The Division of Enforcement, by any measure, had a successful year despite facing significant headwinds, according to its FY 2019 Annual Report. Success stems from a variety of factors, not just the number of cases or the amounts of money ordered in actions. Factors discussed in the Report include:
Main street investors: The main street investor is a key focus of the Division. That focus is reflected in the Share Class Selection Disclosure Initiative which resulted in 95 investment advisory firms voluntarily self-reporting and returning over $135 million to impacted mutual fund investors. It is also reflected in the Retail Strategy Task Force which brought a number of cases utilizing in part data analytics which might more typically be seen in insider trading cases.
Financial institutions and issuers: Activity by these key players in the capital markets can be difficult to detect, according to the Report. Nevertheless, the Division filed a series of significant actions involving companies such as a large social media firm, key players in the automotive industry and others. A series of actions centered on abuses involving ADRs while one involved the Options Clearing Corporation and its operations.
Individuals: A key focus for the Division was bringing actions which held individuals accountable. A review of the case load for last year (a table in the appendix of the Report lists those cases) demonstrates that individuals in leadership position at large and small issuers were named as defendants along with their firms in a number of actions.
Digital assets: The Division brought a series of actions against digital asset firms, frequently alleging fraud and registration violations. A case was also brought against two celebrities who touted digital assets for an issuer without disclosing that they were being paid. This group of actions “sent the clear message that, if a product is a security, regardless of the label attached to it, those who issue, promote, or provide a platform for buying and selling that security must comply with the investor protection requirements of the federal securities laws,” according to the Report.
Cybersecurity: Two years ago the Division created a Cyber Unit to focus on cyber-related treats. This unit has brought a number of significant actions and continues to work with other staff Divisions. Included in those actions are two based on violations of Regulation Systems Compliance and Integrity or Reg SCI. Another action centered on exchange listed options against the Options Clearing Corporation.
Accelerating investigations: To maximize the impact of its cases the Division is focusing on accelerating investigations. In Fiscal Year 2019 the average case took under 24 months from opening to closing. This reflects a “slight improvement” compared to prior years. As the Report notes, however, many cases take longer than the 24 month average.
Leveraging technology: Effectively using technology to enhance the limited resources available to the Division has also been a key focus. The impact of these efforts is evident in, for example, the detailed analysis done in the suspicious trading cases and other large international insider trading actions.
Statistics: The Report details the usual statistics. Those include the number of cases brought in FY 2019 compared to prior years. Last year 526 standalone enforcement actions were brought compared to 490 in FY 2018, 446 in FY 2017, 548 in FY 2016 and 508 in FY 2015. The table does not note that in FY 2019 a series of cases were brought as part of the Share Class cooperation initiative, a point noted in earlier reports.
The types of cases brought last year reflect the focus of the Division. In FY 2019 the largest number of cases were brought against investment advisers and investment companies. The second largest group of cases centered on securities offerings while cases involving issuer reporting and audit and accounting were third. In FY 2018 securities offering actions represented the largest group of cases following by those involving investment advisers and investment companies. While there is little doubt that the share class cooperation initiative impacted these results, they are consistent with trends that have been developing for a number of years.
Finally, in FY 2019 total money ordered in enforcement cases was $3,248 million which is composed of $1,101 million in penalties and $3,248 million in disgorgement. Those results compare to the FY 2018 results of $3,945 million ($1,439 in penalties and $2,506 in disgorgement) and in FY 2017 $3,789 ($832 in penalties and $2,957 in disgorgement).
Challenges: Finally, the Report notes that the decision in Kokesh continues to present an on-going challenge. That decision has resulted in the Commission foregoing an estimated $1.1 billion in disgorgement. While the Division has had some improvement in this area, the decision will continue to present issues. Not discussed in the Report is the potential impact of Lui which the Court just agreed to hear later this term. That decision raises the question of whether the Commission can seek disgorgement in its enforcement actions since neither the Securities nor the Exchange Act have a specific statutory provision authorizing such relief. Both cases are likely to present difficulty for the Enforcement Division during fiscal 2020.