On November 15, 2017, when the SEC Enforcement Division released its annual report detailing its enforcement activity during the preceding fiscal year, the report included a statement by the division’s co-directors detailing the division’s priorities for the coming year. As detailed below, the enforcement statistics in the report clearly reflect an agency in transition. The changes under the new administration are particularly apparent with regard to the agency’s enforcement activities involving publicly traded companies. The Enforcement Division’s annual report can be found here. The division’s November 15, 2017 press release about the report can be found here.
FY 2017 Enforcement Activity
The division’s overall FY 2017 enforcement statistics appear to reflect a drop in enforcement actions compared to the prior fiscal year, but this apparent drop is largely a reflection of activity during the prior year related to the Commission’s Municipalities Continuing Disclosure Cooperation (MCDC) initiative. Thus, with the MCDC actions taken into account, the agency’s 446 standalone actions during the 2017 FY appear to be significantly below the 548 standalone actions in FY 2016. However, if the MCDC actions are disregarded, the 446 standalone actions in FY 2017 are only slightly below the 464 standalone enforcement actions in FY 2016, representing a year-over-year drop of only about 4%. Again disregarding the MCDC actions, the 754 total actions in 2017 is only slightly below the 784 total number of actions in FY 2016, also representing a drop of about 4%.
In terms of monetary recoveries, the enforcement division recovered a total of $3.789 billion during FY 2017, representing a drop of about 7 percent from the $4.083 billion recovered in FY 2016. Interestingly the amount recovered in disgorgements in FY 2017 actually increased slightly compared to the prior year; in FY 2017, the agency recovered $2.957 billion in disgorgements in FY 2017, compared to $2.809 billion in FY 2016. The amount recovered in terms of penalties declined in the most recent year; the agency recovered $832 million in penalties in FY 2017 compared to $1.273 billion in FY 2016. The report details how the vast bulk of the amounts recovered are attributable to a very small number of large cases. In terms of both penalties and disgorgements, well over two thirds of the amounts recovered are attributable to the top 5% largest cases.
Enforcement Trends Involving Public Companies
While the statistics appear to reflect activity levels during FY 2017 largely consistent with the prior year, a more detailed look at the division’s activity reveals significant declines in several activity measures during the second half of the year, particularly with respect to enforcement activity involving public companies.
A November 14, 2017 report from Cornerstone Research and the NYU Pollack Center for Law & Business entitled “SEC Enforcement Activity: Public Companies and Subsidiaries, Fiscal Year 2017 Update” (here) shows that while there were 62 new enforcement actions filed against public companies and subsidiaries in FY 2017, there were only 17 new actions in the fiscal year’s second half, compared to 45 in the year’s first half. As the report notes, “the timing of this drop corresponds with leadership changes at the SEC.”
Overall, the number of new enforcement actions against public companies and their subsidiaries declined by 33 percent in FY 2017 compared to the prior year. While there were 10 FCPA actions filed against public companies and their subsidiaries in FY 2017, only two were filed after February 2017. The decline in the number of FCPA actions corresponds with the departure of the head the SEC’s FCPA unit, who had led the unit since 2011.
In a November 14, 2017 Law 360 article commenting on the SEC’s FY 2017 enforcement activity (here), NYU Law Professor Stephen Choi (one of the contributing authors to the Cornerstone Research and NYU report) also notes a decline in penalties against public companies and their subsidiaries both between FY 2016 and FY 2017 and between the first half of FY 2017 and the second half of the year. In FY 2016, the average public company settlement was $26.7 million in fines and disgorgements and in 2017 it was $21 million. But in the first half of 2017 the average settlement was $23.2 million, compared to only $14 million in the second half.
The Law 360 article also quotes Professor Choi as saying that activity levels and recoveries involving public companies in the second half of the year represent a “pretty dramatic drop” that clearly means that “something has changed.” However, he also cautioned that it’s too early to tell if these sudden declines are due to leadership shakeups at the agency, a drier pipeline of cases, or a broad policy shift in the enforcement program.
The New Administration’s Changing Enforcement Priorities
However the enforcement statistics may be interpreted and whatever they may foretell about future enforcement activity and trends, the enforcement division’s leadership has in fact been signaling a change in approach to enforcement in general. For example, as detailed in an October 26, 2017 Wall Street Journal article (here), SEC Enforcement Divisions co-director Steven Peikin, speaking at a recent securities conference, indicated that the agency will “pivot away from the prosecutorial approach” the agency has pursued since the financial crisis. In particular the agency will drop the “broken windows” strategy of pursuing many cases over even the smallest violations. Because of budget constraints, the Journal quotes Peikin as saying, the agency is going to have to be selective and bring a few cases to send a broader message rather than sweep the entire field.
In the enforcement division’s recent annual report, Peikin and his fellow division co-director, Stephanie Avakian, did lay out their overall enforcement priorities that will guide the agency’s activities going forward. The division’s priorities will be built around five “core principles” that will guide the division’s decision making: focus on the Main Street investor; focus on individual accountability; keep pace with technological change, impose sanctions that most effectively further enforcement goals; and constantly assess the allocation of resources.
The co-directors’ point about individual accountability is reinforced in the statistics in the division’s annual report. Consistent with the co-directors’ statement that “pursuing individuals has continued to be the rule not the exception,” since new SEC Chair Jay Clayton took office earlier this year, one of more individuals has been charged in more than 80% of standalone enforcement actions that the agency has brought. In FY 2017, 73 percent of the agency’s standalone enforcement actions involved charges against one or more individuals, the same percentage as in FY 2016.
With respect to the co-directors’ stated priority to keeping pace with technological change, the division’s report notes that at the end of the fiscal year, the division announced the creation of a Cyber Unit that will focus on what the co-directors called “among the greatest risks facing our securities markets. The unit will focus, among other things, on market manipulation schemes and activities by hackers to access material nonpublic information, as well as violations involving distributed ledger technology and initial coin offerings (ICOs). The division’s September 25, 2017 press release announcing the formation of the Cyber Unit can be found here.
Please also see the accompanying post about SEC whistleblower activity in FY 2017.