SEC Touts Enforcement Success Despite Shutdown

Enforcement Division reports increase in standalone actions and money collected in fiscal year 2019

The Securities and Exchange Commission said 2019 was “a successful year” for its enforcement activity, reporting a higher number of new actions despite being stymied by the government shutdown.


The SEC opened 862 new enforcement actions in fiscal year 2019, a 5% increase over 2018 and a 14% increase over 2017, according to the SEC Enforcement Division’s annual report released earlier this month. The division also reported more than $4.3 billion in penalties and disgorgements it secured through orders and judgments — a 10% increase from the previous year.

The division, which polices violations of securities law, the Foreign Corrupt Practices Act and other federal statutes, saw a spike in new actions against investment advisors and companies in the past year, with 191 compared to 108 in FY 2018.

“We achieved this success despite facing significant headwinds,” said enforcement division co-directors Stephanie Avakian and Steven Peikin in the report. They pointed to U.S. Supreme Court decisions that created obstacles for the division as well as the 35-day hold on activity caused by the government shutdown in December 2018 and January 2019. 

While the division’s statistics bear takeaways for public companies and their counsel, the numbers shouldn’t necessarily be taken at face value.

“In general, it’s wise to take these reports with a grain of salt,” said Coates Lear, a former SEC senior enforcement counsel who is a partner at Squire Patton Boggs in Denver and Washington, D.C. Cases are initiated by SEC enforcement staff and don’t result from decisions at the top, he noted. But enforcement directors look at the numbers and “attempt to put the cases into different themes for the purposes of public messaging” in the annual report, Lear said.

“The report continues a theme that we’ve been seeing out of the SEC since Jay Clayton became the chair of the commission, and that is protecting retail investors being the top enforcement priority,” Lear added.

Securities defense litigator Tom Tenenbaum said the report shows an “an acceleration of cases” focused on protecting the “Main Street investor.” Part of what drove the SEC’s action numbers up in FY 2019, he noted, was its Share Class Selection Disclosure Initiative, where 95 investment advisory firms self-reported to the SEC that they failed to disclose conflicts of interests in how they offered mutual funds. The initiative led to a $135 million return to mutual fund investors, and it appears to be part of the division’s strategy in resolving cases more quickly and efficiently, Tenenbaum said.

Actions against financial advisors and companies totaled 191 — nearly double the number in FY 2018 — and made up more than a third of the SEC’s new standalone enforcement actions.

Even without the initiative, Tenenbaum said, the SEC is taking more action against financial advisors as opposed to broker-dealers. But that might also be a result of market forces, too, he said. “More and more people, especially retirees, have been turning to financial advisors,” and more activity in that sector will naturally generate more complaints from customers, Tenenbaum said.

The SEC Enforcement Division mentioned that it faced “headwinds” in achieving the recovery numbers it did in FY 2019. One obstacle is the U.S. Supreme Court’s 2017 decision in Kokesh v. SEC, which held the SEC’s disgorgement claims to a five-year statute of limitations.

The $3.2 billion the SEC recovered in disgorgement “is pretty impressive in view of Kokesh,” Tenenbaum said. The SEC estimates that Kokesh’s constraints forced it to leave $1.1 billion in disgorgement on the table.

In one section of the report, the division mentions its policy of giving companies leniency for cooperating with SEC investigations. “We recognize the value in providing greater transparency into how the Commission considers and weighs cooperation credit, and we are endeavoring to find additional ways to message what companies and individuals have done to merit the cooperation credit they received,” the report says.

Lear said it’s encouraging to see SEC leadership recognize that “companies and counsel are craving more guidance on cooperation.”

“They say ‘We want you to cooperate and there are benefits to doing so,’” Lear said. “But it is very difficult from the company’s perspective,” he added, to know where the threshold is for cooperation that merits credit and exactly how much credit the company can expect. “That’s a perennial challenge for companies that are facing SEC investigation.”

The report cites cases against PPG and Comscore, where the companies’ cooperation contributed to the SEC seeking no civil penalty against PPG and accepting a $5 million settlement from Comscore. Lear noted the report doesn’t include much illustrative detail on those cases, and it leaves one to wonder what Comscore’s penalty might have been without cooperation credit.

— Doug Chartier

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