SEC Enforcement Annual Results and Looking Forward

The Securities and Exchange Commission’s Enforcement Division just issued a report highlighting its priorities for the coming year a look back at enforcement actions that took place during the past year.

The Enforcement Division’s Co-Directors Stephanie Avakian and Steven Peikin stated stated five core principles that will guide their enforcement decision-making:

  1. focus on the Main Street investor;
  2. focus on individual accountability;
  3. keep pace with technological change;
  4. impose sanctions that most effectively further enforcement goals; and
  5. constantly assess the allocation of resources.

Principles 1 and 3 are being addressed with the SEC’s new Retail Strategy Task Force and Cyber Unit.

Principle 2 is an indication that the SEC will continue to focus on the individual wrongdoers at an organization and not just the organization itself. Corporate fines just hurt shareholders, while cases against individuals may do more to deter wrongdoing.

Principles 4 and 5 are just common sense. Which is a good thing to demonstrate in Washington these days.

The annual report notes that the SEC brought 754 enforcement actions which consisted of 446 standalone actions and returned a record $1.07 billion to harmed investors.

I don’t like seeing a touting of enforcement actions and money collected. I would hate to see the SEC driven towards quotas, which do not necessarily indicate a better protection of investors. (See principle 4 above.) Take a look at the Wells Fargo case to see how a numbers driven organization got in trouble. (See Why Sales Quotas Ruined Wells Fargo by Matt Levine.)

So it was great to see this note in the report:

While such statistics provide some kind of measurement, they provide a limited picture of the quality, nature, and effectiveness of our efforts. For example, returning $100,000 to several dozen defrauded investors has little impact on our overall statistics, but can be lifechanging for those investors. And, of course, violations that are prevented or deterred are never reflected in statistics. We also note that some cases take many years from initiation to resolution. Note that in 2017, $1.07 billion was distributed to harmed investors while $140 million was distributed in 2016, but much of the effort that resulted in the 2017 numbers occurred in prior years.

The trouble with the goal of enforcement is the same trouble that compliance has. How do you measure your effectiveness? Your goal is to have less wrong-doing. If you are finding less wrong-doing, you can’t be sure if it is because there is less wrong-doing and you are being effective. Or, you are finding less wrong-doing because you are doing a worse job of spotting it and being less effective.