The current ongoing federal government shutdown adversely affects the Securities and Exchange Commission with a “very limited number of staff members available” to carry out the agency’s tasks. The SEC handles the enforcement of federal securities laws through overseeing approximately $90 trillion in annual securities trading as well as the activities of over 27,0000 registered entities and self-regulatory organizations. The SEC’s Division of Enforcement investigates into potential securities laws or regulatory violations and recommends any required action against perpetrators. Now, the SEC is reportedly operating at 5.8% and the enforcement division at 8% of capacity. In fact, the Division will take months after the shutdown ends to recover, according to the SEC’s Office of Internet Enforcement’s chief, John Stark. The constraints posed by the government shutdown come after the SEC’s outstanding enforcement and accomplishments in 2018, posted in their second annual report.
Starting with the first 2017 report, the Division assesses the performance of their fiscal year with five core principles in mind. These Division of Enforcement’s five principles are a focus on the Main Street Investor; individual accountability; keep pace with technological change; impose remedies that most effectively further enforcement goals; and continuously assess the allocation of resources. Based on their assessment, SEC’s codirectors Stephanie Avakin and Steven Peikin described the Division of Enforcement’s efforts this year as a “great success”. In evaluating their effectiveness, the Division’s assessment focuses more on the “nature, quality, and effects” of their enforcement actions, rather than just the quantitative metrics.
Nonetheless, the Division did accomplish impressive numeric feats as well despite the constraints of a hiring freeze and the Supreme Court’s 2017 decision in Kovesh v. SEC. The Division has investigated and recommended hundreds of cases alleging misconduct, leading to $794 million returned to harmed investors. Compared to the prior year, the SEC filed more enforcement actions (821) with higher numbers for stand alones (490), follow-on admin proceedings (210) and delinquent filings (121) in 2018. The most common stand-alone enforcement actions involved securities offerings, investment advisors, and issuer reporting as well as disclosure. Despite Kovesh v. SEC limiting the window of time for collecting, the SEC ordered around $2.5 million in disgorgement and another $1.5 million in penalties.
The SEC’s Division of Enforcement’s 2018 two key priorities, as indicated in the report were to protect retail investors and fight cyber-related threats. Given this, the Division formed the Retail Strategy Task Force (RSTF) and the Share Class Selection Disclosure Initiative (SCSD). The RSTF utilized data analytics groups to focus on common issues with retail investors that include fraud involving unregistered offerings, market manipulation, and conflicts of interest. The SCSD uses the voluntary participation of investment advisors to ensure that conflicts of interest related to compensation in the form of 12b-1 fees get disclosed with quick investor money return.
Additionally, the SEC Division of Enforcement 2018 report lists significant enforcement actions, such as a $345 million Ponzi-scheme impacting investors nationwide. The SEC led an enforcement action against Moody’s Investor Services for their failure to define and consistently apply credit rating symbols. Concomitant with individual accountability, the SEC enforced actions against big names that included Tesla’s Elon Musk, Theranos Inc.’s founder Elizabeth Holmes and Walgreens Boots Alliance Inc.’s former CEO Gregory Wasson. Notable insider trading related enforcements include the U.S Congressman Christopher Collins’s alleged tip off his son in advance of news related to adverse clinical trial results. A prominent cyber-related misconduct enforcement was an action against former Yahoo! Inc for failing to disclose a massive data breach.
Overall, the SEC’s 2018 achievements demonstrate their shift in enforcement priorities with more of a focus on protecting retail investors and battling cyber-related conduct. Our securities fraud attorneys only hope that the Securities and Exchange Commission will have the funding to continue their enforcement related-activity at maximum capacity. Now, investors must take extra precautions to stay safe with many financial fraudsters using the government shutdown as an opportunity. For those under investigation, the government shut down may slow down this process, as we all provide ripe opportunity to settle as backlog sets in when the government gets back in business. Our securities attorneys represent financial professions under investigation as well as defrauded investors who hope to recover their losses. If you need assistance with any of these issues, contact our securities attorneys for a free consultation.