On November 15, 2022, the SEC announced its enforcement results for fiscal year 2022, which ended on September 30, reporting the following key metrics and highlights:
- 9% increase in number of actions filed. The SEC filed 760 enforcement actions, representing a 9% increase over the prior year. Of the 760 actions, 464 were “stand-alone” matters, a 6.5% increase over the prior year.
- Record-breaking and “recalibrated” penalties issued. The agency set a new record for money ordered in SEC actions in a single year, with the total, including disgorgement, pre-judgment interest, and civil penalties, reaching nearly $6.5 billion. Civil penalties accounted for $4.2 billion of the total money ordered, which is the largest single-year amount ordered in that category in the SEC’s history — and more than was ordered the past three years combined. Disgorgement and pre-judgment interest totaled $2.245 billion, representing a 6% decline over fiscal year 2021. $937 million was distributed to harmed investors, over $400 million more than the prior year.
- Individual accountability — as well as cooperation and remediation — emphasized. More than two-thirds of the stand-alone enforcement actions involved charges against at least one individual. Where relevant, settled orders were also increasingly transparent in detailing cooperation and remediation that merited credit.
- Whistleblowers continued to be a focus. Fiscal year 2022 was also the SEC’s second highest year for whistleblower awards, both in the number of whistleblowers awarded and the total amount awarded.
Robust Sanctions and Relief
While the SEC broke several records, Gurbir S. Grewal, Director of the Division of Enforcement, noted that the SEC does not expect to see records like this every year: “we expect behaviors to change. We expect compliance.” The SEC noted that the penalties imposed in fiscal year 2022 were “recalibrated” higher to more effectively deter future violations and promote increased accountability and compliance. In other words, in the SEC’s view, past penalties were seemingly not large enough to deter similar misconduct. In addition to large monetary penalties, several settlements in fiscal year 2022 included tailored undertakings, which provided detailed prophylactic remedies and were designed to offer additional guidance for compliance by other firms. The SEC also required that parties admit to committing violations in several settlements to enhance accountability. The off-channel (text and social media) communication actions against several financial institutions, as well as an action against a large auditing firm, are reflective of these considerations.
Despite Director Grewal’s warning about not exceeding the records set in fiscal year 2022, there is no indication that the SEC’s enforcement actions and corresponding penalties will slow or diminish in the current year. In a recent speech, Director Grewal paraphrased Warren Buffet: “It is only when the tide goes out that you know who’s been swimming naked.” In other words, a rising tide conceals a lot of fraud that the SEC is likely to investigate.
Emphasis on Individual Liability and Cooperation
As in prior years, individual accountability continued to be a pillar of the SEC’s enforcement program. In fiscal year 2022, more than two-thirds of stand-alone enforcement actions involved charges against at least one individual. This is consistent with prior years. Charges under Sarbanes-Oxley (SOX) 304 continued to be an important aspect of the SEC’s efforts to hold individuals accountable. In an effort to incentivize senior executives at public companies to prevent misconduct and set an appropriate tone at the top, the SEC, pursuant to SOX 304, ordered executives to return subject compensation and/or stock sale profits even when they were not personally engaged in wrongdoing.
The SEC also continued to recognize and incentivize meaningful cooperation. To demonstrate the tangible benefit of such cooperation, the SEC has increasingly been transparent in certain settled orders regarding cooperation and remediation that merited credit.
Willingness to Litigate
The SEC’s 2022 fiscal year enforcement actions demonstrated a continued willingness to take matters to trial and an ability to succeed. The Trial Unit won favorable verdicts in 12 of the 15 trials brought this year, the most conducted in a single year in over a decade. The SEC was also successful at the summary judgment stage in 9 other matters, and it won partial summary judgment in many others.
Increased Use of Data Analytics
The SEC also increased its use of data analytics in fiscal year 2022, which helped the agency to bring a wide range of enforcement actions, from traditional insider trading to an alleged complex microcap market manipulation scheme. SEC staff reviewed and triaged over 38,500 tips, complaints, and referrals of potential securities law violations. The SEC also continued to emphasize the importance of rewarding and protecting whistleblowers as part of its enforcement approach, evidenced by its issuance of approximately $229 million in 103 awards to whistleblowers. The Whistleblower Program received more than 12,300 whistleblower tips in fiscal year 2022, a record number. The SEC was not only focused on protecting the whistleblower’s anonymity, it also pursued individuals and entities who impeded or retaliated against them.
Priority Areas of Enforcement
The SEC’s enforcement actions in fiscal year 2022 covered a broad spectrum of subject areas, including areas that senior leadership had previously identified as priorities going forward. These priority areas include the following:
- Financial fraud and issuer disclosure. The SEC charged numerous companies and individuals for misleading investors. As one example, an airline company and its former CEO were charged for misleading investors about the safety of the 737 MAX planes following crashes in 2018 and 2019.
- Focus on gatekeepers. The SEC has focused its enforcement actions on gatekeepers, such as attorneys, auditors, and transfer agents. These matters in fiscal year 2022 included an action against a large audit firm that resulted in admissions of wrongdoing and the highest penalty ever ordered against an audit firm. The SEC also charged attorneys for roles in fraudulent securities offerings and an alleged would-be pump-and-dump scheme. In addition, the SEC charged a recidivist transfer agent and its former principal for violating an associational bar the SEC had previously imposed on them.
- Crypto. Consistent with the SEC’s emphasis on the crypto asset securities space, the agency nearly doubled the staff of its Crypto Assets and Cyber Unit in fiscal year 2022. The SEC brought numerous actions related to crypto-assets securities, including a first-of-its-kind action against a crypto lending platform for violating the registration requirements of the Investment Company Act of 1940, which related to the platform’s failure to register the offers and sales of its retail crypto lending product. FINRA, the other regulator of broker-dealers, also recently announced it would give more attention to the digital-asset security space, including conducting a targeted sweep exam of firm practices regarding retail communications concerning related products and services.
- Environmental, social, and governance. As ESG matters have grown in importance to investors, the SEC has increased its focus on these issues. This has resulted in several actions touching ESG issues, including charges against a large investment advisor for materially misleading statements and omissions about its consideration of ESG factors in making investment decisions. The SEC also brought charges against one of the largest iron ore producers that were related to alleged false and misleading claims about the safety of its dams prior to the collapse of one its dams in Brazil.
- Private funds. Following recent growth in the total amount of assets managed by advisors to private funds, the SEC increased its enforcement actions in this area. In fiscal year 2022, the SEC brought several actions related to conduct by private fund advisors, including charges against nine private fund advisors for failure to comply with the Custody Rule or update their Forms ADV to accurately reflect the status of their private fund clients’ financial statements.
Fiscal year 2022 can serve as a roadmap for the direction in which the SEC will take future enforcement efforts. Additionally, between now and early 2023, the SEC’s Division of Examinations will publish its list of priorities for 2023 and FINRA will publish its 2023 Report on its Examination and Risk Monitoring Program. Each will provide additional insight regarding the exam and enforcement themes we can expect in the coming year.
 November 4, 2022, PLI 54th Annual Institute on Securities Regulation Conference.