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From Securities Regulation Daily, November 16, 2017

SEC Enforcement Directors promise focus on individuals, retail fraud

By Anne Sherry, J.D.

In introducing the Enforcement Division’s annual report for FY2017, Co-Directors Stephanie Avakian and Steven Peikin listed retail fraud, individual accountability, technological change, sanctions, and resource allocation as their key priorities. The directors assessed the past year as a success for the Division, noting that the Commission brought 754 actions, obtained relief exceeding $3.7 billion in disgorgement and penalties, and returned a record $1.07 billion to harmed investors. But they also cautioned that statistics do not tell the full story of the Division’s efforts.

Five principles. The report summarizes the five core principles that guide the division’s decisionmaking, which coalesce around investor protection, deterrence, and punishing wrongdoers. The first principle is a focus on retail investors. The recently formed Retail Strategy Task Force will work with the examination staff and the Office of Investor Education and Advocacy and will use data analytics to identify risks to retail investors. Avakian and Peikin do not see "a binary choice between protecting Main Street and policing Wall Street." Instead, they believe their oversight of Wall Street is most effective "when viewed through a lens focused on retail investors."

Another key principle is a focus on individual accountability. The directors note that charging individuals has a cost on the Commission because individuals are more likely to litigate, but say that the trade-off is worth it. They also prioritize responding to cyber crime, including with the specialized Cyber Unit; imposing effective sanctions; and constantly assessing the allocation of the agency’s resources. To that point, the directors observe that Enforcement is the largest SEC division but employs fewer than 1200 professionals.

2017 results. The 754 standalone enforcement actions last year mark a decline from FY2016, but the report attributes this to the fact that 15 percent of the actions brought in 2016 were part of a voluntary self-reporting program for municipal bond issuers that concluded that year. Cases involving investment advisory issues, securities offerings, and issuer reporting or accounting and auditing each made up about one-fifth of the total number of enforcement actions. Actions relating to market manipulation, insider trading, and broker dealers each accounted for about one-tenth of the total.

Penalties and disgorgement also declined from $4.083 billion in 2016 to $3.789 billion last year. The report notes that five percent of cases account for the vast majority of all financial remedies obtained, but the remaining 95 percent constitute the bulk of the Division’s overall activity and address the broadest array of conduct. This is an example of how statistics do not tell the whole story, the report observes. Avakian and Peikin also give another example: the return of $100,000 to a small number of harmed investors may be life-changing to the investors, but will not move the SEC’s statistics much.

The directors also acknowledge that much of the effort behind the record $1.07 billion in distributions to harmed investors occurred in prior years. Of this total, $814 million came from four Fair Funds: $494 million from the CR Intrinsic Investors fund, $200 million from a JPMorgan Chase fund, and $120 million from two related Credit Suisse RMBS funds.

In 2017, 73 percent of standalone actions involved charges against one or more individuals. The SEC also suspended trading in the securities of 309 issuers, sought 35 court-ordered asset freezes, and barred or suspended 625 wrongdoers.

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