SEC Releases Law Enforcement Statistics for Fiscal Year 2022: Trends and Takeaways | Morgan Lewis

The US Securities and Exchange Commission recently released its enforcement statistics for fiscal year 2022. In this one, we discuss trends and takeaways on what’s been a brisk year for the enforcement department.

The U.S. Securities and Exchange Commission (SEC or Commission) announced its enforcement statistics for fiscal year 2022 (FY22) on November 15, 2022, at press release (2022 Executive Permit) and what accompanies it addition (statistics). The Enforcement Division (Enforcement) filed 760 total enforcement actions in fiscal year 2022.[1] Of the total, 462 were stand-alone enforcement actions, including administrative actions and civil actions.[2] Enforcement activity resulted in total funds being sought in the amount of $6,439,000,000 during the fiscal year, including civil penalties, waiver of adjectives and interest prejudices in SEC actions.[3] This represented an increase of $2,587,000,000 from the previous year and set a record for the highest total ever recorded in SEC history.[4]

Some overarching topics of enforcement:

  • Belief in the power of sanctions: While stating that success is about more than just numbers, enforcement highlights a significant increase in civil penalties and an intent to continue this trend as a form of deterrence.
  • Focus on individual responsibilityEnforcement will continue to focus on individuals, particularly those you consider to be gatekeepers.
  • Sweeps are here to stayExtensive enforcement surveys similar to recent out-of-channel communications cases are here to stay, and more are likely to continue in the future because such investigations are viewed by the enforcement department as maximizing impact while enhancing internal efficiency.
  • Collaboration must be measurable: While cooperation credit is available in certain circumstances, those seeking cooperation must think early and tactically about the best way to obtain such credit at the conclusion of the enforcement process.

Trends and orientations

Increased enforcement activity despite limited resources

The total number of enforcement actions taken in FY22 represents a 9% increase in enforcement actions overall and a 6.5% increase in standalone actions compared to FY2021 (FY21).[5] The numbers reflect a two-year upward trend in the number of independent enforcement actions taken by the SEC. The trend illustrates the Enforcement’s efforts to maximize its limited resources through initiatives such as investment in and use of data analytics.

Employees continue to work remotely, according to the Securities and Exchange Commission Congressional Budget Justification for Fiscal Year 23 Report, the minimum annual increase in the number of individuals is expected.[6] In fiscal year 2021, there were 1,366 enforcement jobs, and the number of jobs was unchanged in fiscal year ’22.[7] In March 2022, the SEC notified Congress that it was seeking to add 125 positions to enforcement for the fiscal year (FY23).[8]

schedule a

Consistent enforcement activity against specific entity ratings

The Enforcement Division filed 301 of 462 stand-alone claims against three classifications of regulated entities – investment advisors and investment firms (119), securities offerors (106), and entities responsible for issuer reporting, auditing, and accounting work (76).[9] These top three entity ratings align with FY21’s enforcement focus and approach.[10] The consistent number of actions against entities and individuals responsible for issuer reporting, auditing, and accounting work is consistent with enforcement body statements, including the 2022 and year-round enforcement statement, that focus on “gatekeepers.”[11]

schedule b

Aggressive approach on civil penalties

Civil penalties tend to fluctuate from year to year, but the $4,194 million reported in FY22 is nearly three times the amount of civil penalties imposed in FY21 and is more than the civil penalties imposed over the past three years combined.[12] This stark increase reflects a bolder approach to treatment by the committee for a “deterrent effect”.[13] On November 15, 2022, Director of Enforcement Gurbir Grewal alerted the industry during a speech at the Securities Enforcement Forum in Washington, D.C. that we should expect the Commission to continue to pursue significant civil penalties in FY23.

Minimize panic

The cancellation amount requested in FY22 is the lowest it has been in the past six years and represents a 6% decrease from FY21.[14] It is not entirely clear why such a decline occurred, but it may be related to the US Supreme Court resolution in Liu v. SEC (Leo resolution).[15] There, the court limited the SEC’s ability to seek deregulation as a form of equitable relief under Section 21(d)(5) of the Securities Act of 1934 in cases where the disavowal does not exceed the defendant’s net earnings and is awarded in favor of affected.[16]

The Leo The decision may cause the SEC to look differently than it did in the past. Although it is too early to fully understand this trend, he stresses the importance of focusing on each remedy pursued by the Commission, the need to consider how the practical effects of decision-making law and the focus on enforcement interact.

schedule c

Increase focus on pledges

The SEC is increasingly seeking and securing covenants in stable administrative procedures. According to the 2022 enforcement version, “tailored covenants” can be used as potential “roadmaps for compliance by other firms” and enforced so that entities can address issues, review policies, procedures, and controls, and enhance compliance with securities laws and regulations.[17] However, such undertakings represent additional costs for the entities resolving matters with the Commission and constitute a significant additional administrative burden for those entities.

SOX 304 Clawbacks for Uncharged Executives

The 2022 enforcement statement asserts that holding individuals accountable “is a pillar of the SEC’s enforcement program,” noting that more than two-thirds of independent enforcement actions filed in FY22 involved one or more individual defendants or defendants.[18]

However, the SEC also notes that it is using Sarbanes-Oxley (SOX) 304 to charge senior executives in public companies — who were not charged — for affecting the recovery of their bonuses and compensation after misconduct occurred at their companies.[19] The SEC has repeatedly emphasized its ability to use the SOX 304 as a tool during various speaking engagements throughout the year, so there will likely be more clawbacks in fiscal ’23.[20]

Improve efficiency through the use of data analytics

In past years, the SEC has spoken at length about the use of data analytics.[21] For example, in October 2021, SEC Chairman Gary Gensler commented:[p]Conceptual data analytics, including machine learning, is being increasingly adopted in finance” and opined that this development “could be as big as the internet was in the 1990s.”[22] The SEC’s repeated mention of the topic predicted increased use of data analytics during fiscal ’22, and this appears to have materialized..

