SEC Enforcement Annual Report
On November 2, 2020, the Securities and Exchange Commission’s Enforcement Division issued its annual report, highlighting the Division’s priorities for the upcoming fiscal year and reviewing the enforcement actions for the prior. Due to challenges related to the COVID-19 pandemic, the SEC reported filing a total of 715 actions for the year — including 405 standalone actions, 180 follow-on actions, and 130 actions for delinquent filings — down 17% from fiscal 2019. Despite the total number of actions being the lowest number since 2013, the financial remedies obtained this year were record-breaking, resulting in nearly $4.7 billion in monetary penalties and disgorgements, an 8% increase over 2019.
Director Stephanie Avakian called fiscal year 2020 “the most challenging year in recent memory” but praised the Enforcement Division’s “agility and its commitment to the SEC’s mission as it moved quickly to address the ongoing crisis.” Outgoing SEC Chairman Jay Clayton noted that in addition to the “core types” of cases generally pursued by the Commission, the Enforcement Division responded to the COVID-19 global pandemic by taking against “wrongdoers who sought to take advantage of the uncertainty and volatility in the markets.” Director Avakian also highlighted the Division’s efforts to focus on issues of diversity, equity, and inclusion, in conjunction with the Office of Minority and Women Inclusion and the Office of the Chairman.
This year’s report highlights the affirmative steps taken by the Enforcement Division to protect against potential fraud related to the pandemic, including forming a Coronavirus Steering Committee to coordinate investigations in the areas of microcap, insider trading, and financial fraud and issuer disclosure. From mid-March through the end of the fiscal year, the Division’s Office of Market Intelligence responded to over 16,000 tips, complaints, and referrals, a roughly 71% increase over the same time period in 2019. Overall, the Division reported that it opened more than 150 COVID-related inquiries and investigations and recommended a number of fraud actions to the Commission.
In addition to the Enforcement Division’s COVID-related efforts and actions, the SEC’s announcement highlighted a number of areas of enforcement focus that we expect will continue to be of priority going forward. Those of note include:
- Financial Fraud and Issuer Disclosure: The SEC maintained its focus on identifying securities laws violations involving different components of the financial reporting process. In particular, the SEC brought a number of actions against companies and their executives involving financial statement misstatements, as well as charging issuers with materially misleading and incomplete disclosures about the issuer’s condition. The report notes that a priority for the Division is recommending actions against issuers that distort non-GAAP metrics and key performance indicators. In this area, the Commission brought actions alleging such behavior against major corporations including Wells Fargo & Co. and BMW AG.
- Insider Trading: The report emphasized the Commission’s continued focus on insider trading and other illegal trading activities. In particular, the SEC specifically highlighted the importance of “robust corporate controls and compliance policies around the use and safeguarding of material nonpublic information.” In addition to classical insider trading actions — including a case charging a former finance manager at Amazon.com Inc. — the Commission brought a number of actions against financial professionals for allegedly misappropriating MNPI that they and/or others then traded on. In addition to insider trading, the SEC’s efforts to curb other abusive trading practices included filing an emergency action and obtaining an asset freeze against 18 traders in a complex scheme to manipulate over 3,000 U.S.-listed securities for approximately $31 million in illicit profits.
- Investment Advisory Actions: These cases accounted for 87 total standalone actions in the past year, which reflects a 15% decrease in the percentage of cases involving investment advisors or companies (down from 36% in 2019 to 21% in 2020). This decrease is due in part to the conclusion of the SEC’s mutual fund share-class disclosure program, which garnered $139 million in restitution from nearly 100 firms. The SEC noted that other areas of concern for advisory clients include potential undisclosed conflicts related to advisers’ use of cash sweep arrangements and transparency of fee structures like “wrap fee programs,” in which clients pay an asset-based “wrap fee” that covers investment advice and brokerage services like trade execution.
- Whistleblowers: The SEC awarded a record $175 million to 39 whistleblowers in 2020, representing both the highest dollar amount and the highest number of individuals awarded in any fiscal year. The Commission noted that process improvements designed to streamline and substantially accelerate the evaluation of claims for whistleblower awards were partially responsible for the increases.
While fiscal year 2020 saw a slight decline in the total number of enforcement actions pursued by the SEC, we expect the Commission to ramp up efforts in Fiscal Year 2021, as the Enforcement Division rebounds and adjusts to changed conditions resulting from the global pandemic. Companies can prepare for an active SEC Enforcement Division by focusing on internal controls and required disclosures, and fostering a culture of compliance.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.