The number of actions announced represent a 3% increase over fiscal year 2022, and include 501 original, or “stand-alone,” enforcement actions, an 8% increase over the prior fiscal year.
The SEC also filed 162 “follow-on” administrative proceedings seeking to bar or suspend individuals from certain functions in the securities markets based on criminal convictions, civil injunctions, or other orders, and 121 actions against issuers who were allegedly delinquent in making required filings with the agency.
Orders for $4.949 billion in financial remedies were obtained in fiscal year 2023, the second highest amount in SEC history, after the record-setting financial remedies ordered in fiscal year 2022. The financial remedies comprised $3.369 billion in disgorgement and prejudgment interest and $1.580 billion in civil penalties. Both the disgorgement and civil penalties ordered were the second highest amounts on record.
The SEC also instituted orders barring 133 individuals from serving as officers and directors of public companies, the highest number of officer and director bars imposed in a decade.
Significance of whistleblowers
It was a record-breaking year for the SEC’s Whistleblower Program, with awards totaling nearly $600m, including a record-breaking $279m awarded to one whistleblower. The agency received more than 18,000 whistleblower tips, a record number and approximately 50% more than the previous record of 12,300 whistleblower tips received in fiscal year 2022. The SEC received more than 40,000 tips, complaints, and referrals in total, a 13% increase over fiscal year 2022.
It is clear that whistleblowers helped propel the $5 billion enforcement haul, and combined awards to tipsters from the SEC and CFTC amount to more than $2 billion. Granted, only $365m came from the CFTC, but these whistleblower programs, created with the passage of the Dodd-Frank Act in 2010, have been immensely successful in helping the agencies’ patrol the securities and commodities markets. They have incentivized people to bring forward critical information about malfeasance that can be devastating to their livelihoods.
“Whether it was by leveraging risk-based initiatives, seeking robust remedies, rewarding cooperation, protecting whistleblowers, or returning nearly a billion dollars to harmed investors, the Enforcement Division stood up for the investing public.”
Gurbir Grewal, Director, SEC Enforcement Division
With that said, the programs require ongoing funding, and bipartisan bills offering some reforms to the programs are pending in Congress. Also, some companies are still getting aspects of their own whistleblower programs wrong, especially when it comes to the severance agreements they provide employees, and the SEC has to spend some of its time patrolling that specific type of wrongdoing.
Types of cases
The SEC gives a sample of the types of cases it brought in this past fiscal year, and it starts out with the off-channel communications and attendant recordkeeping lapses first.
Recordkeeping
Twenty-five advisory firms, broker-dealers and some credit rating agencies – including some of the biggest names in the market – agreed to pay combined civil penalties totaling more than $400m to settle charges that they violated the recordkeeping requirements of the federal securities laws. The cases were mainly brought in groups and fines ranged from $7.5m to $206.8m. They are the biggest penalties ever against US financial services firms for recordkeeping lapses.
Because companies do not surveil personal messaging channels, using them to discuss business puts SEC-regulated employers in breach of requirements to record all business communications, and the SEC has said such records are critical for guarding against fraud and other misconduct. And they are essential for the SEC to do its core job of ensuring businesses are doing that guarding.
In keeping with the messaging about the importance of keeping adequate business records, the SEC charged one large investment bank for its investment advisory arm’s failure to provide complete and accurate securities trading information, known as blue sheet data, to the SEC. According to the SEC’s order, the firm made more than 22,000 deficient blue sheet submissions over approximately 10 years. The submissions contained missing or inaccurate trade data for at least 163 million transactions.
Marketing Rule
In addition, the SEC obtained judgments from the federal courts, plus continued pursuing cases of noncompliance with the Marketing Rule, charging nine advisers. The SEC’s orders find that each of the charged firms advertised hypothetical performance to mass audiences on their websites without having the required policies and procedures.
Each of the firms settled the charges, paying combined civil penalties of $850,000. In addition, a fintech investment adviser agreed to pay more than $1m combined in a civil penalty, disgorgement, and prejudgment interest to settle charges that it violated the marketing rule.
Accountability and gatekeepers
The SEC pointed to how individual accountability is a key feature of its enforcement program. In fiscal year 2023, approximately two-thirds of the SEC’s cases involved charges against one or more individuals. In addition, to protect investors from future violations, the SEC obtained 133 orders barring individuals from serving as officers and directors of public companies, the highest number in a decade.
It also sought to protect retail investors from the affinity frauds and other schemes targeting certain investors, such as elderly church members, Tongan Americans, Orthodox Jews, and law enforcement/first responders, among others.
Through its enforcement actions and other public statements, the SEC reiterated all year the important role gatekeepers play in the financial markets – such as accountants, auditors, and lawyers who share responsibility for protecting investors and play critical roles in the capital markets as the first lines of defense against misconduct. Ensuring that they comply with their obligations is a critical part of the SEC’s mission, the agency said.
ESG disclosure
The SEC noted how important ESG information is to investors, which has prompted a growth of ESG-branded investment products (such as impact and integrated funds) and an increased focus on ESG by public companies. The SEC brought several enforcement actions addressing ESG issues in fiscal year 2023.
One notable enforcement action was the one brought against a large bank’s subsidiary for making materially misleading statements about its controls concerning ESG products. The case involved an investigation by the SEC’s Climate and ESG Task Force, and it was accompanied by a separate anti-money-laundering enforcement action against the unit.
The firm marketed itself as a leader in ESG that adhered to specific policies for integrating ESG considerations into its investments, but it allegedly failed to adopt and implement policies and procedures reasonably designed to ensure that its public statements about the ESG-integrated products were accurate. The subsidiary agreed to pay a total of $25m in penalties – $6m for the AML deficiencies and $19m for the ESG lapses.
The SEC’s press release and cease-and-desist orders do not use the term, but the allegations encompass greenwashing. The enforcement action and settlement are one of many examples of how the companies that have faced ESG-related claims are the ones that have touted their ESG efforts, but failed to live up to their own stated standards.
Year in summary
Gurbir S Grewal, Director of the SEC’s Division of Enforcement, summed up the year’s activities by saying this: “Whether it was by leveraging risk-based initiatives, seeking robust remedies, rewarding cooperation, protecting whistleblowers, or returning nearly a billion dollars to harmed investors, the Enforcement Division stood up for the investing public.
“I am extremely proud of the Division’s efforts, including those that are not directly reflected in today’s results like the many important investigations that may not result in enforcement actions or the thousand-plus ongoing investigations teams conduct each fiscal year – all of which help protect investors, hold bad actors accountable, and promote public trust.”