The Securities and Exchange Commission has the same problem as any compliance professional: “How do you prove you’re being effective?” The Enforcement Division issued its annual report of its ongoing efforts to protect investors and market integrity.
On one hand, remedying the identified harms committed by bad actors on investors is easy to measure. The missing piece is how effective the SEC was at identifying the bad actors. The second prong is a deterrence to the harmful conduct. What bad acts didn’t happen because the potential bad actor changed his mind?
Rightly, the report shows the quantitative and qualitative activities of enforcement.
The quantitative part is easy to lay out: 821 enforcement actions with $3.945 billion in disgorgement and penalties. That’s up from last year which had 754 actions yielding $3.7 billion.
Those are big numbers that should create some amount of deterrence. How much?
Co-Directors of Enforcement Stephanie Avakian and Steve Peiken de-emphasized the importance of those numbers and chose to focus on qualitative metrics such as “the nature, quality, and effects” of the Division’s enforcement program as a better measure of success. The report lays out five principles that guide the Enforcement Division’s assessment of its performance:
- focus on the Main Street investor;
- focus on individual accountability;
- keep pace with technological change;
- impose remedies that most effectively further enforcement goals; and
- constantly assess the allocation of our resources.
As for the first item, the Annual Report highlights the Retail Strategy Task Force that was formed the past year. The second is the Share Class Selection Disclosure Initiative. “We do not believe the Commission faces a binary choice between protecting Main Street and policing Wall Street. It must do both.”
For individual accountability, the Annual Report notes that firm does not act autonomously. People do the bad things. The enforcement actions were 70% charges against individuals.
We all are challenged with keeping pace with technological change. The Enforcement Division’s Cyber Unit became fully operational during the past year. The Annual Report has a focus on actions against cryptocurrency and ICOs.
The Enforcement Division wants to have a package of remedies to address misconduct. Besides the penalties and disgorgement, the SEC wants to tailor specific relief to address the misconduct. The report notes that the Kokesh decision limiting the periods eligible for disgorgement reduced the dollar amounts.
The SEC is still under an agency-wide hiring freeze that has been in place since late 2016. The Annual Report notes that the number of positions at the Enforcement Division, including the number of contractors supporting the it’s investigations, has decreased by 10% from FY 2016 to FY 2018.
Sources:
- Enforcement Division Annual Report – FY18
- U.S. SEC collects nearly $4 billion in fines, disgorgement in fiscal 2018 by Pete Schroeder
- SEC’s Division of Enforcement Issues 2018 Annual Report by Debevoise & Plimpton
