Bates Research  |  10-22-20

SEC Chair and Director of Enforcement Review the Record

SEC Chair and Director of Enforcement Review the Record

In a likely preview of the SEC Division of Enforcement 2020 Annual Report, SEC Chair Jay Clayton and Division of Enforcement Director Stephanie Avakian gave back-to-back speeches regarding the agency’s enforcement record since they took the reins in 2017. In context, these speeches presented a strong accounting of the impact the Division has had on the financial industry during their tenure. The remarks, delivered last month to the Institute for Law and Economics at the University of Pennsylvania Law School, also raised some of the important challenges to the SEC’s enforcement priorities presented by COVID-19. Here are the highlights from their speeches.

Avakian Paints the Big Picture, Shares the Numbers

Director Avakian described the Division’s key goals as investigating and recommending impactful cases that serve to protect investors, and continuing efforts to adapt to market and technological developments in order to operate effectively and efficiently.

During Chair Clayton’s tenure, she reported, the Division brought over 2,500 enforcement actions, received $14 billion ($4.3 billion in 2019, the highest on record) in financial remedies, returned over $3.3 billion to harmed retail investors, and distributed more than $350 million to whistleblowers.

Ms. Avakian described cases brought by the Division in traditional enforcement areas, highlighting the use of innovative data analysis to support investigations and actions. She named a host of financial and issuer fraud cases, key insider trading cases, Foreign Corrupt Practices Act violations, cases involving improper financial reporting disclosure (“involving virtually all aspects of the financial reporting process”), Ponzi schemes, and cases where the Division went after suitability violations by broker-dealers. She also discussed cases brought by the Division that involve complex non-traditional matters and those that implicate market integrity—such as potential fraud in initial coin offerings—and innovative remedies to address misconduct. Further, Director Avakian said the Division sought to “deter wrongdoing by holding individuals accountable.” She stated that in roughly 70% of cases, they had “pursued charges against individuals for misconduct,…including registered individuals, executives at all levels of the corporate hierarchy, including CEOs, CFOs and other high-ranking executives, as well as gatekeepers such as accountants, auditors, and attorneys.”

In continuing to focus on large public companies and financial institutions, Ms. Avakian emphasized the introduction of new approaches to protect retail customers and to further enhance the efficiency and effectiveness of the enforcement program. These include streamlining investigations through targeted requests, better communication with respondents around the benefits of cooperation, and targeted initiatives.

As to the most successful targeted initiatives, Ms. Avakian highlighted the Share Class Selection Disclosure Initiative, a self-reporting program “focused on the recurring problem of advisers failing to disclose conflicts of interest associated with the selection of fee-paying mutual fund share classes.” She reported that “the initiative resulted in the SEC ordering nearly 100 investment advisory firms that voluntarily self-reported to the Division to return nearly $140 million to investors.” (See also Bates reporting on the Share Class Disclosure Initiative.) Ms. Avakian also noted  initiatives that addressed conduct affecting vulnerable investor groups (e.g., Teachers’ and Veterans’ Initiatives) and efforts to better reward whistleblowers, and she commended the Enforcement Division and the SEC's Office of Compliance, Inspections and Examinations for their cooperation on additional efforts to improve efficiency and effectiveness.

Ms. Avakian described the unique circumstances of managing the operations of the Division and discussed at length the Division’s response to "substantial, unexpected challenges" to Chair Clayton’s announced priorities. She cited several Supreme Court cases that negatively affected the Division's enforcement powers (see Bates summary coverage regarding Lucia v. SEC and Kokesh v. SEC) in addition to the challenges of operating during the COVID-19 pandemic. (Since mid-March, the Commission “filed more than 325 new [regular] enforcement actions.”) Ms. Avakian also noted that during the relevant period, the Division opened nearly 150 COVID-related inquiries or investigations.

Chair Clayton Reviews Enforcement Record

In his address, Chair Clayton highlighted the success of the Enforcement Division in bringing meaningful cases to the Commission that had “a substantial impact on investors and the integrity of our markets.” He assessed the oversight, management and performance of the Division against several guiding principles. These included whether the actions (i) rectified harm to retail investors by returning money as "promptly as practicable;" (ii) worked to eliminate widespread fraud; and (iii) strengthened the "integrity and fairness" of the capital markets.

Chair Clayton offered examples of the Division’s work that satisfied these objectives. He noted the SEC’s Retail Task Force for its successful initiatives on Share Class Selection Disclosure and on Teacher and Veteran protections. He underscored the work of the Division in the area of Initial Coin Offerings, pointing out that the subject matter lent itself “to fraud, speculation and widespread harm,” and that the Division responded to these challenges by “issuing an investigative report confirming the application of the securities laws to the use of blockchain or distributed ledger technology to facilitate capital raising and to offers and sales of digital assets that are securities.” He contended that through a series of additional “measured yet timely actions” and the “creation of the Cyber Unit,” the Division “restored order, while leaving room for distributed ledger and other technologies to drive cost savings and innovation.”

Chair Clayton also commended the Division for its efforts during COVID-19, including (i) trading suspensions and enforcement actions against companies that were engaging in fraud (e.g., companies offering preferred access to personal protective equipment and COVID-19 tests) and other COVID-19 related claims; (ii) guidance reminding market participants about corporate controls and procedures; and (iii) the promotion of good corporate governance to ensure compliance, market integrity and investor confidence. Mr. Clayton also noted the important role the Enforcement Division played in the crafting of Regulation Best Interest, “with the interests of Main Street investors front of mind.”

Chair Clayton concluded that, based on the guiding principles, the Division was extraordinarily successful during his tenure (giving it a 12 on a scale of 10), and that, despite the challenges—including judicial limitations on SEC authority, a government shutdown and a pandemic, the Division achieved meaningful and impressive results for retail investors through a “powerful combination of deference, cooperation and support.”

Conclusion

The record is undeniably impressive. At the start of their tenure, it would have been impossible for Chair Clayton and Director Avakian and former Enforcement Co-Director Steven Pieken (who left the agency on August 14, 2020) to have anticipated the many unexpected challenges they were about to encounter. That they managed the operations and processes throughout, while keeping their eyes on a determined pre-pandemic agenda is commendable. It will be interesting to revisit these achievements in December, when the Division’s 2020 Annual Report is released. We will continue to keep you apprised.

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For more information about Bates Group’s Regulatory and Investigations practice, please reach out to Alex Russell, Managing Director, White Collar, Regulatory and Internal Investigations at arussell@batesgroup.com.


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