The number of SEC enforcement actions against public companies and their subsidiaries declined in the first half of FY 2018 compared to the comparable year prior period, continuing a sharp downward trend that began in the second half of FY 2017 and falling to the lowest level in years, according to a new report from Cornerstone Research, written in collaboration with the NYU Pollack Center for Law & Business. Monetary settlements during the first half of fiscal 2018 also fell to their lowest level in years. The report, entitled “SEC Enforcement Activity: Public Companies and Subsidiaries, Midyear FY 2018 Update” (here), reports on SEC enforcement activity involving public companies and their subsidiaries for the first half of fiscal 2018, which ended March 31, 2018. Cornerstone Report’s May 15, 2018 press release about the report can be found here.
The report is based on analysis of the collaborating partners’ Securities Enforcement Empirical Database (SEED), which reflects SEC enforcement actions initiated against public company defendants and their subsidiaries between October 1, 2009 and March 31, 2018.
According to the report, the SEC filed 15 new enforcement actions against public companies and their subsidiaries in the first half of FY 2018, representing a 67 percent decline from the 45 enforcement actions the SEC filed in the first half of FY 2017. The number of enforcement actions filed in the first half of 2018 is significantly below the average of 29 enforcement actions filed per half year during the period FY 2010 through FY 2017, and below the median of 26 actions per half year filed during that same time period. The 15 enforcement actions filed against public companies and their subsidiaries in the first half of 2018 is the lowest half year filing total since the first half of FY 2013, when there were 12 filings.
The current trend toward significantly reduced numbers of enforcement actions against public companies and their subsidiaries began in the second half of 2017. In the last half of the 2017 fiscal year, the SEC filed only 17 enforcement actions against public companies and their subsidiaries, compared to 45 actions filed in the first half of FY 2017.
While the SEC has in recent years publicized a heightened focus on individual wrongdoers, the enforcement activity against public companies and their subsidiaries does not necessarily bear this out. Of the 15 enforcement actions filed against public companies and their subsidiaries in the first half of FY 2018, ten (or 67 percent) did not have any individual defendants. The FY 2010-2017 average for enforcement actions with individual defendants is 76 percent. The five actions in FY 2018 that included individual defendants named a total of 12 individual defendants. Nine of the 12 individual defendants held positions as CEO, CFO, or Controller.
The 15 enforcement actions filed against public companies and their subsidiaries in the first half of FY 2018 were concentrated in certain industries. Ten of the 15 FY 2018 (67 percent) public company enforcement actions involved companies in the Finance, Insurance, and Real Estate industries. More than half of the public company and subsidiary actions were filed against companies in these same industry groups in four of the last six fiscal years. Half of the ten first half FY 2018 actions against companies in these industries involved Commercial Banks, “consistent with the trend over the prior three fiscal years.”
The most common allegation type against the defendants in the 15 first half FY 2018 enforcement actions against public company and subsidiary defendants were Issuer Reporting Disclosure (in 27% of cases) and Advisor/Investment Company (also 27%). There were two enforcement actions with FCPA allegations in the first half of FY 2018, compared with a semiannual average of about 5.6 actions during the period FY 2010 through FY 2017.
Of the 15 first half FY 2018 public company and subsidiary enforcement actions, 13 (87 percent) were resolved the same day they were initiated. The FY 2010-FY 2017 average for concurrent resolutions is 90%. In the first half of FY 2018, 56 percent of public company and subsidiary defendants cooperated with the SEC, compared with the FY 2010-FY 2017 average of 50 percent.
Not only were the number of enforcement action filings down in the first half of FY 2018, but monetary settlements “decreased substantially” from prior fiscal years. The highest monetary settlement during the period of $14 million was “by far the lowest maximum monetary settlement in any half year in the database.” The average monetary settlement of $4.3 million is also the lowest half-year average in the database, significantly below the next-lowest semiannual average of $13.3 million in the second half of FY 2015. None of first half 2018 settlements were large enough to make the top ten settlement table.
The majority of the monetary settlements were imposed on the public company and subsidiary defendants, not on individual defendants. The largest monetary settlement imposed on an individual in the first half of FY 2018 was $200,000, whereas the largest monetary settlement imposed on any single entity defendant was $13 million. (The $14 million monetary settlement that was the largest during the period was imposed on three subsidiary defendants.)
The decline during the period from the second half of FY 2017 through the first half of FY 2018 in SEC enforcement actions involving public companies and their subsidiaries is interesting and worthy of note. However, it is important to note at the outset what enforcement action data during this period and involving these kinds of enterprises does not include.
It does not include any enforcement activity involving private enterprises. For example, the data do not include the high-profile enforcement action filed against the high-flying private company Theranos and two of its executives (discussed here), nor does it include the recent significant enforcement activity the SEC has pursued against cybercurrency and ICO companies.
Nor do the data include the high-profile April 2018 enforcement action and $35 million monetary settlement involving Altaba, successor in interest to Yahoo, related to Yahoo’s massive data breach (discussed here), as that enforcement action was filed and resolved after the end of the first half of FY 2018.
All of that said, there is no doubt that the data do reflect a very significant decline in SEC enforcement activity involving public companies and their subsidiaries. The Cornerstone Report itself does not include any speculation on the cause of the decline and whether or not the decline represents changing enforcement priorities under the current administration or whether the agency under the current administration has instituted a new, lower enforcement-focused approach to public company regulation.
It may well be that the lower enforcement figures are simply reflect disruption in enforcement activity due to the change in administration and in the top personnel managing the agency’s enforcement docket. However, it does seem significant that the current significantly reduced level of enforcement activity really began during the second half of FY 2017 and continued through the second half of FY 2018. The timing and persistence of the decline does seem to suggest that more is going on than just a disruption from the change in administration; the decline really does seem to suggest that under the new administration, the agency is taking a significantly different approach to enforcement, at least with respect to public companies and their subsidiaries.
It will be very interesting to watch as the second half of FY progresses to see whether or not the reduced filing trends during the last two fiscal half-year periods continues. The Altaba/Yahoo data breach-related enforcement action does seem to suggest that the agency is prepared to take active enforcement measures in at least some situations. At some point, there will be sufficient data to start to draw some more general conclusions about the SEC’s enforcement priorities and related regulatory approach under the current administration.