Yesterday the SEC announced its enforcement results for FY 2019, accompanied by a report from the Co-Directors of its Division of Enforcement. While the total number of actions increased slightly from 2018, the percentage of cases involving investment advisers or investment companies increased more dramatically, growing from 22% in 2018 to 36% in 2019, with a significant portion of the increase attributable to the SEC’s Share Class Selection Disclosure Initiative. Investment advisory issues accounted for 191 standalone actions in the past year. Insider trading cases decreased slightly from 10% of the actions filed in 2018 (51 actions) to 6% of the 2019 actions (30 actions). Total penalties and disgorgement were also up, reaching $4.35 billion, notwithstanding Kokesh v. SEC, a Supreme Court decision holding that Commission claims for disgorgement are subject to a five-year statute of limitations. This year’s report described Kokesh as an ongoing challenge for the Commission’s efforts to seek disgorgement.
The increase in actions, though small, was notable in light of this year’s month-long government shutdown and the SEC hiring freeze, which extended through the first several months of FY 2019. The freeze, which may have been the single biggest factor impacting the current Enforcement program, was lifted on April 1, 2019. The 862 total actions and the 526 stand-alone actions brought by the SEC represent the second highest totals ever.
The Annual Report specifically highlighted cases where large investment advisers allegedly charged undisclosed or inappropriate fees to clients, focusing on the fiduciary duties advisers owe to clients. The SEC also noted a case it settled with a large fund adviser, alleging failure to adopt appropriate valuation policies. As we have previously noted, we expect continued SEC attention to valuation issues, especially with respect to unicorns and start-ups, during FY 2020.
The results also indicate that individual accountability continues to be a priority for the agency’s enforcement staff. Excluding Share Class Initiative actions (which, as part of the Initiative, did not charge individuals), 69% of the Commission’s standalone actions included charges against individuals. The Co-Directors of the Enforcement Division asserted that the Division “remained focused on individual accountability by pursuing charges, where appropriate, against executives at all levels of the corporate hierarchy.” Further, the SEC also continues to highlight its work protecting retail or “Main Street” investors. Based on our interactions with senior SEC staff, this focus on protecting Main Street extends to funds that manage pension and retirement fund investments.
The report additionally focused on cases from the Cyber Unit, a unit focusing on computer hacking, distributed ledger technology and other cyber-related threats. Several cases focused on ICOs and digital assets, and the Co-Directors described the Division’s evolving focus as capturing not only fraud matters, but also compliance with securities laws.
Yearly data from 2014 through 2019 is summarized in the table below:
|Follow-on Administrative Proceedings (i.e., SEC Proceedings initiated following conviction or injunction in District Court)||232||168||195||196||210||210|
|Disgorgement and Penalties Ordered (in billions)||$4.16||$4.19||$4.08||$3.79||$3.95||$4.35|
We will continue to examine the report and provide further updates and analysis.
To view Proskauer’s Private Equity SEC Enforcement Tracker, click here.
For more insights into the SEC’s focus over the past year, please see our prior posts:
SEC Announces the Formation of Asset Management Advisory Committee
Fund Sponsor’s Fee Calculation Mistake Leads to SEC Enforcement
SEC Announces New Approach to Disqualification Waivers
SEC Fines Fund Manager $5 Million Over Undervaluation of Assets
Rocky Mountain Securities Conference: A Review of Enforcement
DC Circuit Opinion Reaffirms Fiduciary and Disclosure Obligations of Advisers While Rejecting SEC Finding of “Willful” Violations
Fraud Claims Against Startup Founder Involving Secondary Market Sales Demonstrate SEC Focus on Privately-Held Companies
The Top Ten Regulatory and Litigation Risks for Private Funds in 2019
SEC Staff Announces 2019 OCIE Examination Priorities
Valuation of Illiquid Securities as a Focus of Recent Enforcement Actions