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2020 Year in Review and a Look Forward: Select SEC and FINRA Developments and Enforcement Cases

February 2021

Morgan Lewis marks its 15th year of publishing Year in Review and a Look Forward, a comprehensive summary and analysis of the practices, developments, considerations, and enforcement actions of the SEC and FINRA, as well as a forward-looking discussion of what to expect on the enforcement front in the year ahead.

Key Takeaways

2020: A Year to Remember

SEC

  • The COVID-19 pandemic had a profound effect on the productivity and emphasis of the SEC Division of Enforcement (Enforcement) in fiscal year (FY) 2020.
  • The November 2020 election of President Biden signaled a number of changes in the composition of the SEC at the commissioner level and for the directors of Enforcement.

FINRA

  • In 2020, there were two significant personnel changes and a major organizational shift at FINRA: Jessica Hopper’s promotion to head of Enforcement and Greg Ruppert’s appointment as executive vice president of the newly created National Cause and Financial Crimes Detection Program.
  • Almost two years after announcing its voluntary self-reporting initiative, the 529 Share Class Initiative, FINRA reported its first formal and informal actions in this area.

SEC by the Numbers

  • SEC Enforcement’s performance understandably declined year over year due to the pandemic. However, we saw a steady decline in cases overall—and against registrants—that may also be attributable to the overall drag of a declining Enforcement headcount and the 2019 government shutdown. Despite the decline in actions, the SEC obtained a record high amount of disgorgement and civil penalties, totaling more than $4.6 billion in FY 2020.
  • In FY 2020, the SEC brought a total of 716 enforcement actions, composed of 405 standalone cases, 180 “follow on” administrative proceedings seeking associational bars against individuals, and 130 deregistration actions against issuers that were delinquent in making required filings.
  • The pandemic drove a 40% surge in tips, complaints, and referrals.
  • From mid-March 2020 through the end of FY 2020 in September, SEC Enforcement staff recommended 492 enforcement actions and 36 COVID-19-related trading suspensions, and opened approximately 640 inquiries and investigations (more than 150 of which were COVID-19 related).
  • This last fiscal year showed the whistleblower program’s coming of age, reflecting an increased efficacy in processing claims and issuing the largest number of final orders resolving whistleblower award claims, including both award and denial orders, of any fiscal year. 
  • During FY 2020, the SEC Division of Examinations completed nearly 3,000 exams, almost the same as it conducted in FY 2019, despite the challenges imposed by the pandemic.

What Lies Ahead

SEC

  • The increase in tips, complaints, and referrals in 2020 will lead to increased investigations and occupy significant resources of SEC Enforcement, particularly given the more aggressive enforcement stance of the Biden administration.
  • While Democrats have secured the majority in the Senate by operation of a tiebreaking vote to be cast by Vice President Kamala Harris, legislative activity in the financial services area is likely to meet substantial headwinds. However, senators have indicated that they expect to implement change through SEC rulemakings, which only require a majority of the SEC commissioners.

FINRA

  • FINRA’s Division of Enforcement’s number one objective will remain unchanged for the foreseeable future: obtaining restitution for harmed customers. Other focus areas are identifying brokers who engage in egregious misconduct that affects customers and protecting senior and vulnerable investors.
  • FINRA is expected to conclude its 529 Share Class Initiative this year, resolving actions with restitution payments to customers, but without fining firms.