The Enforcement Division of the Securities and Exchange Commission (Division) released its Annual Report1 on November 2, 2020, providing information concerning its activities over the past fiscal year and outlining key priorities going forward. Following co-director Steven Peikin’s departure in August 2020, Stephanie Avakian remains at the helm of the Division, and Marc Berger has been named Deputy Director. The Annual Report notes that the Division’s work was significantly impacted by the COVID-19 pandemic, resulting in fewer enforcement actions compared to the previous fiscal year, although there were increases in enforcement activities in certain areas, particularly in response to “the emerging threats presented by” the pandemic and “the ensuing dynamic market conditions.”
In 2020, the SEC brought 715 enforcement actions, down 17% from last year’s record 862 actions. Despite bringing fewer actions, the SEC obtained a record $4.68 billion2 in disgorgement and civil monetary penalties (up more than 7% from 2019), barred or suspended 477 market participants (down nearly 20% from 2019), and returned $602 million to investors through its distribution program (down nearly 50% from 2019 and down about 25% from 2018). While the Annual Report highlights the increase in monetary recovery, the Division in large part attributes the drop in the number of cases to the challenges posed by the COVID-19 pandemic and the transition to remote work.
The Annual Report emphasizes familiar areas of focus (including financial fraud and issuer disclosure, market integrity threats, abusive trading, and misconduct by investment professionals) as key priorities over the past year, for which the Division has introduced new initiatives to confront. The Annual Report again highlights the Division’s commitment to protecting retail investors and returning money to harmed investors, while referencing the Division’s efforts to take action against individuals – notably by charging individuals in 72% of the Division’s “standalone actions.” The Division also made clear the programmatic importance to the Enforcement program of rewarding cooperation, encouraging whistleblowers, and accelerating the pace of its investigations.
COVID-19 Impacts Enforcement as Division Forms Steering Committee
The impact of COVID-19 is discussed throughout the Division’s Annual Report, and serves as a reminder of its significance both in how the Division has functioned logistically, as well as in how pandemic-related issues have affected the enforcement agenda. In March 2020, the Division formed a “Coronavirus Steering Committee” to coordinate an approach to COVID-19-related issues, both internally and among state and federal agencies. The Steering Committee also identified issues relating to misconduct in the microcap securities markets, insider trading, and financial fraud and issuer disclosure. The Division released a public statement specifically highlighting the increased risk of disclosure of material nonpublic information in light of the pandemic, while Retail Strategy Task Force members sitting on the Steering Committee released an Investor Alert in collaboration with the SEC’s Office of Investor Education and Advocacy warning of COVID-19-related scams.
The Division’s efforts in this area have had an immediate impact. The Division reports that, “[i]n March and April alone, the Commission suspended trading in the securities of two dozen issuers where there were questions regarding the accuracy and adequacy of information related to COVID-19 that those issuers injected into the marketplace, including claims about potential COVID-19 treatments, the manufacture and sale of personal protection equipment, and disaster-response capabilities.” From mid-March until the end of the fiscal year, the Division triaged approximately 16,000 tips, complaints and referrals, which represents a 71% increase from 2019. During this period, the Division opened over 150 inquiries and investigations related to COVID-19 issues.
Other Areas of Focus in 2020
The Division outlined several areas of focus in fiscal year 2020, including the familiar emphasis on combatting financial fraud and policing the adequacy of issuer disclosures. The Division announced a new EPS (earnings per share) Initiative, which uses risk-based data analytics to identify earnings management misconduct resulting in accounting or disclosure violations. By September, the Division announced its first settlements for alleged improper accounting practices resulting from this initiative. The Division further emphasized its traditional role in bringing actions against entities and individuals for making incomplete or materially misleading disclosures.
The dramatic increase in activity of the Division’s whistleblower program was among the most notable developments of 2020 from a fiscal perspective. Despite the 17% decrease in the number of enforcement actions, the decade-old whistleblower program had a record year, with 39 individuals being awarded approximately $175 million. Both figures are Division records, and the number of individuals who were issued awards was three times higher than the previous record. The year also saw the SEC’s largest whistleblower award ever – approximately $114 million to a single individual.
