On November 15, 2022, the Securities and Exchange Commission announced the results of its Division of Enforcement activity for the 2022 fiscal year. Actions speak louder than words and—while the Commission issued several significant “proposed rules” during the past year, including enhanced disclosures about Environmental, Social, and Governance (ESG) investment practices and new disclosure rules for Special Purpose Acquisition Companies (SPACs)—the Division’s actual enforcement activity over the last year is a better indicator of where the SEC is likely to direct its enforcement resources for the upcoming year.
First, how did this year compare to last year? In FY 2022, the Commission filed 760 total enforcement actions, a 9% increase over the previous year. Some of this increase may be due to a slowdown in prior years because of COVID-19. Money ordered in SEC actions, including civil penalties, disgorgement, and prejudgment interest, totaled $6.4 billion, the most on record in SEC history. Civil penalties, at $4.2 billion, were also the highest on record, while disgorgement, at $2.2 billion decreased by 6% from fiscal year 2021. (The decrease in disgorgement may be a result of recent Supreme Court decisions placing some limitations on the SEC’s ability to obtain disgorgement.). Also notable is this year’s number of individual whistleblower awards and the total dollar amounts awarded, both of which were the second highest ever.
Second, what tools does the SEC use to identify enforcement targets and obtain cooperation? The Commission highlights three tools of particular importance.
- Data analytics. The SEC uses sophisticated technology and know-how to detect a variety of market abuses. Several offices within the Division of Enforcement head up these efforts, including the Analysis and Detection Center of the Division’s Market Abuse Unit and the Office of Investigative and Market Analytics. Data analytics allow the SEC to identify a wide array of potential securities law violations.
- Proverbial “carrots” for meaningful cooperation. By way of example, the SEC substantially limited the penalty imposed on Baxter International Inc. for improper intracompany foreign exchange transactions and misstating the company’s income because of Baxter’s self-reporting, cooperation with the investigation, and voluntary remedial measures.
- Whistleblowers. Much of the SEC’s enforcement activity begins with a whistleblower complaint. In 2022, the SEC issued approximately $229 million in 103 whistleblower awards. The whistleblower program in 2022 received a record high number of 12,300 whistleblower tips that alleged wrongdoing.
Third, what substantive areas did the SEC focus its enforcement efforts on in FY 2022? While some of the SEC’s substantive focus involves the usual suspects, several new areas appear to be gaining the SEC’s attention.
- As usual, the SEC trained much of its enforcement activity on issuers and their employees for inaccurate disclosures, as well as auditors and other professionals for violating rules in connection with such disclosures.
- The Commission also appears to be ramping up enforcement efforts in the crypto asset securities space. In May 2022 the SEC announced that it was adding 20 positions to its Crypto Assets and Cyber Unit. The SEC’s more significant crypto actions this year include charges against BlockFi Lending LLC for failing to register the offers and sales of its retail crypto lending product and charges against 11 individuals for their alleged roles creating and promoting Forsage, a fraudulent crypto pyramid and Ponzi scheme.
- Another area of increased enforcement activity is ESG. The Commission issued new proposed rules this year regarding ESG disclosures, which have gotten much attention. But enforcement efforts on this front are also significant, including an action charging BNY Mellon Investment Adviser, Inc. for materially misleading statements and omissions about its consideration of ESG principles in making investment decisions for certain mutual funds.
- Another enforcement area gaining more attention is private fund advisors and associated individuals. The SEC has been particularly interested in undisclosed conflicts of interest, fees and expenses, and controls around material nonpublic information. Perhaps the most significant enforcement action in this space were charges against Allianz Global Investors U.S. LLC and three portfolio managers alleging a fraudulent scheme to conceal the downside risks of its options trading strategy, which caused billions of dollars in losses to more than 100 institutional investors.
- Finally, the Commission continues to bring actions focused on abusive trading activity, including insider trading, market manipulation, and cherry-picking as well as violations of the Foreign Corrupt Practices Act.
Fourth, what are the SEC’s broader enforcement methods to look out for in the coming year?
- The SEC can be expected to seek increased penalties in many cases, require admissions, and impose prophylactic remedies, such as requiring the “retention of compliance consultants” to conduct comprehensive reviews of policies and procedures.
- The SEC will likely continue its focus on individual accountability, described as a “pillar” of its enforcement program. In fiscal year 2022, more than two-thirds of the SEC’s stand-alone enforcement actions involved at least one individual defendant or respondent. One of the more well-known individuals charged in the past year is James Velissaris, former Chief Investment Officer of Infinity Q Capital Management, who was charged with allegedly overvaluing assets managed by the firm by more than $1 billion, while personally pocketing more than $26 million in fees.
- The Division continues to stress that it will refer matters to the criminal authorities when appropriate.
Bottom line: The SEC continues its muscular enforcement activities through enforcement actions that cut across a wide variety of wrongful conduct and actors in the securities markets. Understanding the SEC’s enforcement tools, substantive priorities, and broader goals over the last year provides a guiding path to likely SEC enforcement activity in the year to come.