During fiscal year (FY) 2016, the SEC filed 868 enforcement actions — a new single-year high — resulting in more than $4 billion in disgorgement and penalties. The SEC attributes the increase in enforcement activity in part to its reliance on new data analytics to uncover fraud. This technique enhances the SEC’s ability to litigate tough cases, and expands its ability to bring actions to better protect investors and financial markets.
What are the numbers?
Of the FY 2016 actions, 548 were independent or “standalone” actions, a record in terms of total as well as percentage (up 61% since 2013). Standalone actions are significant because they exclude follow-on administrative proceedings and routine delinquent filing actions.
Notably, actions against public companies and their subsidiaries have increased dramatically in recent years. The total number of “public company–related actions” rose from 40 in FY 2013, to 54 in FY 2014, 84 in FY 2015, and a record-high 92 in FY 2016.
What’s the SEC’s focus?
According to a recent report by the Securities Enforcement Empirical Database (SEED) — a collaboration between the NYU Pollack Center for Law & Business and Cornerstone Research — issuer reporting and disclosure claims were the most common allegations in public company–related enforcement in FY 2016. They represented 26% of claims.
Issuer reporting and disclosure claims have topped the list in five of the last seven fiscal years. Foreign Corrupt Practices Act claims were most common in FY 2011 and municipal securities / public pensions claims topped the list in 2015.
In FY 2016, the SEC stepped up its efforts to target violations by investment advisors and investment companies, bringing 19 enforcement actions against these public company–related defendants. Not only does this number represent the most actions ever brought in a year against such defendants, but it’s more than the combined total for the previous three fiscal years.
Do administrative proceedings help?
Another notable finding in SEED’s report is the increasing likelihood that the SEC will bring actions against public company–related defendants as administrative proceedings rather than civil actions in court. In FY 2016, 90% of the Commission’s public company–related actions were brought as administrative proceedings, compared to only 34% six years ago.
As the SEC’s reliance on administrative proceedings has increased, so has the level of cooperation by public company–related defendants. The Commission has long given defendants credit for cooperation, but it launched a formal cooperation initiative in 2010.
The percentage of cases settled with the defendant’s cooperation (based on whether the SEC explicitly mentions “cooperation” in the settlement announcement) has more than doubled since that time, reaching 55% in FY 2016. And cooperation is seen more frequently in administrative proceedings than in civil actions. For example, over the last three fiscal years, 56% of administrative proceedings involved cooperating defendants, compared to only 11% in civil actions.
How common are concurrent settlements?
Most public company–related defendants (97% in FY 2016) resolve SEC enforcement actions with “concurrent settlements” — that is, settlements reached the same day the action was initiated. Historically, concurrent settlements have been the norm in administrative proceedings, but they’re becoming more common in civil actions as well.
For example, in FY 2016, all settlements against public company–related defendants in administrative proceedings were concurrent. In contrast, 67% of settlements in civil actions were concurrent (up from 43% in FY 2015).
Are there other findings?
SEED’s report also found that, from FY 2010 through FY 2016, the top 10 monetary settlements imposed on public company–related defendants totaled more than $3.4 billion. Eight of the 10 settlements involved financial institutions. In addition, three of the top 10 settlements occurred in 2016, with two of the three involving admissions of guilt. This represents a shift from previous years, in which five of the remaining seven actions were settled without admitting or denying guilt.
In FY 2016, the three largest public company–related settlements accounted for more than $1 billion out of $4 billion in total settlements for the year. For more information about the report, visit http://www.law.nyu.edu/sites/default/files/SEC-Enforcement-Activity-FY2016-Update.pdf
It’s not yet certain whether the enforcement trends discussed above will continue in coming years. The answer depends in part on the new presidential administration’s policies and priorities, as well as those of the new SEC Chair.