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SEC’s Top 3 Enforcement Priorities

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Retail investors, cybersecurity and financial fraud. Those are the three priorities for the SEC’s enforcement division, according to its co-director Stephanie Avakian.

Speaking on a panel at the Practising Law Institute’s 49th Annual Institute on Securities Regulation in New York City on Friday, Avakian pointed to the creation of a new SEC Retail Strategy Task Force designed to root out widespread market misconduct affecting retail investors.

(Related: New SEC Task Force to Use Data to Root Out Advisor Fraud)

The focus is not new, but “but we’re trying to be more strategic,” said Avakian, noting the expanded use of data analytics in the SEC’s efforts.

The division is looking at the sales and disclosure practices of brokers, investment advisors and other SEC registrants. More specifically it’s watching for inadequately disclosed fees, mutual fund share class issues and  sales of products unsuitable for individual investors.

“We expect firms to look broadly at all issues,” including whether the right kinds of products are being sold to investors and whether the salespeople understand this and the risks, said Avakian, who like all panelists at the PLI session was speaking for herself and not the agency.

Avakian said the enforcement division is spending more investigative time on cybersecurity cases. “Account intrusions are on the rise,” said Avakian, adding that hackers are not just threatening individual accounts but using those accounts to manipulate markets more broadly, with false tweets and false EDGAR filings in some cases.

(Related: Individuals’ Personal Info Revealed in SEC EDGAR Hack)

She recalled a Morgan Stanley case from 2016 that the division prosecuted because an employee with access to more than 700,000 accounts transferred them to his personal computer, which was subsequently hacked. The firm had failed to restrict access to confidential information for 10 years, said Avakian.

The SEC has created a digital technology working group which among other things is focused on distributed ledger technology – blockchain is one primary example – and cryptocurrencies, including initial coin offerings (ICOs).  

There are two issues raised by Bitcoin and other cryptocurrencies, said Avakian: whether ICO tokens are securities and subject to regulation and whether fraud claims involving blockchain are different type than the usual.

In July, the agency ruled that tokens offered and sold by a “virtual” organization known as the DAO were securities and therefore must abide by the federal securities laws, and in November the SEC issued a statement that celebrity endorsements of ICOs via social media networks may be unlawful if they do not.

(Related: SEC Creating Searchable Database of Bad Brokers)

In response to a question from the panel’s moderator about remediation to address fraud, Avakian said “remediation can never be a bad thing” and the enforcement division “wants firms to do the right thing,” but that doesn’t mean it won’t bring an enforcement case.

She said the recent Supreme Court decision in the Kokesh case, which considers disgorgement a penalty subject to a five-year limitation period, has already had an impact on SEC enforcement actions and will continue to do so. Asked about speculation that SEC penalties could decline, Avakian said the agency has no plans to reduce corporate penalties.

Avakian was appointed co-director of the enforcement division in June, after being appointed its acting director in December 2016. She had been deputy director of the division since June 2014.

— Related: Senators Ask SEC Chief to Mull Further Cyber Rules After EDGAR Hack


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