By Mark S. Nelson, J.D.
One day after the SEC issued its annual enforcement results for FY22, Cornerstone Research issued its own FY22 report on SEC enforcement actions. Cornerstone found that the most common enforcement matter involved reporting and disclosure violations. The Cornerstone report also noted that, in many categories, the current SEC enforcement results were higher than for any prior fiscal year recorded in the data repository used by Cornerstone to compile its report. The SEC's report, by contrast emphasized that the agency had brought 760 enforcement actions and recovered a record $6.4 billion in penalties and disgorgement in FY22.
“The increase in monetary settlements is consistent with the SEC’s public statements that ‘robust remedies’ are an enforcement priority,” said Sara Gilley, a coauthor of the report and a Cornerstone Research vice president. “The $1.2 billion in monetary settlements with 16 public broker-dealer subsidiaries for recordkeeping failures represents 44 percent of total monetary settlements in the fiscal year.”
Types of enforcement actions. According to Cornerstone, based on data obtained from the Securities Enforcement Empirical Database (SEED), which Cornerstone described as a collaboration between the NYU Pollack Center for Law & Business and Cornerstone, the SEC during the most recent fiscal year, the first full fiscal year under Chair Gary Gensler’s leadership, the SEC brought a total of 68 enforcement actions against public companies and/or those companies’ subsidiaries. Cornerstone’s report said this represented an increase over FY21 of 28 percent but also suggested that the increase in FY22 versus rates for the most recent three SEC chairs fell in the middle, with the Clayton-era SEC bringing fewer cases then the Gensler-era SEC and the Mary Jo White-era SEC bringing more cases than the Gensler-era SEC.
A heat map diagram included in the Cornerstone report indicated that the most common type of enforcement action involved reporting and disclosure violations (38 percent). Other frequent enforcement targets included, in declining order, broker-dealers, investment advisers and investment companies, and FCPA violations. Cornerstone said 2018 was the last time broker-dealer actions were this common and the heat map also suggested that the current level is about double the average for the period 2013 to 2021.
Enforcement actions against investment advisers and investment companies were somewhat down versus recent years, while FCPA actions continued a two-year down-trend versus the average for the period 2013 to 2021.
Venue data. Cornerstone observed that, despite court challenges to the SEC’s administrative enforcement regime, the agency still brought the bulk of its enforcement matters as administrative actions (88 percent). A Cornerstone graphic suggested that the high percentage of administrative matters was consistent with data for the period 2013 to 2022, in which only FY13 had a significantly higher percentage of civil actions (49 percent) versus administrative actions (51 percent). In all other years covered in the graphic, administrative actions ranged between 80 percent and 93 percent, spanning portions of two Democratic Administrations (6 years) and one Republican Administration (4 years).
Currently, the Supreme Court is mulling the question of whether SEC administrative action respondents can short-circuit the administrative process by bringing constitutional challenges to those proceedings in federal district courts rather than waiting to file a petition for review after an adverse agency decision.
The Supreme Court case emerged from the Fifth Circuit, as did a more recent decision vacating an SEC penalty on the grounds that the administrative proceeding: (1) violated the Seventh Amendment right to a jury trial; (2) involved an unconstitutional delegation of legislative power by Congress to the SEC because there was no intelligible principle by which the SEC would exercise the delegated power in violation of Article I of the U.S. Constitution, which vests “all” legislative power in Congress; and (3) involved statutory removal restrictions on SEC administrative law judges that violate the Take Care Clause of Article II of the U.S. Constitution. The Fifth Circuit also denied both panel rehearing and rehearing en banc in the case.
FY22 settlements. The Cornerstone report also noted several developments regarding settlements. Overall, 97 percent of settlements had a monetary component, while 82 percent of total monetary settlements involved civil penalties. In many instances, the numbers revealed by the Cornerstone report were among the highest ever recorded in the SEED repository.
Cornerstone reported that the SEC in FY22 imposed $2.8 billion in total monetary penalties as part of settlements. This total was more than FY21 and more than any other fiscal year in SEED. Much of the increase in settlement amounts can be attributed to a small number of high dollar amount settlements with broker-dealers regarding recordkeeping violations, said Cornerstone. Cornerstone said that if all settlement data is viewed together, the median settlement amount in FY22 was $9 million and the average settlement amount was $42 million. But if the several broker-dealer settlements are pulled out of the data, then the average settlement amount in FY22 falls to $30 million, a drop of about $11 million versus FY21.
Admissions of wrongdoing also were double that of any prior fiscal year. Cornerstone noted that the current SEC leadership has indicated it will seek admissions in appropriate cases. In FY22, Cornerstone said all admissions of guilt obtained in SEC proceedings involved broker-dealers matters.