15 December 2015
Practice Group(s):
The Year in Review: Ten Trends in SEC Enforcement
Actions
Government
Enforcement;
By: Jon Eisenberg
Securities
Enforcement;
As 2015 winds down, we offer the following observations about 10 important trends in SEC
enforcement actions.
Broker-Dealer;
Global Government
Solutions
1. Increased Number of Enforcement Actions
The number of SEC enforcement actions continues to grow. In FY 2015, the SEC filed 807
enforcement actions, of which 507 were independent actions for violations of the securities
laws and 300 were either follow-on actions (e.g., seeking bars against individuals based on
prior orders) or actions against issuers who were delinquent in making required filings. 1 This
was up from 755 enforcement actions in 2014, of which 413 were independent actions, and
those, in turn, were up from 676 enforcement actions in 2013, of which 341 were
independent actions. Total monetary relief ordered rose from $3.4 billion in 2013 to $4.16
billion in 2014 to $4.19 billion in 2015.
2. More Broker-Dealer Cases, Fewer Issuer Offering Cases
The current Commission enforcement staff is far more focused on broker-dealers than it is
on securities offerings. From FY 2010 to FY 2014, the number of broker-dealer enforcement
cases rose from 70 to 166, while the number of issuer offering cases fell from 144 to 81. 2
That is all the more striking because between 2010 and 2014, the number of initial public
offerings increased by 44 percent from 253 a year to 364 a year, 3 while the number of
enforcement actions involving offerings fell by roughly the same percentage. Over the same
period in which enforcement actions against broker-dealers more than doubled, the number
of broker-dealers fell slightly. 4
3. Reversal of the Trend Towards Directing Contested Cases to
Administrative Law Judges
At least for now, the Commission has reversed the trend towards bringing cases
administratively rather than in federal court. An October 11, 2015, article in the Wall Street
Journal found that in the three months through September 30, 2015, the SEC sent just 11
percent of its contested cases to administrative law judges, down from 40 percent in the like
period of 2014 and down from nearly 50 percent in the second quarter of 2015. 5 This
probably reflects two factors. First, four decisions have held that the SEC administrative law
process is, or likely is, unconstitutional because SEC administrative law judges are “inferior
officers” within the meaning of Article II of the Constitution but are not appointed either by the
President or the head of the agency, as required for inferior officers. 6 Thus, the SEC runs a
substantial risk that decisions by administrative law judges will be found unenforceable.
Second, there has been widespread criticism that the administrative process is an uneven
playing field in which the SEC enjoys home court advantage and that SEC administrative law
The Year in Review: Ten Trends in SEC Enforcement Actions
judges almost always rule in the Commission’s favor. 7 In any event, it now appears that the
SEC will send more contested cases to federal court. The SEC still prevails in most federal
court cases, but federal courts provide a more level playing field and the SEC’s win
percentage is less than it is when it litigates administratively.
4. Increased Reliance on Big Data
Over the past few years, the Commission has significantly increased its ability to analyze
large volumes of data, especially trading data. Indeed, it surpasses the ability of the firms
that it regulates. The Enforcement Division works closely with the recently created Division
of Economic and Risk Analysis. In FY 2015, the two divisions collaborated on over 120
projects involving market manipulation, insider trading, structure products, accounting fraud,
and abusive practices by brokerage firms and investment advisers. 8 The Office of
Compliance Inspections and Examinations (“OCIE”) also relies extensively on its ability to
aggregate and analyze massive amounts of data in its examination program. It relies on
such data to identify firms with aberrant changes in business activities, potential fraudulent or
other suspicious activities, migration of bad actor industry participants, and other possible
indicia of heightened risk.
5. The Jury is Out on the Effectiveness of the Whistleblower Program
Among the many changes contained in the 2010 Dodd-Frank Act was a whistleblower
provision directing the Commission to make monetary awards to individuals who voluntarily
provide original information that leads to successful Commission enforcement actions
resulting in monetary sanctions over $1 million. 9 Awards are required to be made in an
amount equal to 10 to 30 percent of the monetary sanctions collected.
