Top SEC, FINRA officials say downtrend in enforcement cases not caused by pullback

NEW YORK(Thomson Reuters Regulatory Intelligence) - Enforcement cases have trended lower over the past two years for the two leading U.S. securities regulators as new leadership has taken over at both. Top officials said on Wednesday in separate speeches that they remain committed to policing Wall Street fraud and cited other factors for the downturn.

A judge wearing white gloves stands before a special session of the United States District Court for the Southern District of New York on the occasion of the 225th anniversary of the first session of the court in New York November 4, 2014.

Securities and Exchange Commission Co-Director of Enforcement Steven Peikin and Financial Industry Regulatory Authority Chief Executive Officer Robert Cook both said there has been no pulling back on enforcement despite the pronounced decline in the number of cases closed.

Both agencies have had changes at the top and both have seen the departure of long-time enforcement chiefs and staffers. FINRA and the SEC have also shifted priorities to focus on retail abuses that produce lower fines than settled actions against large firms for capital markets violations.


The SEC under Chair Jay Clayton has raised the priority of bringing cases against individuals rather than allowing firms to settle cases without anyone personally named. The increased focus on individual culpability is seen as another factor that translates to lower yields in fines overall.

But Peikin said the SEC’s shifting focus has been effective in aligning enforcement with the agency’s core mission of providing investor protection. The SEC has also pushed for quick responses to stem risky behavior before it grows into a long-running investigation that ends with a large payoff. Instead it is ending cases with non-monetary relief, undertakings and injunctions to curb risky, violative behavior.

In his speech{here}, Peikin cited the SEC’s action against Tesla Chief Executive Officer Elan Musk over alleged misleading tweets on a buyout plan as an example of how the agency is becoming more active in “undertakings” aimed at changing behavior and improving compliance. In the settlement, Musk was forced to relinquish his chairmanship and add two independent board members and create stronger controls on use of social media.


FINRA’s chief executive, meanwhile, said many enforcement cases are in the pipeline and that firms should not “read too much” into recent statistics. Like the SEC, FINRA has shown a sharp decline in disciplinary actions. FINRA fines plunged to $64.9 million from $173.8 million the prior year, according to FINRA statistics.

“Our commitment to enforcement has in no way changed," Cook said in remarks at a Securities Industry Markets Association conference reported by Investment News{here}. "It's not like we said to the enforcement program, 'Hey, don't bring as many enforcement cases.' We certainly would like to bring cases that really matter and get at real investor harm.”

Cook took over the leadership of FINRA in 2017 and launched a revamp of the self-regulator to add transparency to the examination process and to combine markets and sales practice enforcement. He was reluctant to forecast the future of enforcement but noted that there had been an uptick in the first half of the year.


FINRA and SEC have both gone through a period of transition to new enforcement leadership, which some see as a factor in the decline in cases. But others see the decline as a long-term trend as the blockbuster cases of the post-crash era give way to a more risk-based focus for market regulation and a heightened focus on investor-centered fraud.

The securities regulators have pushed back on critics who measure them based on past performance. Peikin, in a speech at the “PLI White Collar Crime 2018” conference, said it could be “counterproductive” to apply a numbers-based assessment of the SEC's effectiveness. SEC enforcement cases dropped to the lowest level in five years, according to a recent study by the NYU Pollack Center for Law & Business and Cornerstone Research{here}.

“These quantitative metrics are of some value in assessing the work of the division; they certainly provide a rough measure of our overall activity level,” Peiikin said. “But statistics such as these do not provide a full and meaningful picture of the quality, nature, and effectiveness of our efforts.”


The falling metrics, however, have been viewed by some as a sign that agencies are following President Donald Trump’s vow to ease up on Wall Street firms with regulation that hampers capital formation and to concentrate on retail abuses. Both agencies, FINRA and SEC, had put retail abuses and bad-broker initiatives at or near the top of enforcement priorities in recent years.

The shift to retail abuses has played an even larger role over the past two years during the Trump administration. Retail cases tend to reduce the likelihood of more big-ticket enforcement actions. At the same time an important Supreme Court case that limits disgorgement to a five-year period in a legal development whose biggest impact will be felt in retail abuse cases that weigh heavily on disgorgement.

The court’s rule, which came in the Kokesh decision issued late last year, has already reduced payouts to harmed investors by $800 million, Peikin said, based on an SEC study disclosed earlier this year. “That number continues to rise,” he said. The five-year time limit means the SEC has a narrow window to bring cases that often take years to complete from the time an Order of Investigation is issued to the final resolution. The challenge to close cases has grown as enforcement deals with increasingly complex forms of fraud and often involve complicated investment products.


Peikin argued that the agency should be reviewed based on “the full range of remedies the Commission has at its disposal, beyond the ability to seek penalties and disgorgement.” He cited the Tesla case as one that hit all of the SEC goals in that it brought significant fines of $40 million, injunctive relief in shaping corporate governance changes and compliance and in deciding individual culpability, since Musk himself paid half the total in fines.

When the Tesla settlement was announced last week, SEC chief Clayton cited it as an example of how the agency’s enforcements must take a broader look of how they affect all stakeholders. The agency initially pushed for an industry ban on Musk, but ultimately settled the case by allowing him to remain as chief executive of Tesla.

For Clayton, who has frequently criticized agency actions that punish shareholders for management misbehavior, the Tesla case was an example of how the agency can bring a measured response to transgressions. In his comments on the case he noted that “corporate fines often are financed with funds that could otherwise benefit shareholders, and the skills and support of certain individuals may be important to the future success of a company. “


Peikin, whose association with Clayton began prior their assuming top roles at the SEC, as they worked together at the Wall Street law firm of Sullivan & Cromwell LLP. The SEC chair, who lacked government experience prior to taking over as head of the SEC, has been known to work closely with Peikin, a veteran prosecutor for the U.S. Attorney in the Southern District of New York and in the SEC fraud division.

Peikin’s role has included adapting to an enforcement style that Clayton prefers. Peikin, in his speech, said enforcement should use “a variety of remedies and relief” and “a nuanced and qualitative evaluation” that balances the interest of all stakeholders.

His speech capped his first year as co-head of enforcement. The division evaluates each case to decide how to tailor enforcement to balance investor protection with market integrity and consider a range of tools in enforcement, he said.

“What we do not do,” he concluded. “is assess large penalties simply for the sake of counting them up at the end of the year.”

(Richard Satran is a financial journalist covering daily and emerging issues for Thomson Reuters Regulatory Intelligence.)