The Pandemic Has Caused the Number of SEC Enforcement Actions to Decline Sharply in FY 2020

Faegre Drinker Biddle & Reath LLP

Faegre Drinker Biddle & Reath LLP

The SEC’s Division of Enforcement issued its annual report on November 2, 2020. According to the report, fiscal year 2020 saw the SEC file a total of 715 enforcement actions, representing a whopping 17% drop from the 862 enforcement actions it brought during the 2019 fiscal year. Indeed, the FY 2020 figure was the lowest in the past six years.  The number of SEC enforcement actions filed against public companies (61) declined to a six-year low, representing the lowest number since 2014.

In the agency’s report, Enforcement Director Stephanie Avakian (the sole remaining person in that position, following the departure of former Co-Director Steven Peikin earlier this year) attributed the sharp decline to disruptions caused by the COVID-19 pandemic and the related need to transition the Division’s staff to working remotely. Although Ms. Avakian commended the staff’s creativity in navigating and responding to the pandemic, which included learning how to take testimony remotely and filing a number of COVID microcap lawsuits and trading suspensions, the COVID crisis clearly impeded Enforcement staff’s members’ ability to complete their investigations, which are precursors to filing new cases.

During the past four years, despite the antiregulatory reputation of the Trump administration, the average number of SEC enforcement actions actually was slightly higher than the average number of such actions brought under President Obama, even including the agency’s numerical decline in 2020. Between 2017 and 2020, the SEC brought an average of 788 enforcement actions per year, which was slightly more than the 740 actions per year brought during the 2009–2016 Obama years. Total collections follow a similar pattern: during the four Trump years, the SEC collected an average of $4.19 billion per year in disgorgement and penalties, slightly higher than the $3.96 billion average per year during the second term of the Obama administration.

To counter criticism of its low number of actions, the SEC noted that the number and amount of whistleblower awards exceeded prior years and that its 2020 collection figure of $4.68 billion dollars represented an all-time high. According to the agency, a record-breaking $3.59 billion of the overall figure was from disgorgement (including prejudgment interest). Although a further $1.09 billion was collected from penalties, this represented a slight decline from the $1.1 billion collected in penalties the prior year.

All in all, the report shows that the Division of Enforcement has been able to adapt to the pandemic and will continue to carry out its investor-protection mission. Given our expectation that the SEC will adopt a more aggressive enforcement posture under the forthcoming Biden administration, and sharpen its focus on public companies, in a departure from the somewhat “industry friendly” approach taken by Chairman Clayton, we anticipate that its enforcement numbers (including cases against public companies) will return to, or exceed, historical levels in 2021.

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.

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