If you have had the sense that under the current administration the SEC is more active and more aggressive, two reports issued this past week will confirm that your sense is correct. First, on November 15, 2022, the SEC’s Enforcement Division issued its Enforcement Results Report for FY 2022 (ended September 30, 2022), showing that during the fiscal year money ordered in SEC enforcement actions totaled $6.439 billion, the most on record in SEC history. Second, on November 16, 2022, Cornerstone Research, in conjunction with the NYU Pollack Center for Law & Business, issued its report on SEC Public Company-related enforcement activity during FY 2022, which shows that the agency’s actions against public companies increased relative to prior fiscal years and that the agency’s $2.8 billion in aggregate total monetary settlements with public companies was the highest in any fiscal year.
The November 15, 2022 SEC Enforcement Division Report can be found here. The Enforcement Division’s FY 2022 statistical summary can be found here. The November 16, 2022 Cornerstone Research report entitled “SEC Enforcement Activity: Public Companies and Subsidiaries: Fiscal Year 2022 Update,” can be found here. Cornerstone Research’s November 16, 2002 press release about the report can be found here.
The SEC Enforcement Division Report
According to the SEC Enforcement Division’s report, not only was the SEC’s total of $6.439 billion in monetary awards in FY 2022 an all-time high, it represented a massive increase over the $3.852 billion recovered in FY 2021. The FY 2022 total was composed largely of penalty amounts; the $4.194 billion in penalties during FY 2022 was also the highest on record.
The impressive aggregate monetary award totals were increased significantly by huge awards in connection with individual matters during the fiscal year. Thus, for example, a significant portion of the total amount relates to the SEC’s actions against JP Morgan, 15 other broker dealers, and on investment adviser for failure to maintain and preserve word-related text messages. In aggregate, these 17 firms paid $1.235 billion in penalties (representing nearly 20% of the annual total of monetary awards). By the same token, the SEC’s action during the fiscal year against Allianz Global Investors US LLC, in which the agency alleged a fraudulent scheme to conceal risks involved in a complex trading strategy, resulted in an SEC order for Allianz to pay a total of $1.024 billion (of which $675 million represented a civil penalty). These two matters alone accounted for over 35% of the fiscal year’s record total of monetary awards.
The SEC’s report contains a number of portentous messages, as well. For example, the report emphasizes that “individual accountability is a pillar of the SEC’s enforcement program,” and highlights several specific cases in which individual defendants were charged with securities law violations. In a detail that should heighten concerns about the SEC’s recently enacted Compensation Clawback Guidelines, the report specifically notes several cases where corporate executives were ordered to return bonuses and compensation following misconduct at their firms, pursuant to previously existing requirements under the Sarbanes-Oxley Act. The report cites a statement from the SEC Enforcement Division’s Director, Gurbir Grewal, as saying that the Enforcement Division is “working with a sense of urgency to protect investors, hold wrongdoers accountable, and deter future misconduct in our financial markets.”
The report also notes that during the fiscal year, the SEC’s Office of the Whistleblower issued approximately $229 million in 103 awards, making FY 2022 the second highest in terms of dollar amounts and number of awards. The Whistleblower Program also received over 12,300 tips, the highest number during a single fiscal year.
The report also emphasizes that during the fiscal year, the agency brought a number of enforcement actions charging “gatekeepers” with “failing to live up to their heightened trust and responsibility.” In that regard, the report details actions brought during the fiscal year against auditors, lawyers, transfer agents, and others.
In an interesting comment on the agency’s record setting enforcement year, the report notes that it is not the agency’s goal to set similar annual records in the future. To the contrary, the agency hopes that the record levels of monetary rewards will produce a deterrent effect. The report quotes the Enforcement Division head Grewal as saying that “we don’t expect to break these records and set new ones each year because we expect behaviors to change. We expect compliance.”
The Cornerstone Research Report Regarding Public Company Enforcement Actions
According to the Cornerstone Research Report, the SEC filed 68 actions against public companies and their subsidiaries during fiscal year 2022, representing a 28% increase from the 53 actions in FY 2021, and the highest number of annual actions since the total of 95 actions in FY 2019. Interestingly, the agency filed more than three-quarters of the 68 actions in the second half of FY 2022, including 27 actions in September, the last month of the fiscal year, the highest total in any FY final month in the report’s data set.
While the 68 actions in FY 2022 represents an increase in the number of actions compared to the two preceding fiscal years, the FY 2022 total is consistent with the FY 2013-FY 2021 annual average number of actions of 68.
The total monetary settlements in actions against public companies and subsidiaries increased to $2.8 billion, the highest annual total for any fiscal year in the report’s data set. The FY 2022 total of $2.8 billion is significantly higher than the annual average of total public company settlements of $1.7 billion. The average public company settlement during FY 2022 of $42 billion far exceeded the average public company settlement during the period FY 2013-FY 2021 of $29 billion, and the median public company settlement during FY 2022 of $9 billion was three times the $3 million annual median settlement during the period FY 2013-FY 2021.
Discussion
The data reflected in the two reports substantiates that the SEC was active and aggressive during FY 2022, the first full fiscal year of Gary Gensler’s tenure as Chair of the SEC. The SEC clearly wants to communicate that there is an alert and active cop on the beat. The agency is also clearly trying to communicate a number of other messages, including the fact that individuals will be held accountable for wrongdoing and that gatekeepers are answerable as well.
It is worth noting that the agency’s heightened levels of activity under the current administration is not limited just to enforcement activity. The current administration has also been active in terms of proposed rulemaking as well. As the SEC’s Office of the Inspector General noted in an October 13, 2022 report (here), in just the first eight months of FY 2022, the SEC introduced a total of 26 proposed new rulemaking initiatives, higher than the number of rulemakings the agency proposed in any of the preceding five full fiscal years.
While the various statistics clearly evidence that the SEC is currently a very active enforcement and regulatory agency, it could be possible to overstate what the various data show. For example, while the number of enforcement actions against public companies was indeed up during FY 2022 relative to the two prior fiscal years, in four of the fiscal years during the period FY 2013- FY 2021, the annual number of public company enforcement actions was higher than during FY 2022. By the same token, while the monetary awards in connection with SEC enforcement actions during FY 2022 was higher than any prior year, these aggregate recoveries were significantly increased by the significant awards in just two matters.
In other words, while the agency is undeniably more active right now, it would not be fair to say that the agency has somehow gone off the rails or is headed in enforcement levels completely out of whack with what has gone before.
Nevertheless, the SEC enforcement statistics for the FY 2022 taken collectively represent a warning for all companies and firms. The possibility of an SEC enforcement action is clearly something that every company needs to take into account in connection with its operations and financial reporting.
The possibility of an SEC enforcement action is also something that companies need to take into account in connection with their D&O insurance placements as well. While the penalties, fines, and disgorgement associated with most SEC enforcement actions likely would not be covered under the typical D&O insurance policy, the defense costs the company and its executives incur in many instances will be covered, in whole or in part.
The possibility that companies might need its insurance to pay these kinds of fees needs to be taken into account in connection with the company’s D&O insurance limits selection, as these fees often are incurred at the same time as the company is also incurring fees and facing the possibility of separate settlements in connection with related civil actions. In a world where the SEC is as active as the agency is under the current administration, the calculus of limits sufficiency may be a very different matter altogether.