The SEC imposed fines on U.S. exchange-listed publicly traded companies at the highest levels in years during fiscal year 2022 (which ended September 30, 2022), according to an analysis published Saturday by the Wall Street Journal. As the Journal noted, the fines imposed during the fiscal year on firms accused of wrongdoing “underscore the Biden Administration’s tougher regulatory stance.” The October 29, 2022 Wall Street Journal article, entitled in the online edition “Under Biden Administration, Wall Street Watchdog’s Fines Surge,” can be found here.
The Journal study was limited only to fines imposed during the fiscal year on companies whose shares are listed on U.S. exchanges. The study does not reflect fines imposed on privately held companies or companies whose share are only traded over the counter (OTC).
According to the Journal, fines imposed against U.S.-listed firms in FY 2022 totaled $2.2 billion, an amount that according to the Journal “dwarfs what the commission imposed in recent years.” By way of contrast, the highest recent level of equivalent fines was the total of about $1.2 billion in fiscal year 2018.
The significant total amount of fines in FY 2022 was largely driven by the significant numbers of fines exceeding $100 million during the year. There were 13 fines greater than $100 million in FY 2022, up from FY2021’s total of three cases at that level. As the Journal notes, in some other recent years, the SEC didn’t levy any fines that large.
A key factor in the total number of fines during the fiscal year exceeding $100 million were the massive fines imposed on some of the biggest U.S. and European banks in settlement of claims that the banks’ employees used prohibited messaging apps, such as WhatsApp, to conduct business. The SEC contended that the banks’ use of these apps violated SEC rules that require securities dealers to keep business records for three years. Nine banks paid out $125 million each to settle the claims. (A host of lesser fines paid by other market participants such as brokerage firms brought the total amount of fines paid in connection with the enforcement action to approximately $1.8 billion.)
Other firms paid out very large fines during the fiscal year in connection with a number of other high-profile enforcement actions. For example, in September, Boeing agreed to pay out $200 million to settle charges that it misled investors in its public statements following crashes of its 737 Max jet airliner.
Also in September, Barclays PLS agreed to pay a civil penalty of $200 million to resolve claims that it had raised billions of dollars from investors for the offering and sale of securities that were not properly registered with the SEC. (In addition to the penalty, Barclays also agreed to pay disgorgement and prejudgment interest of $161 million.)
In addition, earlier this year, Charles Schwab & Co. and related entities agreed to pay a civil penalty of $135 million to settle an SEC investigation that the firm had not properly disclosed to investors that investment funds were being allocated in a way that could be less profitable for investors. (In addition to the civil penalty, Schwab agreed to pay $52 million in disgorgement.)
As impressive as the aggregate numbers of fines paid during the year by listed companies are, the total of all fines paid during the year, inclusive of firms that the Journal study omitted, may be even more impressive.
As noted above, the Journal’s study omitted fines paid by private firms and OTC companies. As a result, the Journal’s numbers apparently omit the largest fine paid during the fiscal year. As discussed here, in May, Allianz Global Investors U.S. LLC, an affiliate firm of Allianz SE, agreed to pay a civil penalty of $675 million (as well as $315.2 million in disgorgement and $34 million in prejudgment interest) in settlement of allegations that the firm misled investors about 17 private investment funds. Allianz SE’s shares are not listed on a U.S. exchange, so the Journal’s analysis apparently does not include the Allianz fine.
The SEC’s enforcement division will release its own fiscal year report in coming weeks, and it likely will show that the total amount of fines collected during the fiscal year, inclusive of amounts the Journal’s study omitted, are even greater than the Journal reported.
The Journal article highlights the fact that the SEC has considerable leeway in the amount it imposes on targeted companies. By way of justification for the massive fines, the Journal article quotes Gurbir Grewal, the SEC’s enforcement director, as saying that “the robust penalties levied this year are designed to deter and reduce securities violations, and should not be seen as an acceptable cost of doing business.”
However, the article also quotes an academic, who is a former SEC official, as saying that “it is questionable whether huge corporate penalties ever deter individual bankers and traders from breaking the law in the future.” Instead, the eye-popping number reflected in the fines are more to help satisfy the SEC’s desire for headlines, as a way of looking tough.
In any event, the agency’s pursuit of massive fines is consistent with the agency’s overall approach under the current administration, in which the agency has taken an overall more active and arguably aggressive approach both to regulation and to enforcement. As the Journal noted in an October 26, 2022 editorial (here), the SEC under Chair Gary Gensler has been issuing regulations “at a furious pace.” The editorial notes that the number of rule-makings on the SEC agenda increased by nearly two-thirds between spring 2017 and 2022. In the first eight months of 2022, the SEC proposed 26 new rules, twice as many as in 2020 and 2021. The same activist approach is evident in the SEC’s enforcement activity. To cite one example, in March 2021, Gensler announced that the agency had formed a climate change and ESG task force. As discussed here, during 2022, the task force initiated a number of enforcement actions against listed firms, without waiting for the agency’s various related regulatory initiatives to be completed.
Regardless of the merits or effectiveness of the current administration’s approach, it is clear that reporting companies and other financial marketplace actors need to be aware that there is the cop on the beat is taking an active approach, with significant implications for all firms. The Journal’s report on the sizeable fines paid during the 2022 fiscal year merely underscores the point.