Recent Trends in SEC Enforcements
By Joshua Pena, Senior, Assurance Services
The role of the Securities and Exchange Commission (“SEC,” or “Commission”) as a regulatory agency has been shaped in recent years by the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010. The actions the Commission has adopted in response to these laws continue to have ripple effects in enforcement trends. Here we discuss some of the more important SEC enforcement trends that have emerged in the last few years. In particular, we see an increased reliance on administrative law proceedings, a shift towards seeking admissions of guilt in certain civil action settlements, and an overall robust pursuit of enforcement, as measured by the total number of actions filed.
Continued Reliance on Administrative Law Proceedings
One of the more hotly-contested implications of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) is the pathway it opened for the SEC to bring charges against public companies using in-house administrative law courts. Before the Dodd-Frank Act, the Commission’s use of administrative law proceedings and the imposition of civil penalties was restricted to entities under its direct regulation, such as broker-dealers and investment advisors. The new law expanded the scope of its jurisdiction and ability to impose penalties. Since 2010, the percentage of SEC actions against public companies and subsidiaries that were brought before administrative law judges nearly tripled, rising from 33% in 2010 when the Dodd-Frank Act was passed, to 88% in the first half of 20161. This shift has helped reduce the case-load shouldered by federal district courts, but it has led to complaints that public company defendants no longer face a level playing field.
There are several reasons for these complaints. In-house SEC administrative law proceedings usually are administered under time constraints, leading to claims that counsel has not had time to mount a proper defense. Furthermore, the proceedings do not afford defendants certain rights available in the traditional judicial system, and the outcomes of the proceedings are decided by the SEC’s own administrative law judges, with initial appeals going directly to the Commission itself2. The effect of these factors is reflected in the statistics: from October 2010 to March 2015, 90% of SEC proceedings were successful when brought before an administrative law court, compared to 69% in federal district courts for the same period3.
Shift Toward Requiring Admission of Liability in Limited Cases
Historically, the SEC has entered into civil action settlements on almost exclusively a “no-admit no-deny basis.” Over the last few years, under the leadership of Chair Mary Jo White, the Commission’s attitude on this issue has undergone a significant evolution. In 2012, the SEC began to include references in its settlements to charged parties’ admissions of guilt in cases where the parties had entered a guilty plea in criminal cases running parallel to the SEC’s civil enforcement actions. In 2013, the Commission began pursuing admissions of guilt even in certain cases where criminal charges were absent, or where such changes were alleged but not admitted to by the defendants. Although the vast majority of enforcement actions brought by the SEC are still settled without admission of guilt, the SEC has begun to pursue such admissions in cases it deems to have special significance. This policy shift is attention-worthy, since admissions of guilt tend to garner additional media attention and may do additional harm to the business and reputation of the parties being charged.
The SEC has not set out a clear bright-line for cases where it will require admissions in settlements, but it has put forward certain principles to clarify when admissions are more likely to be pursued. Specifically, Chair White indicated in a September 2013 address that admissions are more likely to be sought where violations impacted a large number of investors, where violations created significant risk to the market or investors, where admissions would assist investors in deciding whether to deal with a particular party, or where the SEC believes that an admission would send an important message to the market4.
Overall Growth in Number of Enforcement Actions
The overall level of scrutiny faced by entities subject to SEC regulation continues to rise unabated in the wake of the 2007-2008 financial crisis. For the fiscal year ended September 30, 2016, the SEC filed a record 868 enforcement actions against the range of individuals and entities subject to its regulation, up from the previous record of 807 in 2015. In addition, the SEC’s whistleblower program initiated by Dodd-Frank awarded over $57 million to 13 whistleblowers, more than all previous years combined5.
In summary, recent trends in SEC enforcement continue to reflect a robust enforcement program. The Commission has demonstrated a preference for administrative law proceedings in the wake of the Dodd-Frank Act. It has begun to pursue admissions of guilt in civil action settlements that it deems to have special significance. Finally, the Commission’s overall enforcement efforts have climbed to record levels, as measured by the overall number of enforcement actions filed.
1. NYU Pollack Center for Law & Business, Cornerstone Research, “SEC Enforcement Activity against Public Companies and Their Subsidiaries,” Midyear FY 2016 Update
2. Ronald Betman, “Trends in SEC Enforcement,” The CPA Journal, March 2016
3. Jean Eaglesham, “In-House Judges Help SEC Rack Up Wins,” Wall Street Journal, May 7, 2015
4. Speech by SEC Chair Mary Jo White, “Deploying the Full Enforcement Arsenal,” September 26, 2013
5. SEC Press Release, “SEC Announces Enforcement Results for FY 2016,” October 11, 2016