Alert
Financial Institutions Law Alert
11.07.2019

Yesterday, the SEC’s Division of Enforcement released its 2019 annual report, looking back on the prior year’s activities and enforcement action metrics. In a uniquely challenging year that began with a government shutdown (or, in the SEC’s words, “a near complete cessation of activity resulting from the 35-day lapse in appropriations”) and included two landmark Supreme Court cases in Kokesh (subjecting disgorgement to a statute of limitations) and Lucia (impacting the appointment of ALJs), the SEC had a 5% increase in enforcement actions, resulting in a 10% increase in total money ordered. In general, the Report highlights 2019’s focus on retail clients and digital assets, although more than 1/3 of the prior year’s enforcement actions related to investment advisers and investment company issues. Some important takeaways from the 2019 Report:


Retail Investors
  • Retail Client Task Force: In its second year of existence, the RCTF plays an increasingly vital role both through (i) the use of data-driven analytics to identify potentially problematic patterns in market behavior and; (ii) the development of outreach programs to enhance investor education.

  • Share Class Selection Disclosure Initiative: In March 2019, this year-long initiative concluded with nearly 100 investment advisory firms self-reporting issues relating to improper mutual fund share class recommendations and conflicts of interest. The SEC ultimately ordered 79 investment advisers to return a total of $135MM to affected mutual fund investors.

Digital Assets

  • In 2019, the SEC continued to bring actions against issuers of digital assets, but this year included the first action by the SEC against a digital asset issuer for registration violations and the first set of charges against ICO promoters, which included two celebrities who marketed digital assets without disclosing the compensation they had received for their marketing efforts.

  • In settlements with digital asset issuers, the SEC provided a framework for compliance with registration requirements, which included registering “tokens” under the Exchange Act.

  • The main takeaway from these Enforcement actions: “if a product is a security, regardless of the label attached to it, those who issue, promote or provide a platform for buying and selling that security must comply with the investor protection requirements of the federal securities laws.”

Continued Areas of Focus
  • The SEC will strive to increase the pace of its investigations which, on average, took about 24 months from opening to enforcement action in 2019. Enforcement noted that collaboration with other agencies has helped bring about resolution more quickly in certain cases (e.g. Nissan and PPG).

  • Enforcement will endeavor to be more transparent with its application of cooperation credit – primarily by continuing with its recent practice (also adopted by FINRA) of providing details about actions that led to the credit reflected in public orders.

  • The Office of the Whistleblower continues to receive thousands of tips, and in response, the SEC has focused on streamlining and accelerating its review for a program that, since inception, has generated more than $2 billion in financial remedies and $387 million in whistleblower awards.

Practice Areas

Industries

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