The US Securities and Exchange Commission (SEC) has been operating under a hiring freeze since 2016 and has lost approximately 10% of its workforce over that time. Nevertheless, it has maintained relatively consistent enforcement results. In 2017, the SEC Division of Enforcement (the Division) issued its first annual report. Its 2018 annual report shows a modest increase in enforcement actions year over year. 2019 presents new challenges, including the impact of the Supreme Court’s Kokesh v. SEC
decision and controlling the growing risk of cyber threats.
The Division’s annual report measures success against five guiding principles:
- focus on the Main Street investor
- ensuring individual accountability
- improving technological capabilities
- effectively furthering enforcement goals
- better allocating resources
Following are some highlights from the 2018 annual report.
Main Street investors
The Division demonstrated its focus on protecting Main Street investors in 2018 through two key initiatives. First, it formed a task force focused on types of misconduct that most affect retail investors. Second, the Division began an initiative addressing Share Class Selection Disclosures, which focused on bringing relief to investors harmed by failures to disclose conflicts of interest related to marketing fees and expenses associated with the selection of mutual fund share classes.
A Division cyber unit formed in 2017 focuses on the ever-increasing cyber threat to public companies and their shareholders. The unit became fully operational in 2018. As demonstrated through an increase in enforcement actions, the cyber unit focused on misconduct relating to digital assets and initial coin offerings. The unit also recommended enforcement actions related to registration violations, unregistered broker-dealer activity, and instances in which the purported use of blockchain technology is merely a front for fraud. If the current hiring freeze is lifted, the cyber unit is likely to be an area of growth for the Division.
Improved data analytics
During 2018, the Division worked to improve its use of technology. In the 2018 annual report, the Division discusses its ability “to use proprietary tools to conduct sophisticated data analysis” to pursue a wide variety of misconduct, including insider trading, cherry-picking schemes, and the sale of unsuitable investment products or programs to retail investors. The Division will continue to invest in and expand these capabilities.
The Kokesh decision
The Supreme Court’s 2017 decision in Kokesh v. SEC
, has adversely affected the Division’s ability to collect funds through disgorgement because the Court held that claims for disgorgement are subject to a five-year statute of limitations. This ruling has a significant impact on to matters that have already been filed. The Division estimates that the Kokesh
ruling may result in forgoing $900 million in disgorgement, a substantial amount of which could have been returned to retail investors.
The SEC and the Division intend to continue focus on their guiding principles in 2019.
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