Over the past four years, the number of whistleblower tips grew modestly each year, from
3,001 (FY 2012) to 3,238 (FY 2013), to 3,620 (FY 2014), to 3,923 (FY 2015). 10 Since the
beginning of the whistleblower program, however, awards have been made only in
connection with 16 covered actions. 11 During that same period, the Commission brought
over 2,500 enforcement actions. One individual alone submitted 54 non-meritorious claims
for whistleblower awards, all of which were denied. 12 Whether the benefits of the program
outweigh the distractions from non-meritorious tips remains to be seen.
6. Heightened Risk for Compliance Professionals
Perhaps no issue has provoked more public statements by SEC commissioners and the staff
than its current focus on compliance professionals. In describing its “Accomplishments”
between 2013 and 2015, the SEC recently highlighted the actions it has filed against
“gatekeepers” to hold them “accountable for the important roles they play in the securities
industry.” 13 It described gatekeepers as including “attorneys, accountants, and compliance
professionals.” Between 2010 and 2014, the Commission brought over 70 cases against
chief compliance officers. 14 Commissioner Gallagher recently dissented from two
Commission enforcement actions against chief compliance officers, stating that recent
Commission enforcement actions flew in the face of his concern that the Commission should
tread carefully when bringing enforcement actions against compliance personnel.15
Compliance officers are particularly vulnerable because with hindsight one can almost
always charge that either an absence of a particular policy or a failure to adequately enforce
a policy contributed to the underlying violation. But compliance officers deal with literally
2
The Year in Review: Ten Trends in SEC Enforcement Actions
hundreds of different policies and procedures, and ensuring that every single procedure is
appropriately designed and enforced is not realistic. Chair White and Andrew Ceresney, the
Director of Enforcement, have stated that compliance professionals should not fear
enforcement “if they perform their responsibilities diligently, in good faith, and in compliance
with the law,” 16 but that is little comfort since such judgments are made with hindsight and
are often the types of judgments on which reasonable people may disagree. In the abstract,
no one need fear enforcement actions if they act diligently, in good faith, and in compliance
with the law because there would not be a basis for an enforcement action against anyone in
those circumstances. Unfortunately, these statements suggest that most of the current
Commission and enforcement staff look at compliance professionals much like they look at
any other potential defendant in an enforcement action.
7. Market Structure Issues Continue to Attract Enforcement Attention
As Andrew Ceresney pointed out in a recent speech, the equity markets have been
transformed in less than a decade. 17 Less than a decade ago, the New York Stock
Exchange handled almost 80 percent of the volume for stocks listed on the exchange; today
it handles less than 15 percent of that volume. Today’s equity trading volume is divided
among 11 separate exchanges and 40 dark pool alternative trading systems. In addition,
high frequency trading now accounts for 50% or more of the total market volume. In this new
market structure, the Commission’s enforcement program has been highly focused on
fairness in trading markets, protection of confidential customer order information,
manipulative activities such as spoofing and layering, and policies and procedures to guard
against the risks of direct market access, including the risks of coding errors resulting in the
transmission of erroneous orders.
8. Unclear Effect of “Broken Windows” Policy
In an October 9, 2013 speech, Chair White announced what became known as the “broken
windows” policy, declaring that no infraction is too small to be uncovered and punished and
that “it is important to pursue even the smallest infractions.”18 She stated that violations such
as control failures, negligence-based offenses, and violations of rules with no intent
requirement are examples of the types of cases that the Commission will bring.
It is unclear what impact, if any, the “broken-windows” policy has had on the enforcement
program because, even before the broken-windows speech, the Commission’s enforcement
program was never limited to violations requiring proof of intent. For example, delinquent
filing cases would appear to be the quintessential broken-windows type of case. The
Commission brought 107 such cases in 2014 (the year following the speech), but in the two
full years preceding Chair White’s broken-windows speech it brought 121 and 127 such
cases.19 Thus, the number of delinquent filing cases went down after her broken-windows
speech.