Actions against investment professionals, particularly those that interact with retail investors, remain a focus of the Division. While the Division concluded its Share Class Selection Disclosure Initiative, which resulted in almost 100 investment advisory firms voluntarily self-reporting, the Division continues to focus on investment advisers’ fiduciary obligation to disclose material conflicts of interest, including those related to the use of cash sweep arrangements and to wrap fee programs. The Division announced settlements for the failure to disclose conflicts related to revenue sharing from cash sweep money market funds, as well as for misleading wrap fee clients regarding trade execution costs they incurred.
The Division also continues to emphasize its role in addressing market structural issues and preserving market integrity. The Annual Report notes, in particular, the Division’s focus on the “pre-release” of American Depository Receipts (ADRs). While “pre-release” allows ADRs to be issued without foreign share deposits under certain circumstances, the Division has brought actions against 15 firms and four individuals since late 2018, ordering more than $432 in disgorgement and penalties, as a result of alleged misconduct in this area. The Division also is active in cases involving order routing practices and addressing improper conduct in the credit rating process.
Looking Ahead to 2021
Now that the SEC has largely adjusted to remote work, fiscal year 2021 likely will see a return to pre-pandemic levels of enforcement activity, including through remote interviews, testimony, depositions, Wells meetings, and perhaps litigation to the extent allowed by public health protocols. However, given the logistical difficulties associated with in-person trials during the COVID-19 pandemic, it is possible that the Division may be more inclined to settle a case that it otherwise would pursue through trial.
One further factor indicating that the Division will be quite active in 2021 – less than one week after the Division issued its Annual Report, Joe Biden was projected to be the winner of the 2020 presidential election. With the change in the administration, it appears likely that the Division will be at least as active, if not more active, under an SEC chair chosen by President-elect Biden, as SEC Chairman Jay Clayton announced on November 16 he would step down as chairman by the end of 2020. For similar reasons, it also is likely that the Division will focus more on cases involving large financial institutions, while not abandoning its focus on protecting retail investors. In particular, it may be expected that investment adviser and investment company actions will return to former levels in 2021. These actions had declined precipitously in numbers in 2020, due in part to a significant number of self-reports in 2019 in connection with the Share Class Selection Disclosure Initiative.
In addition, further developments are expected regarding the extent of the SEC’s ability to seek disgorgement in its cases resulting from the June 22, 2020 Supreme Court decision in Liu v. SEC, which upheld, but limited, the SEC’s power to seek disgorgement.3 Following the Court’s 2017 decision in Kokesh v. SEC, which held that disgorgement is subject to a five-year statute of limitations, in Liu the Court affirmed the SEC’s disgorgement powers generally, but required that disgorgement must: be for the benefit of victims harmed by the relevant misconduct; not be based on joint-and-several liability; and exclude any legitimate expenses that had been incurred by the defendant. These limitations on disgorgement will continue to be litigated (or, in the case of settled actions, negotiated), and the Annual Report notes the Division will adjust its approach to “changes in the balance between penalties and disgorgement,” and likely will seek “higher penalties in some cases where the statutory scheme permits” it to do so.
Fiscal Year 2020 was a year marked by COVID-19’s impact on the Division’s enforcement activities. Enforcement activity, especially involving large financial institutions, is expected to rise in the coming year broadly, both because of the Division’s adjustment to remote work and because of the projected result of the 2020 U.S. presidential election.
1) The factual statements in this OnPoint are derived from the content of the Division’s Annual Report and other public sources.
2) In FY 2020, 81% of the “Total Money Ordered” derived from the SEC’s largest (top 5%) cases – up significantly from 70% the previous year.
3) For further analysis, please refer to Dechert OnPoint, The Supreme Court Affirms, But Limits, The SEC's Disgorgement Authority.