FYI: The SEC’s Division of Enforcement has released its Annual Report on enforcement activity during Fiscal Year 2019 (the year ended September 30, 2019). Much of the report pertains to enforcement activity in areas outside of the financial services industry. However, interesting points summarized in the report involving or impacting financial services include:
- The report recaps the 2 waves of settled cases brought under the mutual fund Share Class Selection Disclosure Initiative, where a total of 95 IA firms voluntarily self-reported and were ordered to return a total of over $135 million to primarily retail investors. Standardized settlement terms were given to IA firms that self-reported failures to disclose conflicts of interest associated with the selection of fee-paying mutual fund share classes when a lower- or no-cost share class of the same mutual fund was available.
- Several actions were mentioned in the report that the SEC brought dealing with digital assets and distributed ledger technology (blockchain). These included settlements with three issuers of digital assets, the terms of which required rescission offers to investors and registration of the “tokens” offered, as well as the SEC’s first litigated action against a digital asset issuer solely for violating registration provisions.
- The report also references a couple of cases intended to highlight the “cooperation credit” provided to companies and individuals involved in the cases who self-reported or cooperated with the SEC in its investigation. The report expressly recognizes the value in providing greater transparency into how cooperation credit is considered and weighed, and says the Division is endeavoring to find additional ways to message what companies and individuals have done to merit the cooperation credit they received. This includes a number of instances where information on cooperation credit has been included in public orders, which the Division anticipates it will continue to do in the future.
- Since its enactment in 2011, the whistleblower program has led to more than $2 billion in financial remedies ordered by the SEC, and 66 whistleblowers have been awarded approximately $387 million.
- Data cited for FY19:
- 862 enforcement actions brought (up from 821 in FY18), 526 of which were of a “standalone” nature (up from 490 in FY18);
- of the 526 “standalone” enforcement actions, the largest category concerned investment companies and investment advisers, where 191 actions (up from 108 in FY18) were brought, comprising 36% of the total (up from 22% in FY18);
- 38 actions (7%) were brought against broker-dealers (down from 63 (13%) in FY18);
- judgments and orders were issued totaling more than $4.3 billion in disgorgement and penalties (up from $3.9 billion in FY18);
- 595 industry bars/suspensions were issued against market participants (up from FY18);
- trading suspensions were ordered in securities of 271 issuers (a slight decrease from 280 in FY18);
- 69% of the “standalone” actions involved charges against one or more individuals (company executives, auditors, attorneys, etc.) (this percentage falls to 57% if the Share Class Initiative settled actions are included).
- The SEC’s two-year-long hiring freeze was lifted on April 1, 2019, and 15 new staff joined the Division of Enforcement in FY19. Even still, combined number of positions in the Division and the number of contractors supporting the Division remains almost 9% lower in FY19 than in FY16.
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