The 2022 Enforcement Statement notes that the enforcement app has used “sophisticated analytical work” to assist in a variety of enforcement actions.[23] The Commission will likely continue to use data analytics in all types of cases because it increases efficiency and allows the SEC to target behavior that might otherwise go undetected.

Industry surveys

The SEC earned $1,235,000,000 in cumulative fines in connection with its industry survey of personal device-related record-keeping violations in fiscal ’22.[24] In his speech on November 15, 2022, director Grewal confirmed that the industry can expect more sweeps in the future. This is likely because surveys are an efficient and effective use of limited law enforcement resources, as surveys allow the commission to develop a single theory and legal structure and then apply it to many regulated entities. Although the Examinations department will likely be looking for similar issues, expect to see more direct-to-enforcement investigative surveys by Enforcement in FY23.

The high plateau of whistleblower tips

The SEC received more than 12,300 tips for wrongdoing during fiscal ’22, a “record number.”[25] While this figure represents about 100 more tips than in the previous fiscal year, the statistic is significant because it reflects a steady stream of tips in high amounts compared to tip amounts received prior to fiscal year ’21.[26] Whistleblower advice is important to the SEC because it often alerts the enforcement department to behavior it might not otherwise have detected, and the whistleblower can provide an insider’s view and account of alleged violations that can greatly assist law enforcement in their investigation.

table d

Whistleblower awards remain high

In fiscal ’22, the SEC issued nearly $229 million in awards to 103 whistleblowers.[27] That’s less than half of the $564 million awarded to the 108 whistleblowers in fiscal ’21.[28] However, fiscal ’22 marks the SEC’s second-highest year in terms of award amounts and number of awardees.[29] So while there has been some fluctuation in reward amounts, whistleblower rewards remain at an all-time high.

conclusion

Enforcement was very active in fiscal ’22, which increased the number of actions filed overall. The Securities and Exchange Commission enhanced the impact of the actions resolved during the fiscal year by seeking bonds, aggressively seeking civil penalties, and obtaining the largest amount of money ever sought in the history of the Saudi Electricity Company. The increased enforcement activity followed the roadmap laid out by the commission’s statements throughout the year.

Morgan Lewis will continue to closely monitor SEC announcements and statements and identify industry trends.

[1] Securities and Exchange Commission, Addendum to Enforcement Section press releases for Fiscal Year 2022 at 1 (November 15, 2022).

[2] ID. in 1-2 See also The Securities and Exchange Commission Announces Enforcement Results for Fiscal Year 22 (November 15, 2022).

[3] The Securities and Exchange Commission Announces Enforcement Results for Fiscal Year 22 (November 15, 2022).

[4] Securities and Exchange Commission Addendum to Enforcement Division Press Releases for Fiscal Year 2022 at 2 (November 15, 2022); See also The Securities and Exchange Commission Announces Enforcement Results for Fiscal Year 22 (November 15, 2022).

[5] The Securities and Exchange Commission Announces Enforcement Results for Fiscal Year 22 (November 15, 2022).

[6] Securities and Exchange Commission, Annual Performance Plan for Congressional Budget Justification for Fiscal Year 2023 (March 25, 2022).

[7] ID. at 16.

[8] ID. On 6, 19, 25.

[9] Securities and Exchange Commission, Addendum to Enforcement Section press releases for Fiscal Year 2022 at 1 (November 15, 2022).

[10] Securities and Exchange Commission, Addendum to Enforcement Section press releases for Fiscal Year 2021 at 1 (November 18, 2021).

[11] The Securities and Exchange Commission Announces Enforcement Results for Fiscal Year 22 (November 15, 2022); See also Grewal, Gurbier, Director of the SEC’s Enforcement Division, Testimony on “Overview of the SEC’s Enforcement Division” before the U.S. House Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets (July 21, 2022).

[12] Securities and Exchange Commission, Addendum to Enforcement Section press releases for Fiscal Year 2022 at 2 (November 15, 2022).

[13] The Securities and Exchange Commission Announces Enforcement Results for Fiscal Year 22 (November 15, 2022).

[14] ID. ; Securities and Exchange Commission, Addendum to Enforcement Section press releases for Fiscal Year 2022 at 2 (November 15, 2022).

[15] Leo vs. Sec. & Exchange. KomenNo. 18-1501, 2020 WL 3405845 (June 22, 2020).

[16] ID. in 2.

[17] The Securities and Exchange Commission Announces Enforcement Results for Fiscal Year 22 (November 15, 2022).

[18] ID.

[19] ID.

[20] See, for exampleSecurities and Exchange Commission, Notes in SEC Speaking (September 9, 2022).

[21] See, for examplePrepared remarks in the SEC (October 12, 2021).

[22] ID.

[23] The Securities and Exchange Commission Announces Enforcement Results for Fiscal Year 22 (November 15, 2022).

[24] ID.

[25] ID.

[26] We see Securities and Exchange Commission, Whistleblower Program Annual Report 2021 to Congress on 2 (November 15, 2021).

[27] The Securities and Exchange Commission Announces Enforcement Results for Fiscal Year 22 (November 15, 2022).

[28] Securities and Exchange Commission, Whistleblower Program Annual Report 2021 to Congress on 10 (November.

15, 2021).

[29] The Securities and Exchange Commission Announces Enforcement Results for Fiscal Year 22 (November 15, 2022).

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