by Anat Carmy-Wiechman, Giovanni Patti, and Peter Robau
As the second fiscal year of Chairman Jay Clayton’s tenure at the SEC ends, a look at the Commission’s enforcement actions against public companies and their subsidiaries may help to understand the new enforcement priorities at the SEC. In a new report (PDF: 995 KB), the NYU Pollack Center for Law & Business, in collaboration with Cornerstone Research, investigated recent trends in enforcement via the Securities Enforcement Empirical Database (SEED). Below, we highlight some of the key findings.
The SEC Filed 95 Enforcement Actions Against Public Companies and Subsidiaries in FY 2019
SEED currently provides data for SEC actions initiated against public companies traded on major U.S. exchanges and their subsidiaries from October 1, 2009 through the present.[1] SEED found that the SEC brought 95 new actions against public companies and subsidiaries (out of a total of 526 independent actions) in FY 2019, representing a more than 30% increase over FY 2018. SEED also found that the Commission brought 26 out of the new 95 actions under the Share Class Selection Disclosure Initiative (the “Share Class Initiative”), as described below. Even excluding the actions that were part of the initiative, the number of FY 2019 actions was still higher than the average of 59 actions during the previous fiscal years tracked by SEED (FY 2010 – FY 2018). Notably, the SEC filed 22 actions against public companies and subsidiaries in the last month of the fiscal year (September 2019). As Professor Stephen Choi noted in the report: “In SEED’s 10 years of data, FY 2019 had the highest number of new actions against public companies and subsidiaries. More than half of these new actions targeted investment advisers/investment companies or broker-dealers, reflecting the SEC’s stated focus on retail investors.”
The above figure illustrates the number of SEC actions against public companies and subsidiaries in each fiscal year 2010 to 2019.
The Share Class Selection Disclosure Initiative and Its Impact on SEC Enforcement Activity
The SEC created the Share Class Initiative in February 2018 to “identify and promptly remedy potential widespread violations” by investment advisers of Sections 206(2) and 207 of the Investment Advisers Act of 1940 for failure “to make required disclosures relating to [their] selection of mutual fund share classes that paid the adviser . . . or its related entities or individuals a fee pursuant to Rule 12b-1.” Investment advisers had to self-report by June 12, 2018 to be eligible for the Share Class Initiative. In FY 2019, the SEC filed a total of 26 settled actions against 29 public companies and subsidiaries as part of the Share Class Initiative. The 26 actions represent over a quarter of the total 95 actions against public companies and subsidiaries filed in FY 2019. In addition, SEED found that all 26 actions noted self-reporting. Finally, the average monetary settlement for these actions was $3 million, substantially lower than the average of $21 million for all other actions in FY 2019.
“Investment Adviser/Investment Company” Represented the Most Common Allegation Type
At the outset of SEC Chairman Jay Clayton’s service, the Commission announced “the establishment of a retail strategy task force that will implement initiatives that directly affect retail investors.” Consistent with this announcement, and for the first time in all fiscal years covered by SEED, in FY 2019, Investment Adviser/Investment Company represented the most common allegation type in FY 2019 for a total of 35 actions (including 26 actions related to the Share Class Initiative), accounting for 37% of the total actions against public companies and subsidiaries. As reflected in the below chart, the second and third most common allegations in FY 2019 involved, respectively, Issuer Reporting and Disclosure (a total of 28 actions, accounting for 29% of the actions compared to the FY 2010 – FY 2018 average of 36%) and Broker–Dealer allegations (a total of 15 actions, accounting for 16% of the actions, down from 26% in FY 2018). SEED also found that Investment Adviser/Investment Company allegations in combination with Broker–Dealer allegations (the other allegation type strictly related to the SEC’s goal of protecting retail investors) represented over half of the total actions in FY 2019.
The above figure contains a heat map of the percentages of SEC actions against public companies and subsidiaries for each allegation type from fiscal year 2010 to fiscal year 2019.
The SEC Brought Only 7% of Actions Against Public Companies and Subsidiaries As Civil Actions
The SEC has pointed out that, “[w]hether the Commission decides to bring a case in federal court or within the SEC before an administrative law judge may depend upon various factors.” In August 2019, the Lucia v. SEC case—challenging the constitutionality of protections preventing removal of the SEC’s administrative law judges (ALJs)—was dismissed.[2] After the dismissal, another defendant filed a similar case.[3]
SEED found that the SEC brought only 7% of actions against public companies and subsidiaries as civil actions in FY 2019. The number of civil actions (7) was lower than the average of 16 that SEED tracked in fiscal years 2010 through 2018. SEED also found that, while in the previous fiscal years from FY 2010 to FY 2018 all Investment Adviser/Investment Company actions had been filed as administrative proceedings, in August 2009 the SEC brought the first action with this type of allegation as a civil action. Finally, SEED found that FY 2019 is the second consecutive year in which all actions alleging violations of the Foreign Corrupt Practices Act (FCPA) were brought as administrative proceedings (15 actions). In comparison, only 51% of actions alleging FCPA violations were brought as administrative proceedings prior to FY 2018.
The above figure illustrates the percentages of civil actions and administrative proceedings against public companies and subsidiaries for each fiscal year 2010 to 2019.
