The New Leadership of the SEC’s Enforcement Division Recently Laid Out Its Enforcement Priorities for 2018
The new leadership of the Enforcement Division of the Securities and Exchange Commission (SEC) recently laid out its priorities for the upcoming year and beyond. The agency’s primary focus will be on cybersecurity, retail investors and accountability for individuals.
After much speculation about how enforcement may change under the Trump Administration, the SEC Enforcement Division announced the new priorities in conjunction with its annual report. According to Co-Directors Stephanie Avakian and Steven Peikin, five core principles will guide their enforcement decision-making. Below is a brief summary of what the SEC had to say about each principle:
Focus on the Main Street Investor: The report notes that retail investors are not only the most prevalent but also the most vulnerable investors. Accordingly, the division plans to focus on the types of misconduct that traditionally have affected retail investors: accounting fraud, sales of unsuitable products and the pursuit of unsuitable trading strategies, pump and dump frauds and Ponzi schemes. “Simply stated, our oversight of Wall Street is most effective and protects those who need it most, when viewed through a lens focused on retail investors,” the report states.
Focus on Individual Accountability: The Enforcement Division has adopted the position that the pursuit of individual wrongdoers must be the key feature of any effective enforcement program, as individual accountability more effectively deters wrongdoing. “That pursuit will send strong messages of both general and specific deterrence and strip wrongdoers of their ill-gotten gains,” the report states.
Keep Pace with Technological Change: The Enforcement Division highlights that technology has not only changed the markets but also transformed the ability of wrongdoers to engage in cyber-enabled misconduct. Wrongdoers can manipulate markets by hacking into electronic accounts or broker the sale of information on the dark web. “As nefarious actors take advantage of technological change and market evolution, the Commission’s enforcement efforts must respond with purpose and vigor,” the report states.
Impose Sanctions That Most Effectively Further Enforcement Goals: In imposing sanctions, the SEC will consider the package of remedies that will be most appropriate in the matter at hand and more broadly.
Constantly Assess the Allocation of Our Resources: As the report noted, the Enforcement Division employs fewer than 1,200 professionals but reviewed last year alone more than 16,000 tips from the general public and 20,000 reports of suspicious activity filed by broker-dealers. Accordingly, it must “constantly assess whether we are allocating our resources to address the most significant market risks and in the most effective manner, keeping the front of mind the violators who pose the most serious threats to investors and market integrity.”
SEC Creates New Enforcement Units
The SEC also announced the creation of two new enforcement units. The Division of Enforcement created a new Cyber Unit to focus exclusively on risks posed by cyber-related misconduct. The Cyber Unit will focus on market manipulation schemes involving false information spread through electronic and social media; hacking to obtain material nonpublic information and trading on that information; violations involving distributed ledger technology and initial coin offerings (ICOs); misconduct perpetrated using the dark web; intrusions into retail brokerage accounts; and cyber-related threats to trading platforms and other critical market infrastructure.
The SEC also formed the Retail Strategy Task Force, which will be dedicated to developing effective strategies and methods to identify potential harm to retail investors. The Task Force will focus on wrongdoing that typically targets retail investors, including Ponzi schemes and offering frauds. It will also will focus on identifying misconduct that “occurs at the intersection of investment professionals and retail investors”, such as steering clients to higher-cost mutual fund share classes, abuses in wrap-fee accounts, investment adviser recommendations to buy and hold highly volatile products like inverse exchange-traded funds, suitability issues involving the sale of structured products to retail investors, and abusive sales practices such as churning and excessive trading.
Overall, the SEC report does not reflect a major shift in enforcement or examination priorities. The agency had already been increasing its focus on cybersecurity and retail investors. The most significant change is likely the greater focus on individual accountability. As highlighted by the SEC Enforcement Division, one or more individuals have been charged in more than 80 percent of the standalone enforcement actions the agency has brought since Commissioner Jay Clayton took the helm.
If you have any questions or if you would like to discuss the matter further, please contact me, Kenneth Oh, at 201-806-3364.