The number of enforcement actions increased from 676 in 2013 to 755 in 2014 and 807 in
2015, and that could be because there are more broken-windows cases. But it is equally
possible this is because of an increase in other types of cases. For example, the number of
market manipulation cases increased from 46 in the year before the broken-windows speech
to 63 in the year after, but manipulation cases are the opposite of what might be
characterized as broken-windows cases.
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The Year in Review: Ten Trends in SEC Enforcement Actions
One indication of broken-windows cases might be the number of referrals originating from
OCIE examinations. In FY 2015, OCIE made 200 enforcement referrals.20 Still, only a small
percentage of OCIE exams result in referrals and the referrals usually involve not minor
deficiencies but allegations of fraud, failure to disclose material information, allocation issues,
failure to properly value illiquid securities, and breach of fiduciary duty. It is by no means
clear that the OCIE enforcement referrals are often broken-windows issues.
The average fine per case changed little between 2013 and 2015it was $5.03 million in FY
2013, $5.5 million in FY 2014, and $5.2 million in FY 2015. That too does not suggest a
significant change from of broken-windows cases.
We suspect that the broken-windows policy has had little impact on the aggregate
enforcement numbers, but that in select areasfor example, short sale violations and
policies and procedure deficienciesthe policy may have resulted in a small number of
message cases that might not have been brought in previous years.
9. Admissions in Settlements Remain the Exception Rather Than the Rule
In June 2013, the SEC changed its policy and decided to require admissions of wrongdoing
in a limited number of settlements. Prior to that, the Commission only required admissions
where there was a parallel criminal proceeding that resulted in an admission. Since the
change in policy, there have been over 30 enforcement settlements with admissionsa very
small fraction of the roughly 700-800 enforcement actions that are brought each year. The
Commission sometimes uses admissions in low-culpability casesfor example, when a
firm’s “blue sheet” responses were deficientin order to emphasize the Commission’s
concerns in an area. It is a way of bringing more attention to a case that otherwise might not
be viewed as noteworthy. In other situations, it requires admissions where it regards the
conduct as particularly egregious, but there are plenty of serious fraud cases that the
Commission settles without an admission. Unfortunately, despite the staff’s articulation of
the factors it considers, there is not a great deal of predictability in this area and, once the
staff decides a settlement should require an admission, there is usually little chance it can be
persuaded to change its position.
10. The Commission Gives Credit for Self-Reporting, but Do Not Expect a
Pass
Andrew Ceresney gave two speeches in 2015 that focused on what credit firms and
individuals get for cooperation, by which he mostly meant voluntarily reporting of wrongdoing
rather than simply acting cooperatively in the Commission’s investigation. 21 Two key points,
however, should be kept in mind. First, it is rare (though not unprecedented) for a
cooperator to get a pass in an enforcement action if it is viewed as having engaged in
wrongdoing. In most instances, the credit is a lower penalty than the staff says it would
otherwise have required to resolve the action against the cooperator. Charges are still
brought, disgorgement is required, and a penalty is usually imposed. Second, for a
corporation to get cooperation credit, increasingly it needs to identify culpable individuals.
These days, the first focus of the SEC and other government enforcement agencies is,
“Where were the individuals?” Indeed, the Department of Justice’s recent issuance of the
Yates Memorandum makes that explicit in both civil and criminal cases. 22
**********
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The Year in Review: Ten Trends in SEC Enforcement Actions
In short, 2015 reveals an aggressive enforcement program, with cases up significantly, a
greater focus on gatekeepers and less focus on offering cases, a reversal of the trend
towards directing contested cases to administrative law judges, increased reliance on the
Commission’s impressive ability to gather and analyze huge amounts of trading and other
data, limited impact to date of the whistleblower program, heightened risk for compliance
professionals, more enforcement attention to market structure issues, only small changes
from the Commission’s “broken windows” policy, very selective use of admissions, credit for
self-reporting but mostly in the form of a penalty reduction rather than avoidance of actions
altogether, and a continued focus on individual liability.
Author:
Jon Eisenberg
jon.eisenberg@klgates.com
+1.202.778.9348
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© 2015 K&L Gates LLP. All Rights Reserved.
