by Robin M. Bergen, Matthew C. Solomon, Alex Janghorbani, Jenny Paul and Samuel H. Chang

On November 6, 2019, the SEC’s Division of Enforcement released its annual report (the “Report”) describing its enforcement actions from fiscal year 2019.[1] Like prior reports, the Report quantifies the Division’s activities in a number of ways and discusses priority areas going forward. The Report also brings front-and-center certain challenges the Division has faced—including difficulties navigating recent Supreme Court decisions that call into question the constitutionality of the SEC’s administrative proceedings and the agency’s ability to obtain disgorgement, as well as the impact of the government shut-down and general resource constraints.

Notwithstanding these challenges, the Report somewhat surprisingly cites a 7% increase from last year in so-called “standalone” enforcement actions[2]—the true metric of the Division’s enforcement footprint because they exclude actions such as issuer delistings that entail little to no investigation. Although the Division brought cases in some areas where it had not been active for some time (including the first standalone Regulation FD case since 2013) and several of the settlements highlighted in the Report plainly resulted from substantial investigations, it is difficult to draw definitive conclusions regarding regulatory intensity from numbers alone in light of the Division’s ongoing initiatives and shifting enforcement priorities. To take one example, actions against investment advisers and investment companies in FY 2019 nearly doubled from the year before, but this increase was largely attributable to 95 settlements that resulted from self-reports in the SEC’s Share Class Selection Disclosure initiative.

While the number of standalone enforcement actions and other quantitative metrics may not be particularly instructive—numbers by their nature can be presented in different ways to show “improvement” by some metrics from the prior year—the allocation of resources and enforcement trends the Report highlighted, both explicitly and implicitly, offer some indicators of the Division’s posture and priorities going forward:

Enforcement Priorities

As with the previous two years, the Division maintained its priority of protecting “Main Street” retail investors, focusing on investment advisers, financial frauds, and threats to investors stemming from new technologies, such as coin offerings. In particular, the Report highlights a return to traditional pre-financial crisis staples of earnings management and accounting fraud, including cases like those against Nissan and Volkswagen that hold individuals accountable and stretch the boundaries of SEC overseas enforcement authority. Notably, the Division’s stated priorities are silent on (and the figures confirm a relative scarcity of) cases relating to large private equity firms, broker dealers, FCPA, and insider trading, all of which were enforcement priorities during Chair Mary Jo White’s tenure. The number of broker-dealer actions, for instance, fell by nearly 40% from FY 2018.

Challenges

The Report also highlights the continuing challenges the Division faces due to staffing constraints and recent adverse Supreme Court decisions, continuing a theme it began to highlight last year of “doing more with less.”[3] It notes that the Division has received authorization to hire more staff, but staffing levels for FY 2019 remained almost 10 percent lower than FY 2016. The Report also notes that the Division has had to prioritize investigations that are most likely to return funds to investors in the wake of the Court’s 2017 ruling in Kokesh v. SEC, which prevents the SEC from seeking disgorgement for conduct older than five years.

While the Report does not address the Supreme Court’s grant of certiorari in Liu v. SEC, announced just days before the Report’s release (discussed in our previous blog post), the Court in that case could limit or eliminate altogether the SEC’s ability to seek disgorgement in district court actions. The impact of such a ruling on the Division’s recoveries could be significant, as it obtained triple the amount in disgorgement over penalties in FY 2019 ($3.2 billion compared to $1.1 billion). In addition, the Division is still hamstrung in its in-house courts, which remain under constitutional assault as a result of the Court’s 2018 decision in Lucia v. SEC. Congress has expressly authorized the disgorgement remedy in administrative proceedings, but the continued constitutional uncertainty surrounding this forum means that it is not a viable substitute for district court, thereby exacerbating the potential impact of Liu on the SEC’s enforcement program.

Quicker Investigations

The Division announced a goal of accelerating the pace of investigations in FY 2020, particularly for financial fraud and issuer disclosure cases. Although the Division did not detail the steps it would take to accomplish this goal, it highlighted cooperation with local and foreign regulatory authorities and the cooperation of companies under investigation as external levers that can help to quicken the pace of investigations. This emphasis on speed is also consistent with our firm’s recent experiences in enforcement investigations, where we have seen an increased willingness on the part of senior staff to engage proactively – including, at times, relatively early in investigations – in order to drive cases to conclusion more quickly.

Non-Monetary Relief

Also notable is the Report’s continued emphasis on the use of non-monetary remedies in enforcement actions, including requiring independent compliance consultants as part of settlements and the increasingly “innovative” and “creative[]” use of undertakings, such as claims processes for harmed ICO investors and ethics and integrity training for audit professionals. While the Report offers no specific guidance or standards as to when those remedies should be expected, the Division noted that undertakings would be “tailored to remedial objectives and specific to the wrongful conduct at issue.” Should the Supreme Court pare down the Commission’s disgorgement authority in Liu, such remedies may become increasingly important for the Division in future enforcement actions.

Conclusion

While in our view it is not particularly useful to attempt to draw conclusions from one year to the next based on a series of metrics that, absent case-by-case analysis, may reveal very little, it is clear that the SEC is working hard to bring cases in its areas of focus—which are somewhat different than those pursued during Chair White’s tenure. This year’s Report confirms that the SEC continues to prioritize protecting retail investors, and is perhaps less interested in investigating and bringing cases in areas where the nexus to retail investor harm is less plain, such as private equity and FCPA. Although the headline numbers paint a bright picture of the Division’s performance in FY 2019, a closer look also reveals headwinds from this past year that will likely continue unabated in fiscal year 2020 resulting, in part, from adverse Supreme Court decisions and staffing constraints. Those headwinds lead us to expect to see increasingly novel uses of non-monetary relief and increased emphasis on conducting investigations efficiently.

[1] U.S. Sec. & Exch. Comm’n, Division of Enforcement 2019 Annual Report (Nov. 6, 2019) (PDF: 1.67 MB).

[2] There were 526 standalone enforcement actions in FY 2019, compared to 490 actions in FY 2018.

[3] See U.S. Sec. & Exch. Comm’n, Division of Enforcement 2018 Annual Report 14 (Nov. 2, 2018) (PDF: 914 KB).

Robin M. Bergen and Matthew C. Solomon are partners, Alex Janghorbani is a senior attorney, and Jenny Paul and Samuel H. Chang are associates at Cleary Gottlieb Steen & Hamilton LLP.

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