on detecting and investigating issuer reporting violations have resulted in such cases becoming the largest percentage of the SEC’s filed cases.
What’s Ahead in 2018? New Enforcement Directors Share Their Priorities
In addition to discussing the outcomes of FY 2017, the new SEC Enforcement co-directors outlined five principles that would guide them going forward, all of which are pretty much in line with previous goals of Enforcement leadership:
- Focus on the Main Street Investor: The SEC expressed its renewed commitment to prioritize protecting average, “Main Street” investors. To do so, the SEC announced the creation of the Retail Strategy Task Force to identify and address investor risk.
- Focus on Individual Accountability: In an attempt to increase deterrence, the SEC indicated that it would focus on investigation and prosecution of cases against individuals, and would continue to aggressively seek disgorgement and penalties against such wrongdoers. While this priority is not new, the emphasis on charging and penalizing individuals likely signals some skepticism about over-penalizing entities, especially public companies whose current shareholders shoulder the burden of monetary penalties.
- Keep Pace With Technological Change: In September, the SEC announced the creation of a specialized Cyber Unit to investigate and prosecute technologically-driven securities violations. The Enforcement co-directors emphasized that the Cyber Unit will play an important role in ensuring that the SEC keeps pace with emerging threats. Expect to see cases being investigated by the Cyber Unit in the cryptocurrency space, including cases targeting unregistered securities offerings designated as initial coin offerings (ICOs). If, as anticipated, the SEC issues updated guidance on public company cyber disclosure requirements, expect to see more investigations targeting companies for inadequate disclosure of cyber incidents that materially affect the issuer’s business.
- Impose Sanctions That Most Effectively Further Enforcement Goals: In addition to focusing on individual accountability, the SEC noted that it would also prioritize sanctions that it feels are the most effective: monetary penalties, barring wrongdoers from the securities industry, and tailored relief such as undertakings to fix internal controls or other processes.
- Constantly Assess the Allocation of SEC Resources: Finally, the Enforcement Division highlighted that it would remain committed to using its professionals as effectively and efficiently as possible. This may reflect the leadership’s understanding that new resources will be limited under the Trump administration.
The release of this year’s SEC Enforcement Division annual report is sure to spur articles noting the drop in number of cases filed and speculating that enforcement is being rolled back under the new leadership. Public companies and other market participants should not make the mistake of believing such conjecture. The Enforcement Division has steadily increased its headcount over the past years, and has developed new technological resources that enable its professionals to find misconduct that would have gone undetected previously, such as sophisticated accounting maneuvers. Moreover, all signs indicate that the SEC’s whistleblower program will continue generating new leads. Although the number of filed cases may not again approach the FY 2016 high in the near future, the SEC’s continued focus on financial reporting and cyber issues means that companies must remain focused on compliance and prevention of misconduct.