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New Leadership Pronounces SEC Enforcement Priorities
Author: Kenneth C. Oh
The New Leadership of the SEC’s Enforcement Division Recently Laid Out Its Enforcement Priorities for 2018
The new leadership of the Enforcement Division of the Securities and Exchange Commission (SEC) recently laid out its priorities for the upcoming year and beyond. The agency’s primary focus will be on cybersecurity, retail investors and accountability for individuals.
After much speculation about how enforcement may change under the Trump Administration, the SEC Enforcement Division announced the new priorities in conjunction with its annual report. According to Co-Directors Stephanie Avakian and Steven Peikin, five core principles will guide their enforcement decision-making. Below is a brief summary of what the SEC had to say about each principle:
Focus on the Main Street Investor: The report notes that retail investors are not only the most prevalent but also the most vulnerable investors. Accordingly, the division plans to focus on the types of misconduct that traditionally have affected retail investors: accounting fraud, sales of unsuitable products and the pursuit of unsuitable trading strategies, pump and dump frauds and Ponzi schemes. “Simply stated, our oversight of Wall Street is most effective and protects those who need it most, when viewed through a lens focused on retail investors,” the report states.
Focus on Individual Accountability: The Enforcement Division has adopted the position that the pursuit of individual wrongdoers must be the key feature of any effective enforcement program, as individual accountability more effectively deters wrongdoing. “That pursuit will send strong messages of both general and specific deterrence and strip wrongdoers of their ill-gotten gains,” the report states.
Keep Pace with Technological Change: The Enforcement Division highlights that technology has not only changed the markets but also transformed the ability of wrongdoers to engage in cyber-enabled misconduct. Wrongdoers can manipulate markets by hacking into electronic accounts or broker the sale of information on the dark web. “As nefarious actors take advantage of technological change and market evolution, the Commission’s enforcement efforts must respond with purpose and vigor,” the report states.
Impose Sanctions That Most Effectively Further Enforcement Goals: In imposing sanctions, the SEC will consider the package of remedies that will be most appropriate in the matter at hand and more broadly.
Constantly Assess the Allocation of Our Resources: As the report noted, the Enforcement Division employs fewer than 1,200 professionals but reviewed last year alone more than 16,000 tips from the general public and 20,000 reports of suspicious activity filed by broker-dealers. Accordingly, it must “constantly assess whether we are allocating our resources to address the most significant market risks and in the most effective manner, keeping the front of mind the violators who pose the most serious threats to investors and market integrity.”
SEC Creates New Enforcement Units
The SEC also announced the creation of two new enforcement units. The Division of Enforcement created a new Cyber Unit to focus exclusively on risks posed by cyber-related misconduct. The Cyber Unit will focus on market manipulation schemes involving false information spread through electronic and social media; hacking to obtain material nonpublic information and trading on that information; violations involving distributed ledger technology and initial coin offerings (ICOs); misconduct perpetrated using the dark web; intrusions into retail brokerage accounts; and cyber-related threats to trading platforms and other critical market infrastructure.
The SEC also formed the Retail Strategy Task Force, which will be dedicated to developing effective strategies and methods to identify potential harm to retail investors. The Task Force will focus on wrongdoing that typically targets retail investors, including Ponzi schemes and offering frauds. It will also will focus on identifying misconduct that “occurs at the intersection of investment professionals and retail investors”, such as steering clients to higher-cost mutual fund share classes, abuses in wrap-fee accounts, investment adviser recommendations to buy and hold highly volatile products like inverse exchange-traded funds, suitability issues involving the sale of structured products to retail investors, and abusive sales practices such as churning and excessive trading.
Overall, the SEC report does not reflect a major shift in enforcement or examination priorities. The agency had already been increasing its focus on cybersecurity and retail investors. The most significant change is likely the greater focus on individual accountability. As highlighted by the SEC Enforcement Division, one or more individuals have been charged in more than 80 percent of the standalone enforcement actions the agency has brought since Commissioner Jay Clayton took the helm.
If you have any questions or if you would like to discuss the matter further, please contact me, Kenneth Oh, at 201-806-3364.
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