On November 15, 2017, the SEC’s Division of Enforcement released its annual report for Fiscal Year 2017 (“FY 2017”). The report explains how the Division of Enforcement’s decision making throughout FY 2017 was guided by the following five principles:
- Focus on Retail Investors: As the most prevalent participants in the market, it is imperative to protect their vulnerabilities from traditional types of adviser misconduct such as sales of unsuitable products or the pursuit of unsuitable trading strategies;
- Emphasis of Individual Accountability: Future misconduct can be effectively deterred by pursuing and barring individual wrongdoers and recidivists;
- Focus on Technological Advancements: The Commission must coordinate with all criminal authorities to proactively mitigate cyber-related misconduct resulting from technological change and market evolution;
- Impose Sanctions Supporting Enforcement Goals: Determining punishments on a case-by-case basis can effectively drive behavior in the market. This approach incorporates various remedies such as monetary relief in the form of disgorgement and asset freezes; and
- Continuously Reallocate SEC Resources: The market’s immense size forces the SEC to constantly reallocate resources as deemed necessary to ensure the most significant risks are being addressed.
The Commission’s five principles facilitated numerous accomplishments during FY 2017 based on quantitative metrics. The Commission brought 754 actions and obtained $3.7 billion in disgorgement and penalties. Furthermore, $1.07 billion was returned to harmed investors, 309 companies were suspended in trading securities and 625 individuals were barred or suspended.
In an effort to align the Commissions’ principles with its allocation of resources, the Commission created the Cyber Unit and a Retail Strategy Task Force. The Cyber Unit, which combines the Commission’s cyber-related expertise with its proficiency in digital ledger technology, will focus on the following key areas:
- Market manipulation schemes deriving from the electronic spread of false information;
- Hacking for the purposes of obtaining material nonpublic information;
- Violations involving distributed ledger technology and initial coin offerings;
- Violations resulting from the dark web;
- Intrusions into retail brokerage accounts; and
- Cyber-related threats to market infrastructure.
The Retail Strategy Task Force was created to safeguard the long-term interests of retail investors through the use of technology and data analytics. In addition to violations implicating the microcap market, Ponzi schemes and offering frauds, the Retail Strategy Task force will focus on the following engagements between investment professionals and retail investors:
- The promotion of higher-cost mutual fund share classes;
- The abuse of wrap-fee accounts;
- The recommendation of volatile products like inverse ETFs;
- The sale of structured products that are not suitable to the client; and
- Abusive sales practices like excessive trading.
WHAT DOES THIS MEAN FOR ME?
The Commission’s annual report provides a statistical breakdown of their enforcement actions during FY 2017. While the report highlights numerous successes quantitatively, the Commission has expressed its intentions to also strive for qualitative achievements. Serious violations will thus be met with meaningful punishments to recoup ill-gotten gains, incapacitate wrongdoers and deter misconduct.
Advisers are strongly encouraged to ensure they maintain a robust compliance program. Fairview will continue to assist clients with supporting their compliance programs in addressing the Commission’s current and future areas of focus. If you have any questions or concerns about this annual report, please contact Fairview.