On November 2, the Securities and Exchange Commission’s Division of Enforcement (the Division) published its 2020 Annual Report (the Report), which details the Division’s fiscal year (FY) ending September 30, 2020, accomplishments, significant actions, and areas of strategic change. Stephanie Avakian, the director of the Division, reflected that “the real story of 2020 was COVID-19” and that the Division “quickly dedicated substantial resources to address the emerging threats presented by COVID-19 and the ensuing dynamic market conditions.” 1
Overall, while the number of enforcement actions was down as compared to last year, both the financial remedies ordered as well as whistleblower amounts awarded far exceeded those in prior years. In FY 2020, the Division brought 715 enforcement actions (as compared to 862 in FY 2019), 405 of which were stand-alone actions (as compared to 526 in FY 2019). The Division obtained judgments and orders of over $4.68 billion in disgorgement and penalties (as compared to $4.3 billion in FY 2019) and returned $692 million to harmed investors (as compared to $1.2 billion in FY 2019). Total monetary relief ordered was $330 million higher than in FY 2019, representing roughly an 8 percent increase. FY 2020 was record-breaking for the Division’s whistleblower program, which resulted in issuance of awards totaling approximately $175 million to 39 individuals.
The majority of the Division’s 405 stand-alone cases concerned securities offerings (32 percent), investment advisory and investment company issues (21 percent), and issuer reporting and accounting and auditing matters (15 percent). Other significant matters concerned broker-dealer misconduct (10 percent), insider trading (8 percent), market manipulation (5 percent), public finance (3 percent), and violation of the Foreign Corrupt Practices Act (2 percent). The percentages of cases in each category remained roughly consistent with the FY 2019 break-down. The Division obtained over 475 bars or suspensions against market participants, suspended trading in the securities of 196 issuers, and obtained 24 court-ordered asset freezes.
The Report reflects the substantial resources the Commission dedicated to protecting retail investors from COVID-19-related misconduct. In March, the Division formed a Coronavirus Steering Committee, and in March and April alone, identified and recommended trading suspensions in the securities of two dozen issuers where questions existed regarding the accuracy of COVID-19-related information.2 From mid-March through the end of the fiscal year, the Division’s Office of Market Intelligence triaged approximately 16,000 tips, complaints, and referrals (representing an approximately 71 percent increase over the same time period in 2019), and the Division opened over 150 COVID-19-related inquires and initiated investigations and recommended several COVID-19-related fraud actions to the Commission.
The Report describes the Division’s initiatives and areas of focus in FY 2020 as follows:
- Focus on financial fraud and issuer disclosure. The Division continued to prioritize matters involving financial statement misstatements, including materially misleading and incomplete disclosures, and focused on the individual executives responsible for those violations. The Division also brought actions against issuers that distort non-GAAP [generally accepted accounting principles] metrics, key performance indicators, and related disclosures. In furtherance of its effort to ensure the integrity and accuracy in financial statements and issuer disclosures, the Division took a proactive, risk-based analytic approach to identifying potential violations. The Division’s Earnings Per Share Initiative uses risk-based data analytics to detect potential accounting and disclosure violations caused by improper earnings management practices to hide weak performance.
- Focus on investment professionals. Identifying misconduct on the part of individual investment professionals, who owe fiduciary duties to retail investors, remains an important area of focus for the Division. Highlighting the importance of disclosures of an investment adviser’s material conflicts of interest, the Share Class Selection Disclosure Initiative was concluded during FY 2020 and resulted in almost 100 investment advisory firms that voluntarily self-reported to the Division to return more than $139 million to investors. Other areas of concern and focus for the Division involved advisers’ use of cash sweep arrangements and the transparency of fee structures of adviser accounts.
The Report also notes the Division’s increasing focus on individual accountability, which it describes as “among the Commission’s most effective methods of achieving deterrence.”3 In FY 2020, 72 percent of the Division’s stand-alone actions involved charges against one or more individuals, including chief executive officers, chief financial officers, chief operating officers, accountants, auditors, and attorneys.
An important development for the Division was the Supreme Court’s June 2020 decision in SEC v. Liu, which affirmed the authority of courts to order disgorgement through their power to order “equitable relief” under Section 21(d)(5) of the Exchange Act. The Report notes that the Court’s decision, which supports the proposition that disgorgement is appropriate to the extent it directly benefits harmed investors, left open some questions (i.e., to what extent disgorgement can be awarded if funds cannot be returned to investors), and it predicts that the Division “may recommend higher penalties in some cases where the statutory scheme permits us to do so.”4
Despite the challenges the Commission faced due to the COVID-19 pandemic, the Division maintained an active year, obtaining record-breaking disgorgement and penalty amounts as well as the highest dollar amount and increase in the number of individuals receiving whistleblower awards. The Report suggests the Division will continue to bring a significant number of enforcement actions, with emphasis on financial fraud, issuer disclosure, and investment professionals. The report also touted the division’s vigilance, ongoing guidance and enforcement actions in response to the unique exigencies created by the pandemic.
We encourage all investment advisers and financial market participants, whether entities or individuals, to continue to review their policies and procedures and ensure the robustness of their compliance programs, and to remain attentive in light of the unique challenges of the pandemic and the Division’s priorities and enforcement activities targeted at maintaining the integrity of the markets and protecting investors. OCIE risk alerts and guidance, which have continued through the pandemic, remain a worthwhile source of information and typically tie into enforcement priorities. As a result, keeping apprised of OCIE risk alerts and guidance, and conducting annual reviews, risk assessments and mock examinations in light of such guidance, will help ensure compliance programs are adequate and tailored. Diligent review of policies and procedures now against available guidance can greatly reduce the likelihood that an investment adviser or financial market participant conducting the review becomes part of the 2021 Annual Report statistics.