Following a record-breaking year in 2014, the number of enforcement actions brought by the SEC in 2015 continued to reach new highs. All signs point to much the same, if not a stronger enforcement division, next year.
In all, according to its latest enforcement results, the SEC filed a record 807 enforcement actions in the fiscal year ending September 2015, obtaining a total of $4.2 billion in disgorgement and penalties. In comparison, the agency brought 755 enforcement actions in fiscal year 2014, resulting in $4.1 billion in disgorgement and penalties.
A legal analysis of SEC enforcement actions brought this year, along with recent speeches given by SEC enforcement staff, provide a pretty clear roadmap of where the enforcement staff will continue to focus its top priorities in 2016. “Making sure you are addressing those issues in your compliance programs is very important,” says Barry Goldsmith, a partner at law firm Gibson, Dunn & Crutcher.
Overall, the Enforcement Division has warned that it will continue to bring its resources to bear across the entire spectrum of the financial industry—from complex accounting fraud and market structure cases to investment adviser and municipal securities cases, microcap fraud, and insider-trading cases. Of the more than 8,000 enforcement actions brought by the SEC since 2003, 1,300 were cases against investment advisers or investment firms, according to the SEC.
Moreover, the SEC is getting more innovative in the ways in which it investigates and uncovers securities law violations. “The Enforcement Division’s leveraging of data, quantitative analytics, and expertise of our other divisions contributed significantly to this year’s very strong results,” SEC Chair Mary Jo White said in a statement announcing the agency’s fiscal year 2015 enforcement results.
“The Enforcement Division’s leveraging of data, quantitative analytics, and expertise of our other divisions contributed significantly to this year’s very strong results.”
Mary Jo White, Chairman, SEC
Perhaps no area of SEC enforcement, however, continues to elicit more angst from compliance, legal, and audit, as well as directors and officers than the agency’s increased focus on holding gatekeepers accountable. “Gatekeepers are integral to protecting investors in our financial system, because they are best positioned to detect and prevent the compliance breakdowns and fraudulent schemes that cause investor harm,” SEC Enforcement Director Andrew Ceresney said in remarks last month at the National Society of Compliance Professionals’ national conference. “When gatekeepers fail to live up to their responsibilities, the Division has held—and will continue to hold—them accountable.”
Between 2010 and 2014, for example, the SEC brought over 70 cases against chief compliance officers. “Compliance officers are particularly vulnerable because with hindsight, one can almost always charge that either an absence of a particular policy or a failure to adequately enforce a policy contributed to the underlying violation,” Jon Eisenberg, a partner at law firm K&L Gates, said in a client alert.
Both White and Ceresney have tried—to no avail—to soothe those fears. Ceresney stressed that the enforcement actions causing concern among the compliance community are “rare instances” and, echoing recent remarks by White, said that compliance officers have little to fear if they perform their responsibilities diligently, in good faith, and in compliance with the law. Enforcement actions are warranted only when the CCOs “conduct crossed a clear line,” Ceresney said.
To compliance officers, however, such reassurance has offered little comfort. “In the abstract, no one need fear enforcement actions if they act diligently, in good faith, and in compliance with the law because there would not be a basis for an enforcement action against anyone in those circumstances,” said Eisenberg. “Unfortunately, these statements suggest that most of the current Commission and enforcement staff look at compliance professionals much like they look at any other potential defendant in an enforcement action.”
SEC FY 2015 ENFORCEMENT RESULTS
Below the Securities and Exchange Commission releases the results of its enforcement efforts for year 2015.
The Securities and Exchange Commission today announced that in fiscal year 2015, it continued to build a strong record of first-of-their-kind cases that spanned the spectrum of the securities industry.
In the fiscal year that ended in September, the SEC filed 807 enforcement actions covering a wide range of misconduct, and obtained orders totaling approximately $4.2 billion in disgorgement and penalties. Of the 807 enforcement actions filed in fiscal year 2015, a record 507 were independent actions for violations of the federal securities laws and 300 were either actions against issuers who were delinquent in making required filings with the SEC or administrative proceedings seeking bars against individuals based on criminal convictions, civil injunctions, or other orders.
In fiscal year 2014, the SEC filed 755 enforcement actions and obtained orders totaling $4.16 billion in disgorgement and penalties. Of the 755 enforcement actions filed in fiscal year 2014, 413 were independent actions for violations of the federal securities laws and 342 were either actions against issuers who were delinquent in making required filings with the SEC or administrative proceedings seeking bars against individuals based on criminal convictions, civil injunctions, or other orders.
The agency’s first-of-their-kind cases included the first action involving: a private equity adviser for misallocating broken deal expenses; an underwriter for pricing-related fraud in the primary market for municipal securities; a “Big Three” credit rating agency; violations arising from a dark pool’s disclosure of order types to its subscribers; an FCPA action against a financial institution; an admissions settlement with an auditing firm; and an SEC rule prohibiting the use of confidentiality agreements to impede whistleblower communication with the SEC.
Source: Securities and Exchange Commission
From a compliance standpoint, companies under the eye of the SEC can help mitigate an enforcement action by having the compliance function play a central role in the company. As part of an investigation, Ceresney said, the Enforcement Division will consider the following questions:
Are compliance personnel included in critical meetings?
Are their views typically sought and followed?
Do compliance officers report to the CEO and have significant visibility with the board?
Is the compliance department viewed as an important partner in the business and not simply as a support function or a cost center?
Is compliance given the personnel and resources necessary to fully cover the entity’s needs?
“Far too often, the answer to these questions is no, and the absence of real compliance involvement in company deliberations can lead to compliance lapses, which, in turn, result in enforcement issues,” Ceresney said.
The SEC’s whistleblower program also remains a high priority. In total, the SEC awarded eight whistleblowers with $38 million in fiscal year 2015, compared to the $35 million awarded to nine whistleblowers in fiscal year 2014. Also this year, the SEC announced its first enforcement action against a company for using improperly restrictive language in confidentiality agreements that appeared to stifle the whistleblowing process.
In that complaint, announced on April 1, KBR required witnesses who were interviewed in certain internal investigations to sign confidentiality statements with language warning that they could face discipline and be fired if they discussed the matters with outside parties without the prior approval of KBR’s legal department.
The SEC said that although KBR didn’t specifically prevent employees from going to the government, it still violated whistleblower protection Rule 21F-17 under the Dodd-Frank Act, which prohibits employers from taking any action that may silence potential whistleblowers from reporting securities law violations to the agency.
Sounding a warning to other companies, the SEC said it will continue to vigorously enforce this provision. Sean McKessy, chief of the SEC’s Office of the Whistleblower, cautioned that “other employers should similarly review and amend existing and historical agreements that in word, or effect, stop their employees from reporting potential violations to the SEC.”
Although the SEC’s enforcement efforts appear to be focused on employers in the financial sector, the KBR action is a lesson to all companies to make sure that their non-disclosure agreements do not prohibit a speak-up culture or have a chilling effect on employees’ rights to report a securities law violation to the SEC.
With more SEC cases filed each year, an increased reliance on data analytics to gather and analyze troves of trading and other data, a stronger and broader focus on whistleblower protections, and a closer eye geared toward the lapses of gatekeepers, including the roles and responsibilities of compliance professionals, 2016 portends to be another busy year for the SEC.