Views on improving the integrity of global capital markets
24 October 2014

SEC Displays “Full Enforcement Arsenal” in 2014 Report

Given her decades of experience as a federal prosecutor, it’s no surprise that when Securities and Exchange Commission Chair Mary Jo White took office in 2013, she announced that the SEC Division of Enforcement would step up its enforcement efforts. What may come as a surprise to some are the number, types, and range of successful cases reported by the division a mere one year later.

Last week’s SEC announcement of its fiscal year 2014 enforcement record posts some significant numbers for a division that not long ago was struggling for respect. In total, the group brought 755 enforcement actions and pulled in $4.16 billion in disgorgement and penalties. Examples included charges against more than 135 parties for financial reporting and disclosure violations, including Bank of America Corp. and former law firm Dewey & LeBoeuf. Actions were taken to halt international investment fraud, and charges were brought against investment advisory firms relating to the custody of customer accounts. Charges were filed against 80 people for insider-trading violations and misconduct cases involving complex financial instruments, including against Merrill Lynch, RBS Securities, and three Morgan Stanley entities.

The SEC also highlighted its successes at trial. In addition, there were a number of “first-ever cases” involving inadequate risk controls when providing customers with market access, a broker-dealer’s failure to protect customer material nonpublic information, and violations of the adviser “pay-to-play” rule. And the largest-ever penalties were extracted from an alternative trading system and a high-frequency trading firm for net capital rule violations.

While the SEC lacks authority to bring criminal actions, it may partner with criminal authorities to bring “parallel actions” to send a message to the public that both civil and criminal actions will be pursued against violators of the securities laws. However, most SEC cases are “standalone,” with remedies designed to protect investors through monetary sanctions, penalties, disgorgement, and the barring of violators from practice.

The wide range of successful enforcement actions reflect an agenda that White outlined soon after taking office, when she promised to deploy the SEC’s “full enforcement arsenal” to restore confidence in the US markets. In outlining what that strategy would mean, she highlighted a number of defined enforcement principles:

  • Be aggressive and creative
  • Demand accountability
  • Pursue individuals
  • Cover the whole market
  • Win at trial

In addition to the ramped-up enforcement program, the SEC chair had also questioned the Commission’s strong adherence to the “neither admit nor deny” approach to settling actions, whereby a company could agree to settle SEC claims against it and pay penalties or disgorgement, without officially admitting wrongdoing. This traditional approach recently had come under fire from Congress, judges, and market participants as an insufficient deterrent in holding individuals accountable and discouraging wrongdoing. In response, Chair White announced in early 2014 that the enforcement division would no longer take such a blanket approach, but instead assess cases more individually when considering whether to seek admissions of guilt.

The report on enforcement actions and the SEC’s move toward more accountability mark great strides for the agency and bode well for a revitalized program. So what is missing from this record?

Despite the number of successful actions, one may note the paucity of actions holding corporate executives and other individuals liable — an historical absence in SEC enforcement actions. But times may be a-changing. Just as White declared a full-court press on enforcement shortly after taking office, she has recently noted that an effective enforcement program also must focus on charging individuals and, to this end, has called for a new approach at the SEC. Next year at this time, there may be a dramatically new enforcement category of “first-ever” and “record penalty” cases.

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About the Author(s)
Linda Rittenhouse, JD

Linda Rittenhouse, JD, was a director of capital markets policy at CFA Institute. She focused primarily on issues related to investment products and investment regulation. Rittenhouse holds a JD degree.

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