This week, the SEC Enforcement Division issued its annual report on its enforcement actions in Fiscal Year 2017 and its priorities for the future.
The SEC whistleblower office will put out a separate report, but the enforcement division noted that the SEC reviewed more than 16,000 tips and more than 20,000 reports of suspicious activity by broker-dealers. It will be interesting to see how many of the tips were through a Form TCR filed with the SEC whistleblower office versus tips provided through other methods. In past years, there have been roughly 4,000 Form TCRs filed.
Overall, the SEC had a good year in its enforcement actions in Fiscal Year 2017. The period of the report covers from October 2016 to September 2017, so it includes the last three months of President Obama’s term.
Over this period, the SEC brought 754 actions and obtained judgments and orders for more than $3.7 billion in disgorgement and penalties. Of the 754 actions, 446 were standalone actions in federal court or administrative proceedings, 196 were follow-on proceedings seeking criminal punishment or to bar an individual from securities involvement after another proceeding, and 112 were proceedings to deregister public companies for delinquent filings.
The SEC report also detailed the types of cases that were brought. The majority of actions were for issuer reporting (such as failure to report or accounting fraud), securities offerings and actions against investment advisors. Actions involving broker-dealers or cases involving insider trading and market manipulation made up the next tier of enforcement actions. In its list of noteworthy enforcement actions, it noted segments of cases involving a direct impact on retail investors, cyber-related misconduct, insider trading, issuer reporting/auditor misconduct, and other noteworthy actions (top two in this category were FCPA actions).
In FY2017, the SEC distributed a record $1.07 billion to harmed investors. A significant percentage of these funds were distributed from four funds setup following actions, although the total collective number of Fair Funds and Disgorgement Funds were over 50. The amount that the securities regulator is able to return to investors in the future will likely be limited by the Supreme Court’s decision in Kokesh v. SEC, which limited the period for disgorgement to the term of the statute of limitations (generally five years).
The SEC also noted noted five core principles. Of particular interest to our clients and potential whistleblowers will be three of them:
The Enforcement Division reiterated that one of its priorities is to protect the Main Street investor. The SEC formed a Retail Strategy Task Force to address harm to retail investors and announced they will continue to pursue securities fraud that impacts retail investors, including accounting fraud, pump and dump frauds, Ponzi schemes and other violations of the federal securities laws. Later in the document, it added other examples of misconduct to this list, including steering clients to higher-cost mutual funds, abuses in wrap-fee accounts, investment adviser recommendations to hold inverse exchange-traded funds, recommendations of unsuitable structured products to retail investors, and churning client accounts.
One of the priorities of the nation’s primary securities regulator is to keep pace with technology. The SEC noted that it is frequently encountering the broken of stolen inside information on the dark web and market manipulation through the hacking into of the electronic accounts of others. We continue to believe that this is going to be a fertile area for whistleblower tips in the next few years.
The SEC also plans to continue the pursuit of individuals who have engaged in wrongdoing. One or more individuals has been charged in more than 80 percent of the standalone enforcement actions brought by the SEC in the last six months. The focus on individual wrongdoers in addition to institutions will continue to be the rule, rather than the exception. The DOJ announced a similar stance two years ago encouraging an emphasis on individual accountability in the Yates Memo.
Over the next month, we’ll be getting a similar report from the CFTC and the Justice Department on the False Claims Act. Separate reports will be issued for the SEC, CFTC and IRS whistleblower programs, though the timing of these reports is a little less certain. Please stop back when they are posted to see summaries of them and our commentary.