Select SEC and FINRA Cases and Developments: 2012 Year in Review

by Morgan Lewis

In 2012, the SEC and FINRA continued their vigorous enforcement of the securities laws, rules, and regulations—with cases against broker-dealers, investment advisers, and investment companies accounting for 38% of the SEC enforcement docket and FINRA bringing a record number of enforcement actions against its member firms and associated persons.

The Morgan Lewis Securities Litigation and Enforcement and Investment Management Practices have published an outline highlighting key U.S. Securities and Exchange Commission (the SEC or the Commission) and Financial Industry Regulatory Authority (FINRA) enforcement developments and cases regarding broker-dealers, investment advisers, and investment companies during 2012.[1]

This LawFlash describes important developments in the enforcement programs of the SEC and FINRA, sets forth the metrics used to measure enforcement activity, and summarizes key cases brought by regulators. The full 2012 Year in Review is available here.


The SEC again brought a high number of enforcement actions in FY 2012.[2] Down just one case from FY 2011's record, the Commission filed 734 enforcement actions last year. Senior SEC officials credit the reorganization of and reforms in the Division of Enforcement over the last few years for the near record, while noting that the actions represent increasingly complex and diverse cases.[3] In FY 2012, the SEC also obtained orders requiring the payment of $3 billion in penalties and disgorgement, an 11% increase from the amounts ordered in FY 2011. In sum, the metrics used to measure the SEC's enforcement activity clearly demonstrate that the Commission continues to aggressively enforce the securities laws. At the same time, several members of the Commission, as well as some of its critics, called for even more aggressive measures and legislative changes to enhance the SEC's penalty authority.

Some of the key statistics from FY 2012 are set forth below:

  • The Commission brought 734 enforcement actions, just one case fewer than the 735 initiated in FY 2011.
  • The SEC designated 150 actions as National Priority cases, an increase of approximately 30% from FY 2011.
  • The Commission brought 58 insider trading cases, one more than the prior year.
  • The SEC filed 29 actions related to the financial crisis, up six from the 23 filed in FY 2011, representing a 26% increase from the prior year.
  • Continuing the trend in one of the Commission's principal areas—regulation of broker-dealers, investment advisers, and investment companies—the SEC brought more actions against such regulated entities last year than it did in FY 2011. The Commission initiated 134 actions against broker-dealers, compared to 113 in FY 2011. This represents an approximately 19% increase year-over-year. The SEC also topped the number of actions filed against investment advisers and investment companies, bringing 147 such cases in FY 2012, one more than the record number filed in the previous year. Combined, cases against broker-dealers, investment advisers, and investment companies accounted for 38% of the Commission's FY 2012 enforcement docket.
  • The Commission's Office of the Whistleblower was fully up and running in FY 2012 and received 3,001 tips, complaints, and referrals from whistleblowers in all 50 states and 49 foreign countries. The SEC also made its first award to a whistleblower who helped the Commission stop a fraudulent investment scheme.

In addition to the high number of cases brought last year, the other big headline at the SEC was the significant personnel departures after the reelection of President Barack Obama. Chairman Mary Schapiro announced that she was leaving the agency in November, and then-Commissioner Elisse Walter was appointed the new Chair. Ms. Schapiro's leaving was promptly followed by announcements that the Directors of the Division of Corporation Finance and the Division of Trading and Markets, the SEC's General Counsel, and the SEC's Chief of Staff were all departing the Commission. In early January 2013, the Director of the Division of Enforcement also announced his departure from the agency. Late last month, President Obama nominated Mary Jo White, a former U.S. Attorney for the Southern District of New York, to become the agency's next Chair, which some view as a signal that the SEC will continue to aggressively enforce the securities laws. This year will be a year of change at the Commission, with a new Chair and senior staff appointed to fill these vacancies.

Turning to other key developments, late last year, the U.S. Supreme Court granted certiorari in Gabelli v. Securities and Exchange Commission, which will determine when, in civil SEC enforcement cases, an action "accrues" for statute of limitations purposes. Oral argument was heard in January 2013, and a decision is expected by June.

The SEC's "no admit or deny" settlement policy continued to be a source of controversy. The U.S. Court of Appeals for the Second Circuit began its review of the opinion by Judge Jed Rakoff of the U.S. District Court for the Southern District of New York in which he refused to approve a Commission settlement; a ruling should be forthcoming this year. Other judges have also raised concerns about certain SEC settlements.

Senior Commission officials and some members of Congress sought to increase the SEC's penalty authority last year. The Stronger Enforcement of Civil Penalties Act of 2012, which would substantially increase the amount of penalties the SEC could levy on wrongdoers, was proposed in Congress but has not yet been acted upon.

