Driven in significant part by the new actions filed as part of the SEC’s Share Class Selection Disclosure Initiative, the number of SEC enforcement actions against public companies and subsidiaries remained at “near-record levels” in the first half of fiscal year 2018, according to a recent report. The report, published by Cornerstone Research in collaboration with the NYU Pollack Center for Law & Business and entitled “SEC Enforcement Activity: Public Companies and Subsidiaries Midyear FY 2019 Update,” states that the enforcement activity levels in the first half of FY 2019 continued “a resurgence of activity that began in the second half of FY 2018.” The report can be found here. A May 15, 2019 press release describing the report can be found here.
The findings in the report are based on database of enforcement actions maintained by Cornerstone Research and the NYU Pollack Center. The database contains data from fiscal year 2010 through the present.
According to the report, the SEC initiated 52 enforcement actions against public companies and subsidiaries in the first half of FY2019, the third-most in any half-year period in the database. By comparison, the half yearly average number of enforcement actions during the period FY2010 through FY2018 was 30. The 52 actions against public companies and subsidiaries in the first half of FY2019 is slightly below the 55 actions in the second half of FY2018 but 225 percent greater than the 16 actions in the first half of FY2018.
The SEC filed the significant number of actions during the first half of FY2019 even though the agency was closed for several weeks during the government shutdown at the end of December and through most of January. The significant number of new enforcement actions against public companies and subsidiaries in the first half of FY2019 reflects a continuing rebound from the decline in the number of actions in the second half of FY2017 and the first half of FY2018.
A significant factor in the level of the SEC’s enforcement activity during the first half of FY2019 was the Share Class Selection Disclosure Initiative. The SEC launched the initiative in February 2018 in “an effort to identify and promptly correct ongoing harm in the sale of mutual fund shares from investment advisors.” On March 11, 2019, the SEC announced settled charges with 79 investment advisors in actions stemming from the initiative. Of the 79 actions, 25 were filed against 27 public companies and subsidiaries. The 25 share class initiative actions against public companies and subsidiaries represented slightly less than half of the total of 52 enforcement actions filed against public companies and subsidiaries in the first half of FY2019. In other words, without the actions resulting from the initiative, there were only 27 enforcement actions filed against public companies and subsidiaries in the first half of FY2019. The share class disclosure initiative was a significant factor in the “near-record” levels of SEC enforcement activity in the first half of FY2019.
As a result of the U.S. Supreme Court’s June 2018 decision in Lucia v. Securities and Exchange Commission, the SEC’s use of its administrative forum. Nevertheless, in the first half of FY2019, the SEC brought all of its enforcement actions against public companies and subsidiaries as administrative proceedings. According to the report, this is the first time this has happened during any half-year period in the database.
Of the actions filed against public companies and subsidiaries in the first half of FY2019, 35 actions (or 67 percent of the total) were filed against companies and subsidiaries in the Finance, Insurance, and Real Estate industry. More than two-thirds of the actions in the Finance, Insurance, and Real Estate industry were the result of the SEC’s share class initiative.
Monetary settlements in SEC enforcement actions against public companies and subsidiaries in the first half of FY2019 totaled $742 million, a 24 percent decrease from the half-year average over the prior three fiscal years. The average monetary settlement decreased from $45 million in the second half of FY2018 to $15 million in the first half of FY2019. The median settlement in the first half of FY2019 was$3 million, or approximately 21 percent of the average during the period, which is generally consistent with historical trends.