SEC Enforcement Report Highlights Record-breaking Enforcement Year
Commentary by Steven Lofchie
In its annual enforcement report, the SEC touted an increase in enforcement actions compared to the previous year, highlighting, among other things, a record-breaking number, in both size and volume, of monetary penalties and whistleblower awards. The total number of enforcement actions brought forth in fiscal year 2022 was 760, which reflects a 9 percent increase compared to 2021. The SEC reported a total of $6.4 billion in civil penalties, disgorgement and pre-judgment interest, which represents a 67 percent increase during the same period. In its press release, the SEC said that this was in part due to an agency initiative to (i) impose penalties designed to deter future violations, (ii) establish accountability from major institutions and (iii) order tailored undertakings that provide potential roadmaps for compliance by other firms.
SEC Director of Enforcement Gurbir S. Grewal applauded the record-breaking year but said that encouraging compliance is still the agency's focus. "We don't expect to break these records and set new ones each year because we expect behaviors to change," Mr. Grewal said.
Commentary
The combination of a hyper-complicated regulatory system, a remarkably expansive and aggressive rulemaking agenda and a penalty system that rejects proportionality ultimately serves as a tax on society, on businesses, on their owners and on consumers.
The issue of proportionality as to penalties is serious. In one case (see SEC and CFTC Sweep Uncovers "Egregious Misconduct" Related to Off-Channel Business Communications), large fines were levied for using new messaging technology for which there were no developed recordkeeping methodologies. Without any tie between those failures and specific acts of dishonesty, there was a clear lack of proportionality between the underlying violation and the penalty. It is notable that the $1.8 billion penalty amount was not a disgorgement amount; it was simply money that went directly into the government's coffers.
Judging by the SEC's statement, it does not seem that the agency shares the same view of proportionality. Asserting that any amount of penalty is defensible because it acts as a deterrent effectively rejects the concept of proportionality. Rather, the argument is that any penalty amount is OK, without regard to the underlying violation, because it increases fear.
It is reasonable to ask whether the SEC's record-breaking enforcement amounts are cause for celebration or for recalibration.