skarzynski 1In the following guest post, Tammy Yuen and Ted Carleton of the Skarzynski Black law firm review and analyze the May 9, 2017 Cornerstone Research report entitled “SEC Enforcement Activity: Public Companies and Subsidiaries, Midyear FY 2017 Update” (here), which details the SEC’s enforcement activity during the first half of the current fiscal year. I would like to thank Tammy and Ted for their willingness to allow me to publish their article on this site.  I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Tammy and Ted’s guest post.



Cornerstone Research, in collaboration with the New York University Pollack Center for Law and Business, recently released its midyear review report analyzing the Security & Exchange Commission’s enforcement activity through the first half of fiscal year 2017.   The project, which began tracking enforcement data in 2009, derives statistics from actions filed against publicly traded companies or their subsidiaries.   The data is obtained either from consent decree settlements (for more on the fundamentals of SEC Enforcement procedures see our prior D&O Diary post, here)  or from judgments in court proceedings.


There has been significant speculation about the future of the Commission’s enforcement activity under President Trump-appointed Chairman Jay Clayton’s leadership.  Clayton, who does not come from a governmental background, and whose professional experience is primarily transactional in nature, is viewed as something of a wild card by the regulatory bar.  And while the Commission recently announced the appointment of certain senior officials (such as the general counsel), the head of the Enforcement Division has not yet been announced.  Regardless, before Clayton was confirmed as the Chair, then Acting Chair Michael Piwowar placed the authority to approve subpoenas and orders of investigations exclusively with the Director of Enforcement.  This is a change from the prior policy, which delegated such authority further to Associate Directors within the Enforcement Division.  Limiting the authority to approve the issuance of a subpoena or order of investigation exclusively to the Director of Enforcement may make it more difficult to obtain subpoenas and orders of investigation and curtail enforcement activity though another result may be prolonged informal investigations.   Extended informal investigations may limit coverage under certain D&O policies that only provide coverage for formal investigations of the Insureds.


Importantly, the Cornerstone Research data concerns only enforcement proceedings, i.e. they do not reflect investigations which have been initiated by the Commission following Trump’s inauguration.  Further, virtually all of the data points included in Cornerstone Research’s report are associated with investigative processes initiated many months if not years prior to the finalization of settlement agreements or entry of judgments.  Thus, the Cornerstone Research data should not be seen as reflective of the Clayton Commission’s enforcement priorities, but rather as the legacy of former Chairwoman Mary Jo White’s imperatives.


Also of note with respect to yet-to-be-realized potential changes under the Clayton-led SEC, the Cornerstone Research report indicates that the SEC brought 91% of its enforcement proceedings in administrative courts.   Recently, significant challenges have been mounted—virtually all of which have been unsuccessful—regarding whether the SEC’s administrative courts are constitutionally permissible.  Change may be afoot in this regard, however.  As was previously reported here, House Bill 10, or the Financial Choice Act, proposes to give defendants in SEC enforcement proceedings the opportunity to remove those proceedings to federal court.


Cornerstone Research’s report largely indicates that the Commission’s activity during first half of FY 2017 is consistent with the enforcement data from 2016.  According to the report, the four most prevalent allegation “categories” at the core of 2017 enforcement proceedings were: (1) issuer reporting and disclosure violations; (2) Investment Advisors and Investment Companies Act proceedings; (3) Foreign Corrupt Practices Act violations; and (4) Broker Dealer violations.  Other than with respect to Investment Advisor/Investment Company Act proceedings, which have increased in the past two years, this breakdown of enforcement categories has been consistent since Cornerstone began compiling data in 2009.  Also of note, YTD there were no municipal securities or public pension-related enforcement proceedings, whereas in 2015, those areas represented almost 40% of the Commission’s total enforcement activity.  This is attributable to the Commission’s termination of the Municipalities Continuing Disclosure Cooperation Initiatives, which allowed underwriters and issuers of municipal bonds to self-report violations in exchange for more lenient settlement terms in related enforcement proceedings.


With respect to the value of settlements, the first half of 2017 has not seen any “mega settlements”; that is, of the ten largest settlements since 2010, none were inked in 2017.   Year to date, settlements total $783 million, half of which is attributable to just three settlements, including a settlement with an investment advisor, and two cases involving FCPA allegations.  Of note:  the median settlement in 2017, $6.3 million, is exponentially higher than the figures from 2015 and 2016, or $0.5 million and $3.1 million.  Also, of all of the public company settlements in 2017, 93% involved a monetary component, consistent with the data from 2016.


Cornerstone Research’s report notes that cooperation by defendants in investigations is a consideration the Commission uses in reaching settlements, and Cornerstone tracks those settlements in which cooperation is considered a factor.   In 2017, cooperation was a factor in 63% of settlements, consistent with the data from 2016.  Cornerstone’s report also notes that cooperation is highest in those enforcement proceedings involving FCPA allegations because the Commission seeks to “incentivize cooperation in FCPA violations.”  In this regard, we note that there has been speculation that the SEC will pursue fewer FCPA violations under President Trump because both the President and Chair Clayton reportedly made negative comments about the FCPA and its disproportionate impact on U.S. businesses.


In closing, there are no real surprises in the SEC enforcement proceeding settlement data collected and analyzed by Cornerstone Research for the first half of FY 2017.  Settlement data in 2017 has been in most cases consistent with that from 2016, with the exception of median settlement figures.  But, it would be premature to draw any inferences with respect to those figures, as the settlements may revert to the mean over the second half of FY 2017.   Indeed, for the next few quarters, we expect the data will remain consistent with the Obama-era Commission figures because many of the investigations and related proceedings were initiated under Commissioner White, and enforcement statistics will continue to reflect her regulatory priorities.