Due to an increase in the number of enforcement actions resulting from an agency initiative during the year, the number of enforcement actions brought by the SEC against public companies was at the highest level in at least ten years, according to a recent report. The report, entitled “SEC Enforcement Activity: Public Companies and Subsidiaries Fiscal Year 2019 Update,” which can be found here, was prepared by the NYU Pollack Center for Law & Business and Cornerstone Research. According to the report, the agency’s public company enforcement action monetary recoveries during the fiscal year were consistent with long-term averages. Cornerstone Research’s November 20, 2019 press release about the report can be found here.
The recent report is based on a review and analysis of the Securities Enforcement Empirical Database (SEED), which is the result of a collaboration between the NYU Pollack Center for Law & Business and Cornerstone Research. The database contains records of 629 SEC enforcement actions initiated against 551 public companies and subsidiaries between October 1, 2009 and September 30, 2019.
As the agency itself recently reported, during FY 2019 the SEC brought a total of 526 independent enforcement actions. According to the recent NYU Pollack Center report, 95 of these 526 independent actions involved public companies or their subsidiaries, accounting for 18% of the total independent actions. The percentage of independent actions involving public companies during FY 2019 was at its highest level in the last seven fiscal years.
The 95 independent actions brought against public companies during FY 2019 was the highest annual number of public company actions in any year in the SEED database. The 95 actions against public companies in 2019 represents an increase from the 72 filed in FY 2018 (about 35%). The 95 public company actions in FY 2019 was also well above the FY 2010-FY 2018 annual average number of public companies actions; the annual average number of public company actions is 59, so the FY 2019 total was about 61% above the ten-year average number of public company enforcement actions.
The elevated number of public company enforcement actions in FY 2019 is due in significant part to the impact of the agency’s Share Class Disclosure Initiative, which was in effect during the year. The initiative addresses investment advisers’ failure to make required disclosures related to fees received in recommending certain mutual funds. 26 of the 95 FY 2019 public company enforcement actions (representing about 27%) were attributable to the Share Class Disclosure Initiative.
Though the Share Class Disclosure Initiative accounts for a significant part of the elevated public company enforcement activity during the fiscal year, the agency’s public company enforcement activity was up compared to long-term trends even if the Share Class Disclosure Initiative actions are disregarded. Thus, of the 95 public company enforcement actions during FY 2019, 69 were unrelated to the initiative, which is about 17% above the FY 2010-FY 2018 annual average number of public company enforcement actions of 59.
More than half of the 95 FY 2019 public company enforcement actions involved either Investment Adviser/Investment Companies (35 actions) or Broker Dealers (15 actions). FY 2019 is the first year in the database in which Investment Advisor/Investment Companies were the most frequent target of public company enforcement actions, representing 37 percent of all public company actions. During the period FY 2010-FY 2018, the average annual percentage of all public company enforcement actions that involved Investment Advisor/Investment Companies was 12%.
The significant number of actions against Investment Advisor/Investment Companies largely is a reflection of the Share Class Disclosure Initiative. Of the 35 Investment Advisor/Investment Company actions, 26 were related to the initiative.
During FY 2019, the SEC brought only 7% of the public company enforcement actions as civil proceedings, with the remaining 93% brought as administrative proceedings. The percentage of public company actions brought as civil proceedings in FY 2019 is tied with FY 2015 for the lowest percentage of actions brought as civil proceeding.
As far as the industries targeted in the public company enforcement actions, 55 of the 95 actions were brought against public company and subsidiary defendants in the Finance, Insurance and Real Estate Industry, representing 58% percent of all public company enforcement actions during the year. The Share Class Disclosure Initiative accounted for 24 of the 55 actions against companies in the Finance, Insurance and Real Estate Sector.
Monetary settlements in FY 2019 public company enforcement actions totaled $1.5 billion, which though down from the FY 2018 total of $2.4 billion, is consistent with the FY 2010-FY 2018 annual average of $1.5 billion. Monetary settlements in public company enforcement actions accounted for about 33 percent of the agency’s total monetary settlement recoveries during the year ($1.5 billion out of $4.3 billion).
The average public company enforcement action settlement during FY 2019 was $16 million, down from the $29 million average public company enforcement action settlement during the period FY 2010-FY 2018. This decrease in the average settlement amount is largely attributable to the Share Price Initiative. Share Price Initiative actions accounted for 29 percent of all public company enforcement actions with monetary settlements in FY 2019. The Share Class Disclosure Initiative actions had an average monetary settlement of $3 million, substantially lower than the average of all other actions in FY 2019 of $21 million.
Of the $1.5 billion in FY public company enforcement action settlements, $852 million (59%) was from disgorgement and prejudgment interest. This was higher than the average of 51% from FY 2010-FY 2018. As I noted in a recent post (here), the U.S. Supreme Court recently agreed to take up the question of the SEC’s authority to obtain disgorgement in civil actions.
In FY 2019 settlements, the SEC noted cooperation by 76 percent of defendants in public company enforcement actions, a record high percentage. By way of comparison, the FY 2010-FY 2018 annual average percentage was 51 percent. Once again, the Share Class Disclosure Initiative accounts at least in part for the increase. Since self-reporting was a condition of the Share Class Disclosure Initiative, all 29 defendants involved in the initiative cooperated with the SEC.