SEC building (Photo: Diego Radzinschi/ALM)

The start of the new year is a good time for investment professionals and financial managers to reflect on regulatory activities from the past year to help guide responsible behavior going forward. One valuable source is the annual report by the Division of Enforcement for the Securities and Exchange Commission (SEC).

The SEC Division of Enforcement 2019 Annual Report describes the division’s efforts as being guided by five core principles: (1) focusing on the Main Street investor; (2) focusing on individual accountability; (3) keeping pace with technological change; (4) imposing remedies that most effectively further enforcement goals; and (5) constantly assessing the allocation of resources.

The SEC’s enforcement actions were up 5% in 2019 to 862 total actions, the largest annual number of cases since 2016, when the SEC brought 868 cases. In addition, the SEC received $4.3 billion in disgorgement and penalties in 2019 while returning $1.2 billion to harmed investors — the highest totals for both categories since fiscal year 2015.

The actions in 2019 addressed a variety of significant issues including issuer disclosure/accounting violations, auditor misconduct, investment advisory issues, securities offerings, market manipulation, insider trading and broker-dealer misconduct.

The upticks in SEC enforcement and penalties “reflect the division’s focus on rooting out misconduct that can do significant harm to investors and our markets, and the focus the division places on identifying wrongdoing and taking prompt action to effectively help harmed investors,” SEC Chairman Jay Clayton said in a statement.

The bulk of cases pertained to investment advisory and investment company issues (36%), followed by securities offerings (21%), and issuer reporting/accounting and auditing matters (17%). The SEC also brought actions relating to broker-dealers (7%), insider trading (6%), market manipulation (6%), and others including the U.S. Foreign Corrupt Practices Act (3%) and public finance (3%).

Significant enforcement actions by the commission included charges against:

  • Bank of New York Mellon, JPMorgan Chase Bank N.A., Citibank N.A., Merrill Lynch, BMO Capital Markets, and Industrial and Commercial Bank of China Ltd. (ICBC), for improperly handling “pre-released” American Depositary Receipts (ADRs).
  • Nomura Securities International Inc. for its failure to adequately supervise its bond traders who made false and misleading statements to customers while negotiating sales of commercial and residential mortgage-backed securities.
  • BMO Harris Financial Advisors Inc. and BMO Asset Management Corp. for failing to inform clients about certain aspects of how the advisers selected investments in their retail investment advisory program, which included the selection of more expensive investments from which BMO advisers profited.
  • Stifel, Nicolaus & Co. Inc. and BMO Capital Markets Corp. for providing incomplete and inaccurate securities trading information to the SEC.

The SEC also prioritized protecting retail investors, who are often particularly vulnerable to the conduct of bad actors in the securities markets. One area of special focus involved misconduct that occurs in the interactions between investment professionals and retail investors. According to the recent SEC 2020 Exam Priorities, OCIE will continue its focus on the protection of retail investors, including seniors. Examinations in these areas will include reviews of disclosures relating to fees, expenses and conflicts of interest.

Enforcement actions resulted in 595 bars and suspensions of wrongdoers in 2019, up from 2018. In addition, the SEC charged 42 individuals for insider trading for allegedly misappropriating or trading unlawfully on material, nonpublic information.

Some noteworthy actions against individuals included:

  • The former CEO of a global information and media analytics firm for engaging in a fraudulent scheme to overstate revenue by approximately $50 million and making false and misleading statements about key performance metrics.
  • A chief compliance officer for stealing millions of dollars from investors who were allegedly falsely promised that their funds would be used for the purchase and resale of tickets to Broadway shows and a sporting event, while in actuality using investor funds to benefit himself and his family.
  • Two top executives of a Chicago-area hedge fund and the adviser for multi-year fraud that inflated fund values, misstated the funds’ historical performance and overcharged investors approximately $1.4 million in fees.
  • The former CEO of Westport Fuel Systems for violations of the Foreign Corrupt Practices Act by paying bribes to a foreign government official in China, circumventing internal accounting controls in place to prevent misconduct, and signing a false certification concerning the sufficiency of the controls.

In fiscal 2019, the commission also brought actions against public companies based on a wide range of alleged misconduct, including fraud, deficient disclosure controls, misleading risk factor disclosures, and misleading presentation of non-GAAP metrics. Numerous prominent global companies were hit with multimillion-dollar penalties. Facebook was ordered to pay a $100 million civil penalty in a settled action alleging that its risk factor disclosures presented the misuse of user data as hypothetical when Facebook knew that user data had in fact been misused.

Based on these missteps by such well-known household brands, all companies should expect the SEC to continue monitoring compliance violations closely in 2020. Enforcement actions and penalties are likely to continue to increase. The SEC will continue to focus on areas relating to investment advisers, investment companies, broker-dealers and municipal advisors. Also, advancements in financial technology (fintech) and electronic investment advice (aka robo-advisors) will be examined. That’s why it remains so important to stay compliant to prevent costly penalties and protect business reputations.


Marianna Shafir SmarshMarianna Shafir, Esq., is regulatory advisor at Smarsh, where she’s responsible for legal and regulatory affairs worldwide.