SEC Enforcement Division Reviews FY 2017 Enforcement Actions

The SEC Enforcement Division (the "Division") released its Annual Report for Fiscal Year 2017. The Division outlined enforcement priorities for the coming year, and provided a review of enforcement-related actions from FY 2017. Division Co-Directors Stephanie Avakian and Steven Peikin shared five "core principles" for the Division:

  • Focus on the Main Street investor: concentrate efforts on protecting retail investors while maintaining the effective regulation of financial institutions and intermediaries;

  • Focus on individual accountability: pursue individual accountability, as it represents the most effective means to deter misconduct;

  • Keep pace with technological change: remain informed and respond appropriately to technological developments, as such developments have increased the prevalence of "cyber-enabled" misconduct;

  • Impose sanctions that most effectively further enforcement goals: evaluate remedies in each individual case to determine the most appropriate sanction; and

  • Constantly assess the allocation of resources: due to the wide scope of enforcement responsibilities and limited staff in the Division, consistent assessments of resource allocation efficiency are necessary to maximize effectiveness.

The Division reaffirmed the objectives and planned functions of two newly established enforcement initiatives: the Cyber Unit and the Retail Strategy Task Force. As previously covered, the specialized Cyber Unit was created to address misconduct in the following areas:

  • market manipulation schemes, including the spread of false information through social media;

  • hacking;

  • violations related to distributed ledger technology (i.e., blockchain) and initial coin offerings;

  • dark web-related misconduct;

  • interference in retail brokerage accounts; and

  • cyber threats to trading platforms.

The Cyber Unit represents a centralized effort to leverage the Division's "cyber-related expertise" and "proficiency in digital ledger technology."

The Retail Strategy Task Force will focus on misconduct that affects retail investors, and will use data analytics and technology to identify and address large-scale misconduct. The Task Force's efforts will concentrate on wrongdoing in the microcap market, Ponzi schemes, and fraud affecting retail investors.

In its retrospective review of enforcement in FY 2017, the Division shared the following:

  • Enforcement actions decreased to 754 from 868 in FY 2016;

  • The most common areas in which standalone enforcement actions were filed include investment advisory issues, securities offerings, and issuer reporting/accounting and auditing matters;

  • Total money ordered through monetary judgements decreased to $3.79 billion, down from $4.08 billion in FY 2016;

  • $1.07 billion was distributed to harmed investors, up from $240 million in FY 2016;

  • 73 percent of standalone actions involved charges against one or more individuals;

  • Trading suspensions increased 55 percent from FY 2016;

  • The Division sought 35 court-ordered asset freezes, up from 33 in FY 2016; and

  • Enforcement actions led to 625 bars and suspensions, down from 650 in FY 2016.

The Division also listed notable enforcement actions issued in other areas, including cyber-related misconduct and insider trading.

Commentary

The Report offers the clearest explanation to date of the Enforcement Division's approach and priorities under the new leadership. The principles of focusing on retail investors, individual accountability, and keeping up with technological change are consistent with earlier public statements by Chair Clayton and Co-Directors Avakian and Peikin. The statement that sanctions will be carefully determined in each individual case and not with a "formulaic or statistics-oriented approach" suggests the Division may be pulling back from the aggressive pursuit of record penalties. The inclusion of resource allocation as a core principle is also noteworthy, as it appears to be an acknowledgement that budget constraints are having a significant impact on the Division.

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