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SEC Brought Most Cases Ever Against Investment Companies in 2016

March 13, 2017

Morgan Lewis’s annual report on securities enforcement highlights significant personnel changes, regulatory priorities and trends, and new enforcement initiatives at the US Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

Morgan Lewis released its 2016 Year in Review: Select SEC and FINRA Developments and Enforcement Cases on February 28. The 107-page report, prepared by dozens of lawyers from the firm’s Securities Enforcement & Litigation and Investment Management practices, includes an in-depth discussion of notable enforcement actions and cases involving broker-dealers, investment advisers, investment companies, and their employees.

The report shows that last year the SEC

  • brought its most cases ever against investment companies and advisers, at 159 matters, wherein 254 individuals and entities were named as parties;
  • brought 173 cases against broker-dealer defendants, naming 201 individuals and entities;
  • received 4,218 whistleblower tips, complaints, and referrals;
  • opened 1,063 investigations and pursued 1,729 ongoing cases; and
  • obtained orders requiring the payment of more than $4 billion in civil penalties and disgorgements.

Meanwhile, FINRA had a similarly active year as it

  • brought 1,434 new disciplinary actions and resolved 1,093 actions;
  • referred 785 fraud and insider-trading cases to the SEC and other agencies; and
  • levied more than $176 million in fines and ordered nearly $28 million in restitution to harmed investors.

According to the report, the SEC statistics reflect a steady increase in the number of enforcement actions by the agency since 2013, which can be attributed to its continued focus on regulated entities, the impact of data-driven regulation and enforcement, and a steady stream of referrals from the SEC’s Office of Compliance Inspections and Examinations (OCIE).

Turning to what’s ahead, the report notes that the SEC “has announced priorities for enforcement  . . . including continued work to leverage technology and data to identify market risks and prioritize the commission’s work overall, as well as continuing the seemingly successful joint efforts between and among the SEC’s divisions and offices.”

As for FINRA, the report discusses the agency’s priorities letter for 2017 and identifies potential new areas of concern for investment firms. These include excessive and short-term trading of long-term products; social media and electronic communications retention and supervision; firms’ implementation of credit risk policies, procedures, and risk limit determinations; and internal supervisory controls and monitoring to protect client assets.

The report also notes that some areas have fallen off FINRA’s radar in the priorities letter, which did not focus on exchange-traded funds, internal audits, client onboarding, sales charge discounts and waivers, private placements, or public offerings.

Morgan Lewis Litigation partner Amy Greer, one of the report’s authors, recently spoke about how recent leadership changes at the SEC could impact enforcement, and discussed other trends in securities enforcement.

How likely is it that the agencies’ new leadership could result in a shift in enforcement trends? Should investment advisers and companies anticipate increased or decreased enforcement?

At the SEC, changes in leadership already have impacted how the enforcement division is performing the most basic functions of investigations. Certain authority that had been delegated to the division staff, like the power to issue subpoenas, is now more constrained as the power to issue formal orders of investigation is further considered by the SEC. Looking ahead, while we can expect that clear violations of the securities laws will continue to be charged, we can also expect that the size of penalties and disgorgement may be considered differently by a commission with a different point of view. In regard to investment advisers and investment companies, and to regulated entities more generally, since they are all subject to examination, we can expect that those exams will uncover violations and that those violations will continue to be referred to the Enforcement Division.

How is data analytics used by the SEC, and how does it impact enforcement?

The SEC has been using data analytics as a tool to consider the utility of policy, as a means to judge risk among registered firms, and as a tool to actually identify violations, which has led to successful enforcement actions. With regard to each of these different uses, the SEC has found the data-driven approach to be so successful that, in addition to the Division of Economic and Risk Analysis (DERA), which has as its mission the integration of data into the day-to-day work of the SEC, the Enforcement Division and the OCIE have both developed their own data-centric offices.

What are the most common categories of cases targeted for investigation and enforcement in 2016? Should investment advisers and companies anticipate any changes in priority for 2017?

Almost 40% of the cases last year, as identified by the SEC, were brought against broker-dealers, investment advisers, and investment companies, and that is before you factor in other categories of cases that undoubtedly included matters involving registered entities and individuals, such as the securities offering cases, public finance abuse cases, and insider-trading cases. Since registered entities are subject to examination, we can continue to expect that they will be a focus of enforcement interest.  Moreover, clear violations identified at regulated entities, tend not to be controversial subject matter for enforcement actions at a commission that may be otherwise unsettled or in transition.

How can Morgan Lewis help clients in this area?

Our securities enforcement lawyers work with clients throughout the financial services industry, representing firms and their employees in enforcement or internal investigations and regulatory examinations that reach all aspects of the securities markets, often partnering with those lawyers with deep subject-matter knowledge from our investment management practice. Our combined experience offers our clients the benefit of both our broad industrywide view and our skill in identifying client-specific nuances.