1
Press Release, “SEC Announces Enforcement Results for FY 2015 (Oct. 22, 2015), avail. at http://www.sec.gov/news/pressrelease/2015245.html.
Year-by-Year SEC Enforcement Statistics, avail. at https://www.sec.gov/news/newsroom/images/enfstats.pdf.
3
Renaissance Capital, IPO Center, IPO Filings, avail. at http://www.renaissancecapital.com/ipohome/press/ipofilings.aspx.
4
FINRA Statistics, avail. at https://www.finra.org/newsroom/statistics.
5
Jean Eaglesham, “SEC Trims Use of In-House Judges,” The Wall Street Journal (Oct. 11, 2015).
6
Ironridge Global IV, Ltd. v. SEC (N.D. Ga. Nov. 17, 2015); Duka v. SEC (S.D.N.Y. Aug. 12, 2015); Gray Financial Group, Inc. v. SEC
(N.D. Ga. Aug. 4, 2015); Hill v. SEC (N.D. Ga. June 8, 2015). Contra In re Lucia Cos., Inc. (SEC Sept. 3, 2015).
7
Jean Eaglesham, “SEC Faces New Attack on In-House Judges,” The Wall Street Journal (Oct. 21, 2015).
8
U.S. Securities and Exchange Commission, “Fiscal Year 2015 Financial Report” (Nov. 16, 2015) at 16, avail. at
http://www.sec.gov/about/secpar/secafr2015.pdf (hereinafter “2015 Financial Report”).
9
15 U.S.C. §78u-6.
10
U.S. Securities and Exchange Commission, 2015 Annual Report to Congress on the Dodd-Frank Whistleblower Program at 21 (Nov.
2015).
11
Id. at 42.
12
Id. at 14.
13
U.S. Securities and Exchange Commission, “SEC Accomplishments: April 2013 – August 2015,” avail. at
http://www.sec.gov/spotlight/sec-accomplishments-2015.shtml.
14
Public Statement of Commissioner Luis A. Aguilar, “The Role of Chief Compliance Officers Must be Supported” (June 29, 2015), avail. at
http://www.sec.gov/news/statement/supporting-role-of-chief-compliance-officers.html.
2
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The Year in Review: Ten Trends in SEC Enforcement Actions
15
Public Statement of Commissioner Daniel M. Gallagher, “Statement on Recent SEC Settlements Charging Chief Compliance Officers
With Violations of Investment Advisers Act Rule 206(4)-7 (June 18, 2015), avail. at http://www.sec.gov/news/statement/sec-ccosettlements-iaa-rule-206-4-7.html.
16
Andrew Ceresney, “Speech: 2015 National Society of Compliance Professionals, National Conference: Keynote Address (Nov. 4, 2015),
avail. at http://www.sec.gov/news/speech/keynote-address-2015-national-society-compliance-prof-cereseney.html.
17
Andrew Ceresney, “Market Structure Enforcement: Looking Back and Forward (Nov. 2, 2015), avail. at
http://www.sec.gov/news/speech/ceresney-speech-sifma-ny-regional-seminar.html.
18
Chair Mary Jo White, “Remarks at the Securities Enforcement Forum” (Oct. 9, 2013), avail. at
http://www.sec.gov/News/Speech/Detail/Speech/1370539872100.
19
Year-by-Year SEC Enforcement Statistics, avail. at https://www.sec.gov/news/newsroom/images/enfstats.pdf.
20
2015 Financial Report at 25.
21
nd
Andrew Ceresney, “ACI’s 32 FCPA Conference Keynote Address” (Nov. 17, 2015), avail. at http://www.sec.gov/news/speech/ceresneyfcpa-keynote-11-17-15.html; Andrew Ceresney, “The SEC’s Cooperation Program: Reflections on Five Years of Experience” (May 13,
2015), avail. at http://www.sec.gov/news/speech/sec-cooperation-program.html.
22
Memorandum from Deputy Attorney General Sally Quillian Yates, “Individual Accountability for Corporate Wrongdoing” (Sept. 9, 2015),
avail. at http://www.justice.gov/dag/file/769036/download.
6