A long-running but important supervisory case involving a broker-dealer's General Counsel came to a conclusion in early 2012, without offering any guidance concerning the definition of a "supervisor." Later in the year, Commissioner Daniel Gallagher expressed a desire for the Commission to more realistically define the contours of what it means to be a supervisor.

Last year, the SEC brought broker-dealer cases in matters arising out of the financial crisis, including actions involving mortgage-backed securities and the marketing and sales of collateralized debt obligations. As it has traditionally done, the Commission was also active in the fraud, insider trading, and short-selling areas. In the asset management space, it continued to focus on misrepresentations in the marketing and sales of advisory services, failure to disclose conflicts of interest, mutual fund fee arrangements, and valuation of assets. Finally, the SEC continued to show interest in cases against securities exchanges and alternative trading systems.


Last year, FINRA reported two records in its enforcement program: it brought more disciplinary actions (1,541) and ordered more restitution to investors ($34 million) than ever before. In fact, many of the traditional metrics used to measure FINRA's enforcement activity showed increases from 2011.[4] Highlights from the 2012 statistics[5] are described below:

  • FINRA filed 1,541 new disciplinary actions against firms and individuals, up from 1,488 cases from the prior year—an increase of 3.6% and, as noted, a record since FINRA was established in 2007.
  • FINRA resolved 1,370 formal actions last year; in 2011, it had concluded 1,287 such cases.
  • FINRA expelled 30 firms from its membership (compared to 21 in the prior year), barred 294 people (versus 329 in 2011), and suspended 549 individuals (an increase over the 475 such actions in the prior year).
  • FINRA reported that it had imposed fines of more than $68 million versus almost $63million in the prior year.
  • FINRA ordered firms and individuals to provide more than $34 million in restitution to customers; in 2011, such orders totaled $19million. Again, the 2012 restitution figure was a record and represents an almost 79% increase year-over-year.

In other 2012 developments, FINRA continued its focus on referring potential instances of fraud that fell outside of its jurisdiction to the appropriate regulatory agency. As part of this effort, the Office of Fraud Detection and Market Intelligence referred 692 matters concerning potential fraudulent conduct to the SEC and other law enforcement agencies.

Although we have not undertaken an empirical analysis of all of FINRA's settlements, anecdotally, it appears that the staff is willing to include references to firm-initiated actions in its settlements and to note the fact that such steps had been taken into account by FINRA in resolving the matter. For example, at least eight cases described in the summaries in our outline contain such information.

In 2012, FINRA posted five Targeted Examination Letters on its website. These sweeps involve conflicts of interest, Alternative Trading Systems, communications relating to nontraded REITs, the prohibition against trading ahead of customer orders, and business continuity plans put into use as a result of Hurricane Sandy. Such inquiries show the breadth of concerns at FINRA last year.

As in the past, last year, FINRA actively investigated matters involving anti-money laundering, structured products, mutual fund sales practices, record retention, regulatory reporting, and research report disclosures and supervision and concluded cases against firms in each of these areas. It also returned to previous areas of interest, including advertised trade volume and mortgage-backed securities. FINRA opened new fronts in the customer arbitration agreement and options order-marking areas.

[1]. This LawFlash and its accompanying outline were prepared by partners Ben A. Indek, Ivan P. Harris, Jennifer L. Klass, and Richard F. Morris; senior counsel Anne C. Flannery; of counsel Mary M. Dunbar; and senior associates Joshua R. Blackman and Julia N. Miller, with substantial assistance from associates David C. Behar, James E. Doench, Kimberly Cuff Hicks, Heather L. Hopkins, Lindsay B. Jackson, Kerry J. Land, F. Mindy Lo, Nicholas J. Losurdo, Namita E. Mani, Julie A. Marcacci, Katherine C. Milgram, Katarzyna Mularczyk, John C. Matthews, Kaitlyn L. Piper, Todd W. Smith, and Zachary E. Vonnegut-Gabovitch and paralegal Tanya Paul. Morgan Lewis served as counsel in certain actions described herein.

[2].The SEC's fiscal year begins on October 1. References to FY 2012 are to the year that commenced on October 1, 2011, and ended on September 30, 2012.

[3]. See Press Release, Sec. & Exch. Comm'n, SEC's Enforcement Program Continues to Show Strong Results in Safeguarding Investors and Markets (Nov. 14, 2012), available here. The statistics in this LawFlash were drawn from this press release or other SEC publications cited in our outline.

[4]. In contrast to the SEC, FINRA's fiscal year follows the calendar year; statistics for FINRA reflect the period of January 1, 2012, through December 31, 2012.

[5]. See, Press Release, Fin. Indus. Regulatory Auth., 2012: FINRA Year in Review (Jan. 8, 2013), available here. Unless otherwise noted, FINRA's 2012 statistics are taken from its press release or other materials on its website cited in our outline.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morgan Lewis | Attorney Advertising

Written by:

Morgan Lewis

Morgan Lewis on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.