Enforcement actions can be scary, especially if you or your Firm are named in the enforcement. For the rest of us, enforcement actions provide valuable information on patterns of misconduct, rule violations, and overall cautionary tales.
The Securities Exchange Commission Division of Enforcement recently released their 2019 Annual Report. Below is a list of some takeaways and patterns of non-compliance from the report. It is important to review these with your Firm to ensure that your program will not be subject to the same fate.
Retail Investors
SEC continues to focus on the interactions between investment professionals and retail investors. The protections include stripping gains and returning funds to retail investors. The SEC notes that these investors are more vulnerable to the conduct of bad actors. The Commission notes the success of the Share Class Selection Disclosure Initiative in 2018 which resulted in the return of more than 135 million to affected investors.
Cyber-Related Misconduct
Cybersecurity will continue to be a regulatory focus far into the future. The report noted that enforcement resources revealed violations related to distributed ledger technology, cyber intrusions, and hacking into obtaining material, nonpublic information. The Commission issued an Investigative Report that although was specific to Public companies and Related Internal Accounting Control Requirements, provided a cautionary tale to all firms. The bad actors posed as company executives or vendors and sent emails to company personnel duping them into sending large sums of money to bank accounts controlled by the perpetrators. This tale reveals the importance of having systems in place to train employees against these cyber attacks.
Holding Individuals Accountable
Long are the days where the Firm was held completely responsible for the misconduct of its employees. The SEC’s most effective method of deterrence is taking individual actions against individuals held responsible. This includes chief executive officers, chief financial officers, chief operating officers, accountants, auditors, and attorneys. Fines against both an individual and Firm can include bars, suspensions, monetary penalties, and trading suspensions and asset freezes. Therefore, if you hold a position of accountability to the SEC, having a clear understanding of your role within the program, and developing processes, policies, and procedures to assist you in your compliance requirements is a necessity now more than ever.
Trends and Types of Cases
The majority of the 526 actions brought by the SEC were against investment advisory and investment company issues (36%). Broker-Dealer actions comprised seven percent (7%); however, FINRA’s enforcement actions against broker-dealers close the gap. The remedies obtained by these numbers were significant. The actions and proceeds resulted in disgorgements of 3.248 billion. Penalties imposed totaled 1.101 billion. Monetary relief was $404 million, an increase of 10% from the 2018 findings. The trends reflect that the fines have increased per action for Firms under enforcement.
If you would like to learn more about how we can assist your Firm in building a solid compliance program, please contact our office.
