SEC Annual Report Highlights Enforcement Trends

Earlier this month, the staff of the Division of Enforcement of the United States Securities Exchange Commission (SEC) released its annual report for 2018. The report, available here, spells out for the investing public and the financial services industry the results of the SEC’s enforcement efforts. The report provides us with a macro view of the efforts the SEC is taking to protect investors, and can act as guidance for industry observers looking to build or reinforce a culture of compliance and adopt best practices to avoid enforcement risk.

As a service to our readers—both investors and financial services professionals—we are highlighting the key aspects of this SEC report here, and we invite you to contact us with your specific questions and concerns.

The report begins by framing its results in terms of its “three-part mission of protecting investors, maintaining fair, orderly and efficient markets, and facilitating capital formation.” And it articulates the five principles that would guide the Enforcement Division’s self-assessment of its performance: “(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.”

The Division of Enforcement reports that it “investigated and recommended to the Commission hundreds of cases alleging misconduct perpetrated against retail investors,” returning to investors, through settlements and litigation, $794 million.

The Division acts on the principle that “holding individuals accountable for wrongdoing is a key pillar of any strong enforcement program. Institutions act only through their employees, and holding culpable individuals responsible for wrongdoing is essential to achieving our goals of general and specific deterrence and protecting investors by removing bad actors from our markets.” In 2018, the Commission “charged individuals in more than 70% of the stand-alone enforcement actions it brought. Those charged include individuals at the top of the corporate hierarchy, including numerous CEOs and CFOs, as well as accountants, auditors, and other gatekeepers.” These results are consistent with what we are seeing in terms of the SEC bringing enforcement actions against not just the companies where the alleged wrongdoing took place, but also against the individual executives deemed responsible.

On the technology front, the SEC “brought its first action against a firm for violations of the Identity Theft Red Flags Rule.” We have represented several clients who suffered substantial losses due to identity theft and other forms of online fraud targeting seniors, the disabled and other vulnerable people, obtaining substantial settlements from the firms whose negligence contributed to the losses. We expect that this will represent a growing part of the SEC’s (and FINRA’s) enforcement docket going forward, which is a welcome development for victims of this severe problem that has emerged in the financial services sector over the past several years.

The Division reports that it “recommended enforcement actions for conduct ranging from registration violations, to unregistered broker-dealer activity, to instances in which the purported use of blockchain-related technology is merely a veneer for outright fraud.” We continue to assist financial advisers, investment advisers, broker-dealers and others as they navigate the difficult terrain concerning registration requirements and permissible activities for those who are unregistered.

Next, the Division touts its enforcement actions against the CEOs of Theranos and Tesla for their roles in unlawful activities concerning their companies and the investing public. These high-profile enforcement actions are typically brought not just for their own sake, but also for the perceived deterrent effect they may have on other senior corporate executives who might be contemplating “crossing the line” in a legal or ethical sense.

Finally, the Division shared its “raw quantitative metrics,” which reflected a high level of enforcement activity. It reports that “the Commission brought 821 actions (490 of which were “stand alone” actions) and obtained judgments and orders totaling more than $3.9 billion in disgorgement and penalties. Significantly, it also returned $794 million to harmed investors, suspended trading in the securities of 280 companies, and obtained nearly 550 bars and suspensions.” Taken together, these numbers represent an uptick in activity over 2017.

The rest of the report, 45 pages in all, contains a mountain of detail and parts of it are a bit technical. However, interested retail and institutional investors, as well as broker-dealers, financial advisers, investment advisers and other financial services professionals should take the time to review it, since it represents the best single-document compilation of what the SEC’s Enforcement Division has been up to, and what we should expect going forward.

If you are an investor with questions about the conduct of your broker or any other financial institution; or if you are a financial advisor, investment adviser or other financial services professional with questions or concerns about how the SEC’s enforcement priorities may affect you, please contact a securities attorney at The Galbraith Law Firm. Call 212.203.1249 or email kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.