FINRA Lawyer Blog
On October 11, 2016, the U.S. Securities and Exchange Commission (SEC) released its fiscal year 2016 (FY2016) enforcement results, reporting collections totaling over $4 billion in disgorgement and penalties out of a record 868 enforcement actions against executives, companies and gatekeepers.
SEC enforcement proceedings for FY2016 focused largely on cybersecurity compliance, financial reporting deficiencies, insider trading, protecting investor accounts, market structure requirements, micro-cap fraud and municipal offering disclosure failures.
“By every measure the enforcement program continues to be a resounding success holding executives, companies and market participants accountable for their illegal actions,” said SEC Chair Mary Jo White in a statement. “Over the last three years, we have changed the way we do business on the enforcement front by using new data analytics to uncover fraud, enhancing our ability to litigate tough cases, and expanding the playbook bringing novel and significant actions to better protect investors and our markets.”
Investment Companies and Advisors
This year had the SEC cracking down on due diligence for investment companies and investment advisors, bringing actions for hidden fees, undisclosed transactions, fraud and illegal trading arrangements. The SEC charged 13 advisory firms with repeating false claims made by investment manager firms.
Accountants, Attorneys, Gatekeepers
The SEC also hit hard on the actions of accountants, attorneys, broker-dealers, transfer agents and other gatekeepers, emphasizing their role in protecting the integrity of the OTC Marketplace. The FY2016 report specifically noted actions against gatekeepers for “failures to comply with professional standards,” and included proceedings against:
- EB-5 lawyers for acting as unregistered brokers
- Auditors for ignoring red flags and fraud risks in annual SEC report audits
- Private fund administrators for failure to detect clear indications of fraud in fund accounting records
- Auditor independence rule violations
- Consultants for improperly evaluating internal control deficiencies
Data and Analytics Assistance
Novel data and analytics techniques helped to uncover 78 cases of insider trading and market manipulation. The SEC’s incorporation of data and analytics also helped detect complex market manipulation and trading misconduct among foreign nations. In one example, the SEC detected a United Kingdom citizen who gained illegal access to U.S. investors’ online brokerage accounts and engaged in unauthorized trading.
First of Their Kind Actions
The SEC brought a number of first-time proceedings, including actions against:
- Issuers for misstatements and omissions related to structured note issues
- Private equity advisors for acting as unlicensed broker-dealers
- Audit firms for auditor independence failures regarding client personal relationships
- Firms for failing to file Suspicious Activity Reports (SARs)
- Municipal advisors for violating Dodd-Frank fiduciary and antifraud provisions
Market Participants
In FY2016, the SEC imposed record penalties against market participants. Merrill Lynch was charged $12.5 million for failure to implement adequate risk controls prior to providing customer access to the market. Credit Suisse must pay a $54 million fine for alternative trading systems (ATS) violations. The SEC fined Morgan Stanley $1 million for inadequate written policies and procedures regarding customer records and information security.
Microcap and Private Offerings Fraud
Microcap and private offering fraud are always a major area of SEC focus. In FY2016, the SEC suspended trading in 199 microcap issuers. In addition, a number of private offering fraud actions were brought by the SEC, including focus on violations targeting specific population sectors like retirees.
SEC Whistleblower Program Contributes to Record Numbers
The SECs whistleblower program contributed heavily to the record enforcement actions in fiscal year 2016, awarding whistleblowers a record $57 million in cash awards for tips leading to recovery. For the first time, the SEC awarded an Australian employee a whistleblower award, highlighting the record 21 Foreign Corrupt Practices Act (FCPA) enforcement actions included in fiscal year 2016.
“This has been a strong year for the Enforcement Division, with groundbreaking insider trading and FCPA cases and other important actions across the full spectrum of the securities laws,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division. “Through their hard work and steadfast dedication to our mission, the Division’s committed staff have helped protect investors and made our markets fairer and more reliable.”
SEC enforcement actions are increasing in number and scope. As such, companies need to proactively identify compliance problems BEFORE becoming an SEC enforcement target. At Herskovits PLLC we have decades of experience and successful outcomes stopping SEC problems before they occur, minimizing the time and effects once they begin, and aggressively defending targeted companies already swept up into SEC’s enforcement actions. Give us a call to learn your rights and best defense: