On Wednesday, November 15, 2017, the Securities and Exchange Commission’s Division of Enforcement (“Enforcement”) issued a report setting forth its priorities for the upcoming year, its key initiatives, and summarizing its statistics for the 2017 fiscal year.

2018 Focus: Five Core Principles

            Enforcement reports that its goals for 2018 are to establish concrete measures to “protect investors, deter misconduct, and punish wrongdoers” as the industry evolves.  To achieve these goals, Enforcement has crafted the following five core principles:

1.      Focus on the Main Street Investor

Enforcement has taken proactive steps to champion the long-term interests of retail investors.  Enforcement’s effort includes a focus on certain types of misconduct that traditionally plagued retail investors, including accounting frauds, sales of unsuitable products and the pursuit of unsuitable trading strategies, pump and dump frauds and Ponzi schemes – to name a few.  Enforcement recently announced the formation of the Retail Strategy Task Force (discussed below), which is designed to work closely with Enforcement staff and utilize data analytics to protect Main Street investors. Enforcement emphasizes that protecting the Main Street investor is not mutually exclusive from policing Wall Street, and its protective measures will target overlap between the two realms.

2.      Focus on Individual Accountability

It has been Enforcement’s experience that individual accountability has been an effective deterrent to wrongdoing. As such, Enforcement sees the vigorous pursuit of individuals to be a key feature of an effective enforcement program.  With the understanding that individual ramifications are an effective deterrent to wrongdoing, with the added value of protecting investors, Enforcement will continue to shift its resources toward the pursuit of individual accountability.

3.      Keep Pace With Technological Change

Enforcement recognizes that technology has dramatically transformed our markets and, so too has  cyber-enabled misconduct.  As the tech landscape continues to develop rapidly, Enforcement is making a conscious and vigorous effort to keep pace.  Part of its efforts include Enforcement’s formation of a specialized Cyber Unit to consolidate its expertise (discussed below).   The Cyber Unit will also investigate the increasing technology driven violations while working with the Department of Justice and other criminal authorities to prosecute wrongdoers.

4.      Impose Sanctions That Most Effectively Further Enforcement Goals

Enforcement continues to employ a case-by-case approach to determining the most effective remedies to deter wrongdoers.  Among its remedial toolkit are more traditional forms of monetary relief – disgorgement, penalties, asset freezes—in addition to individual focused remedies such as industry bans, admissions of wrongdoing and monitoring.  Enforcement vows to consider the full array of remedies available to it to effectually achieve its goals.

5.      Constantly Assess The Allocation of Our Resources

Even though Enforcement is the SEC’s largest division, it does not have unlimited resources.  Accordingly, Enforcement vows to continue its conscious effort to allocate its resources and remain dedicated to keeping “the violators who pose the most serious threats to investors and market integrity” front of mind.

Initiatives: Cyber Unit & Retail Strategy Task Force

Enforcement’s recent initiatives circle back to its key objective—protection of retail investors.  To achieve this objective, Enforcement has announced the creation of two targeted subgroups, the Cyber Unit and a Retail Strategy Task Force, to facilitate this goal. 

The Cyber Unit will focus on:

  • Market manipulation schemes involving false information spread through electronic and social media;
  • Hacking to obtain material nonpublic information and trading on that information;
  • Violations involving distributed ledger technology and initial coin offerings (ICOs);
  • Misconduct perpetuated using the dark web;
  • Intrusions into retail brokerage accounts; and
  • Cyber-related threats to trading platforms and other critical market infrastructure.

The Retail Strategy Task Force will focus on:

  • Wrongdoing implicating the microcap market, Ponzi schemes and offering frauds;
  • Identifying misconduct at the intersection of investment professionals and retail investors, including:
    • steering clients to higher-cost mutual fund share classes;
    • abuses in wrap-fee accounts;
    • investment adviser recommendations to buy and hold volatile products;
    • suitability issues involving the sale of structured products to retail investors; and
    • abusive sales practices.

These initiatives are aimed at Enforcement’s five core principles and address growing areas of concern within the industry.

Report: Fiscal Year 2017

Finally, Enforcement used the report as an opportunity to summarize its year end statistics.  In the 2017 fiscal year, Enforcement brought a “diverse mix of 754 enforcement actions, including 446 standalone actions.”  While the number of standalone actions decreased slightly for 2016,  approximately 60% of the standalone matters that were brought centered evenly on: (1) investment advisory issues; (2) securities offerings; and (3) issuer reporting/accounting and auditing.  As in prior years, Enforcement continued its focus on market manipulation, insider trading and broker-dealers – each accounting for approximately 10% of standalone actions.

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