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SEC Releases FY 2019 Enforcement Results: Increases in Investment Advisor Actions and Maintained Focus on Individual Accountability

Yesterday the SEC announced its enforcement results for FY 2019, accompanied by a report from the Co-Directors of its Division of Enforcement.  While the total number of actions increased slightly from 2018, the percentage of cases involving investment advisers or investment companies increased more dramatically, growing from 22% in 2018 to 36% in 2019, with a significant portion of the increase attributable to the SEC’s Share Class Selection Disclosure Initiative. Investment advisory issues accounted for 191 standalone actions in the past year. Insider trading cases decreased slightly from 10% of the actions filed in 2018 (51 actions) to 6% of the 2019 actions (30 actions).  Total penalties and disgorgement were also up, reaching $4.35 billion, notwithstanding Kokesh v. SEC, a Supreme Court decision holding that Commission claims for disgorgement are subject to a five-year statute of limitations. This year’s report described Kokesh as an ongoing challenge for the Commission’s efforts to seek disgorgement.

The increase in actions, though small, was notable in light of this year’s month-long government shutdown and the SEC hiring freeze, which extended through the first several months of FY 2019. The freeze, which may have been the single biggest factor impacting the current Enforcement program, was lifted on April 1, 2019. The 862 total actions and the 526 stand-alone actions brought by the SEC represent the second highest totals ever.

The Annual Report specifically highlighted cases where large investment advisers allegedly charged undisclosed or inappropriate fees to clients, focusing on the fiduciary duties advisers owe to clients. The SEC also noted a case it settled with a large fund adviser, alleging failure to adopt appropriate valuation policies. As we have previously noted, we expect continued SEC attention to valuation issues, especially with respect to unicorns and start-ups, during FY 2020.

The results also indicate that individual accountability continues to be a priority for the agency’s enforcement staff. Excluding Share Class Initiative actions (which, as part of the Initiative, did not charge individuals), 69% of the Commission’s standalone actions included charges against individuals. The Co-Directors of the Enforcement Division asserted that the Division “remained focused on individual accountability by pursuing charges, where appropriate, against executives at all levels of the corporate hierarchy.” Further, the SEC also continues to highlight its work protecting retail or “Main Street” investors. Based on our interactions with senior SEC staff, this focus on protecting Main Street extends to funds that manage pension and retirement fund investments.

The report additionally focused on cases from the Cyber Unit, a unit focusing on computer hacking, distributed ledger technology and other cyber-related threats. Several cases focused on ICOs and digital assets, and the Co-Directors described the Division’s evolving focus as capturing not only fraud matters, but also compliance with securities laws.

Yearly data from 2014 through 2019 is summarized in the table below:

Fiscal Year 2014 2015 2016 2017 2018 2019
Independent/Standalone Actions 413 507 548 446 490 526
Follow-on Administrative Proceedings (i.e., SEC Proceedings initiated following conviction or injunction in District Court) 232 168 195 196 210 210
Delinquent Filings 110 132 125 112 121 126
Total Actions 755 807 868 754 821 862
Disgorgement and Penalties Ordered (in billions) $4.16 $4.19 $4.08 $3.79 $3.95 $4.35

We will continue to examine the report and provide further updates and analysis.

For more insights into the SEC’s focus over the past year, please see our prior posts:

SEC Announces the Formation of Asset Management Advisory Committee

Fund Sponsor’s Fee Calculation Mistake Leads to SEC Enforcement

SEC Announces New Approach to Disqualification Waivers

SEC Fines Fund Manager $5 Million Over Undervaluation of Assets

Rocky Mountain Securities Conference: A Review of Enforcement

DC Circuit Opinion Reaffirms Fiduciary and Disclosure Obligations of Advisers While Rejecting SEC Finding of “Willful” Violations

Fraud Claims Against Startup Founder Involving Secondary Market Sales Demonstrate SEC Focus on Privately-Held Companies

The Top Ten Regulatory and Litigation Risks for Private Funds in 2019

SEC Staff Announces 2019 OCIE Examination Priorities

Valuation of Illiquid Securities as a Focus of Recent Enforcement Actions

© 2019 Proskauer Rose LLP.

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About this Author

Samuel Waldon, Proskauer Law Firm, Washington DC, Corporate Law and Litigation Attorney
Partner

Sam Waldon is a partner in the Litigation Department and a member of the Securities Litigation, White Collar Defense & Investigations and Asset Management Litigation Groups.

Sam’s practice focuses on securities litigation, enforcement and regulatory matters. He represents corporations and financial institutions, and their officers, directors and employees, in investigations, exams, internal investigations and litigation. Sam has in-depth experience in a broad range of Securities and Exchange Commission (SEC) enforcement matters, including...

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Joshua Newville, Proskauer Rose, regulatory enforcement attorney, industry compliance legal counsel, securities exchange commission lawyer
Partner

Joshua M. Newville is a partner in the Litigation Department in New York. His practice focuses on commercial litigation and regulatory investigations. Mr. Newville advises companies and individuals in securities litigation and compliance matters. He also focuses on internal investigations and enforcement matters. Prior to joining Proskauer, Josh was senior counsel in the U.S. Securities and Exchange Commission’s Division of Enforcement, where he investigated and prosecuted violations of the federal securities laws. Josh served in the Enforcement Division’s Asset Management Unit, a specialized unit focusing on investment advisers and the asset management industry.  His prior experience with the SEC provides a unique perspective to help private investment funds and their advisers manage risk and handle regulatory issues.

212-969-3336
Associate

Adam Deming is an associate in the Litigation Department.

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