The Finance, Insurance, and Real Estate Industry Remains the Most Targeted Industry Division
SEED classifies public companies and parent companies of subsidiaries according to the Standard Industrial Classification (SIC) code. This methodology enables us to look at the number of actions that the SEC brings in different industry divisions. SEED found that, in FY 2019, 58% of all actions targeted the Finance, Insurance, and Real Estate industry, up from an average of 48% of SEC actions in fiscal years 2010 through 2018. SEED also found that more than half of the actions (32 out of 55) in the same industry involved Investment Adviser/Investment Company allegations, including those actions (26) brought under the Share Class Initiative. Finally, SEED found that actions against public companies and subsidiaries qualifying as Commercial Banks (falling within the Finance, Insurance, and Real Estate industry) represented 53% of all actions initiated in FY 2019, the highest of any fiscal year in SEED.
The above figure contains a heat map of the percentages of SEC actions against public companies and subsidiaries for each SIC industry division from fiscal year 2010 to fiscal year 2019.
SEC Settlements: 76% of Defendants Noted As Cooperating with the SEC
Since 2001, the SEC has acknowledged cooperation by defendants. The Commission considers four broad factors when negotiating a settlement with a cooperating defendant: “self-policing, self-reporting, remediation, and cooperation.” SEED measures the latter three factors—as an indication of cooperation by a public company or subsidiary defendant with the SEC—based on whether the SEC acknowledges voluntary reporting or explicitly mentions “remediation” or “cooperation” by the defendant in the settlement announcement.
Using this methodology, SEED found that, in FY 2019, 76% of defendants were noted as having cooperated in settlements with the SEC. This percentage is higher than the average of 51% during the previous fiscal years tracked by SEED (FY 2010 – FY 2018). This high percentage was mainly driven by the actions brought under the Share Class Initiative. Indeed, since self-reporting was a condition of the Share Class Initiative, all of the 29 defendants involved in the initiative cooperated with the SEC. However, SEED found that the percentage of defendants not involved in the Share Class Initiative for which the SEC noted cooperation in FY 2019 was also above the FY 2010 – FY 2018 average, at 68%. In addition, SEED found that in actions with Broker–Dealer allegations, the SEC noted cooperation in 94% of cases in FY 2019 and in actions with Foreign Corrupt Practices Act in 88% of cases.
The above figure illustrates, for each fiscal year from 2010 to 2019, the percentages of SEC actions against public companies and subsidiaries that noted: cooperation and monetary settlement; cooperation and no monetary settlement; no cooperation and monetary settlement; no cooperation and no monetary settlement.
SEC Settlements: Monetary Settlements Totaled $1.5 Billion in FY 2019
SEED tracks all monetary settlements imposed by the SEC on all type of defendants (including individuals and other entities) in actions against public companies and subsidiaries. SEED found that the total amount of monetary settlements in actions against public companies and subsidiaries was $1.5 billion in FY 2019. This amount is consistent with both the average and median of the total during the previous fiscal years tracked by SEED (FY 2010 – FY 2018). SEED also found that monetary settlements imposed in actions against public companies and subsidiaries represented 33% of all SEC monetary settlements for FY 2019 ($1.5 billion out of $4.3 billion).
The above figure illustrates the average monetary settlement and the median monetary settlement in each fiscal year 2010 to 2019.
SEC Settlements: Disgorgement and Prejudgment Interest in Monetary Settlements Totaled $852 Million
SEED found that of the $1.5 billion in monetary settlements imposed in actions against public companies and subsidiaries in FY 2019, $852 million (59%) was from disgorgement and prejudgment interest. This was higher than the average of 51% from the previous fiscal years tracked by SEED (FY 2010 – FY 2018).
The U.S. Supreme Court recently decided to review the SEC’s authority to obtain disgorgement in civil actions.[4] SEED found that in FY 2019 disgorgement and prejudgment interest in civil actions totaled $37 million, or 3% of total monetary settlements. This 3% figure was lower than the comparable average (28%) in the previous fiscal years tracked by SEED (FY 2010 – FY 2018).
The above figure illustrates the percentages of civil penalties and other monetary settlements vs. disgorgement and prejudgment interest against public companies and subsidiaries for each fiscal year 2010 to 2019.
Footnotes
[1] We define public companies as those that traded on a major U.S. exchange as identified by the Center for Research in Security Prices (CRSP) at the time the enforcement action was initiated, or otherwise within the five-year period preceding the initiation.
[2] Order (1) Granting Defendants’ Motion to Dismiss, and (2) Denying Plaintiffs’ Motion for Preliminary Injunction, Lucia v. SEC, No. 18-cv-2692 DMS (JLB) (S.D. Cal. Aug. 21, 2019).
[3] Order Granting Injunction Pending Appeal, Cochran v. SEC, No. 19-10396 (5th Cir. Sept. 24, 2019); Appellant’s Reply Brief, Cochran v. SEC, No. 19-10396 (5th Cir. Aug. 20, 2019).
[4] Petition for a Writ of Certiorari, Liu v. SEC, No. 18-1501 (May 31, 2019).
Anat Carmy-Wiechman is the Associate Director and a past Wagner Fellow at the NYU Pollack Center for Law & Business. Giovanni Patti is the Head of Research for the Securities Enforcement Empirical Database (SEED) at the NYU Pollack Center for Law & Business. Peter Robau is the Wagner Fellow at the NYU Pollack Center for Law & Business.
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