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SEC Enforcement Actions Against Public Companies Decrease Substantially In 2017

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  • Posted on: Nov 24 2017

According to a report issued jointly by the New York University Pollack Center for Law & Business and Cornerstone Research, the Securities and Exchange Commission (“SEC” or “Commission”) filed 33% fewer enforcement actions against public companies and their subsidiaries in fiscal year 2017 than in fiscal year 2016.

The report (here), SEC Enforcement Activity: Public Companies and Subsidiaries, Fiscal Year 2017 Update (the “Report”), analyzes data from the Securities Enforcement Empirical Database (“SEED”) (here). SEED tracks and records information for SEC enforcement actions filed against public company defendants. Created by the NYU Pollack Center for Law & Business in cooperation with Cornerstone Research, SEED facilitates the analysis and reporting of SEC enforcement actions through regular updates of new filings and settlement information for ongoing enforcement actions.

In fiscal year 2017, the SEC filed 62 new enforcement actions against public companies and their subsidiaries, compared to 92 actions in fiscal year 2016. There were 45 actions filed in the first half of fiscal year 2017, but only 17 in the second half.

“The data from SEED show a substantial decline in public company-related enforcement actions, the timing of which corresponds with SEC leadership changes in the new administration,” said Stephen Choi, the Murray and Kathleen Bring Professor of Law at the NYU School of Law and director of the Pollack Center for Law & Business. “For example, only two actions with FCPA allegations have been filed against public company-related defendants since February.”

“We also saw major decreases in monetary penalties,” noted David Marcus, senior vice president and head of Cornerstone Research’s finance practice. “Total settlements declined from $1 billion in the first half of FY 2017 to $196 million in the second half.”

In fiscal year 2017, the top three categories of cases brought by the SEC involved issuer reporting and disclosure, investment advisers and investment companies, and the Foreign Corrupt Practices Act (“FCPA”). These categories of cases represented 39%, 21% and 16%, respectively, of the total number of cases brought by the Commission in fiscal year 2017. By contrast, in fiscal year 2016, 26% of the cases involved issuer reporting and disclosure, 21% related to investment advisers and investment companies, and 20% were brought under the FCPA.

A closer look at the numbers shows a change in enforcement priorities that coincides with leadership changes at the Commission. In the second half of fiscal year 2017, the largest category of cases brought by the SEC involved investment advisers and investment companies, not issuer reporting and disclosure. This change in emphasis comports with Chairman Clayton’s focus on retail investors and the new stated focus of the SEC Enforcement Division.

Similarly, in the second half of fiscal year 2017, the number of FCPA cases dropped to 2 from 10 in the first half of the fiscal year. While there may be many reasons for the decline in FCPA enforcement actions, the drop in the number of FCPA actions is consistent with the commitment of the current administration in this area. President Trump has called the FCPA “ridiculous,” and a “horrible law” that makes it difficult for U.S. companies to compete overseas. (See CNBC interview, here.)

In terms of industry, the allocation of enforcement resources has also shifted from finance, insurance and real estate to manufacturing and services. In fiscal year 2016, 59% of the public company actions involved the finance, insurance and real estate sector, while the manufacturing sector accounted for about 18% of the cases, and the services sector accounted for 3%. In fiscal year 2017, however, only 42% of the cases involved the finance, insurance and real estate sector, while manufacturing and services cases increased to 32% and 8%, respectively.

In fiscal year 2017, the SEC obtained $1.2 billion in cash settlements. About 89% of the public company settlements involved monetary penalties. That is comparable to the prior two fiscal years. However, a closer examination of the numbers suggests a possible shift due to a change in leadership. In the first half of fiscal year 2017, 94% of the actions settled for money. By contrast, in the second half of fiscal year 2017, the percentage of monetary settlements fell to 78%.

Cooperation by a defendant also declined in fiscal year 2017.  In that year, about 54% of the settling defendants cooperated with the SEC, compared to 71% in fiscal year 2015 and 64% in fiscal year 2016. In fiscal year 2017, cooperation was at its highest in actions involving the FCPA (61%) and Municipal Securities/Public Pensions (87%).

Finally, actions involving public companies with resolutions that were not concurrent with the filing of a complaint were less likely to have monetary settlements. From fiscal year 2010 through fiscal year 2017, 71% of the actions with non-concurrent resolutions had monetary settlements, compared to 88% of actions with concurrent resolutions. These statistics again raise questions regarding cooperation by defendants in enforcement actions and the settlement approach and tactics employed by the Division of Enforcement.

The press release discussing the Report can be found here.

The SEC, Division of Enforcement, Annual Report: A Look Back at Fiscal Year 2017 can be found here.

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