2011 Asset Management Year in Review: Select SEC Enforcement Cases and Developments Regarding Investments Advisers and Investment Companies
Morgan Lewis Title
by:Investment Management Practice
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This Outline highlights key U.S. Securities and Exchange Commission (the "SEC" or the "Commission") enforcement developments and cases involving investment advisers and investment companies during 2011.
Summary of Key Statistics and Enforcement Developments
The SEC brought a record number of enforcement actions in FY 2011. In its first complete fiscal year since the Division of Enforcement's extensive reorganization, the Commission filed 735 enforcement actions. Although senior Commission officials continue to caution that statistics alone do not tell the whole story, the measures traditionally used to assess the SEC's enforcement activity demonstrate that, in FY 2011, the Division of Enforcement vigorously pursued securities law violators. Some of the key statistics from FY 2011 are described below:
- Last year, the Commission brought 735 enforcement actions, an 8% increase from the 681 cases initiated in FY 2010.
- At the end of FY 2011, National Priority or High Impact cases represented 5.11% of the Division of Enforcement's active docket up from 3.26% in FY 2010.
- Of particular note is the big jump in cases against investment advisers and investment companies. In FY 2011, the Commission brought 146 enforcement actions in this area. This is a single-year record and represents a 30% increase over the prior year. SEC actions against broker-dealers also increased significantly to 112 cases in FY 2011 from 70 in the prior year. This represents a 60% increase year-over-year. Moreover, cases against investment advisers, investment companies, and broker-dealers represented about 35% of the SEC's total enforcement docket.
- The Division opened 578 formal investigations last year. By comparison, in FY 2010, the SEC issued 531 formal orders of investigation.
- Last year, there were 134 criminal actions relating to Commission cases, down slightly from FY 2010's 139 cases.
- The Commission also works closely with other regulators. In FY 2011, 586 SEC investigations were referred to self-regulatory organizations or other state, federal and foreign authorities for enforcement, up from FY 2010 when 492 such referrals were made. In addition, the SEC increased the number of occasions (772) when it sought assistance from foreign regulatory authorities and it received an increasing number of requests (492) for assistance from such regulators.
- Last year, almost 18.5% of the investigations opened during FY 2011 came from referrals within the Commission or other internal analysis. This represents a slight decrease from FY 2010 (21.9%).
- The Commission sought emergency relief in federal courts in 39 cases; that technique was used 37 times in FY 2010. The Commission also sought 42 asset freezes to preserve money for the benefit of harmed investors in FY 2011 versus 57 such actions in the prior year.
- In FY 2011, the Commission filed 61% of its first enforcement actions within two years of starting an investigation or inquiry, well below its target rate of 70%.
- For FY 2011, the SEC reported that it had obtained orders requiring the payment of approximately $928 million in penalties by securities law violators. This is slightly less than the $1.03 billion the SEC reported for FY 2010. It is interesting to note that, like FY 2010, a relatively small number of cases seemingly account for a substantial portion of the fines imposed last year. Specifically, it appears that ten cases represent approximately 46% of the $928 million in penalties imposed by the SEC in FY 2011.
- The Commission obtained orders requiring disgorgement of $1.878 billion in illicit gains last year, a small increase from the $1.82 billion in FY 2010.
Last year there were also a number of important enforcement developments at the Commission, including the SEC's first ever deferred prosecution agreement, the finalization of the Dodd-Frank whistleblower rules, and the continued focus on individual liability in enforcement actions. The SEC also started the process of seeking Congressional approval to enhance its penalty authority and reportedly began leaning toward filing negligence charges rather than scienter‑based fraud claims in connection with certain cases.