In November 2021, the Securities and Exchange Commission’s Division of Enforcement (the Division of SEC) published its annual report for 2021. The annual report was presented as a press release, whereas in prior years it was published as a sizeable brochure. While shorter than previous annual reports, the press release is also supported by an addendum which indexes every action filed through the year.
During the year, the Division filed 697 enforcements, including 434 new enforcement actions (representing a 7% increase over the prior year) and 120 actions against issuers who were delinquent in required SEC filings. Overall, this represented a 3% decrease in total actions filed the prior year. The filings represented a range of matters, including emerging issues in the cryptocurrency and special purpose acquisition companies (SPAC) spaces. There was a 33% decrease in disgorgement awards since the prior year ($2.396 million in 2021 compared to $3.589 million in 2020) and a 33% increase in penalties ($1.456 million in 2021 compared to $1.091 million in 2020). The year was also record-breaking for awards relating to whistleblowers, with $564 million being awarded to 108 whistleblowers.
The Division sought a number of enforcement actions in the following key priority areas:
- Holding individuals accountable;
- Ensuring gatekeepers live up to their obligations;
- Rooting out misconduct in crypto;
- Policing financial fraud and issuer disclosure;
- Charging improper conduct by investment professionals;
- Protecting market integrity;
- Cracking down on insider trading and market manipulation;
- Enforcing the foreign corrupt practices act;
- Guarding against public finance abuse; and
- Pursuing wrongdoing in securities offerings.
The annual report also identifies that the Division filed a number of first ever enforcement actions across emerging areas, which highlighted the following cases and key takeaways outlined by the Division Director, Gurbir S. Grewal:
- Regardless of the technology utilized to offer and sell securities, full and honest disclosure must always be at the forefront. The SEC sought action relating to unregistered sales of securities using decentralized finance (DeFi) technology (in this case, using smart contracts to sell digital tokens) and misleading investors. The order also found that the individuals involved misrepresented the operations and performance of the company.
- The SEC will pursue securities law violators wherever they operate, including on the dark web. A key case was presented relating to violations of the antifraud provisions of the securities law on the dark web, whereby an individual perpetrated a fraudulent scheme to access and sell “insider tips" which subsequently resulted in certain others trading based on the false information provided.
- Municipal advisors must comply with core standards of conduct, including the disclosure of conflicts, to ensure they act in their clients’ interest and not their own. A key case brought charges for violation of duties and engaging in unregistered municipal advisory activities under the Municipal Securities Rulemaking Board (MSRB), Rule G-42, by which the offenders did not adequately disclose conflicts of interest to their clients.
- Crowdfunding allows issuers to cast a wide net for potential investors, which emphasizes the need for and importance of full and honest disclosure. The SEC presented charges for conducting a fraudulent scheme in selling unregistered securities through crowdfunding offerings. This included an individual allegedly hiding his involvement in the offerings due to concern that his prior criminal conviction could discourage prospective investors and the diversion of investor funds for personal use.
- Deceptive conduct and material misrepresentations are prohibited in connection with the purchase or sale of securities, including use of alternative data. The key case presented focuses on “alternative data,” which refers to information not commonly contained within a company’s financial statements or any other traditional data sources. While it was agreed that companies would only share their confidential data if it was aggregated and anonymized before being used, the case identified that non-aggregated and non-anonymized data was used to enhance the value of the data being sold and that this activity was misrepresented to clients.
- Form CRS must be appropriately completed on a timely basis to ensure retail investors are provided a summary of services offered, associated fees, conflicts of interest and any other pertinent information. The Division brought action against 21 investment advisors and six broker dealers who failed to timely file and deliver their client or customer relationship summaries (Form CRS) to their investors, as mandated under new regulation which required compliance by June 30, 2020.
- Appropriately registering as a broker-dealer assists in protecting customers as it subjects the entity to various mandates and oversight, including inspections and examinations by the SEC and the requirement to establish policies and procedures to safeguard customer information. A key case was brought against an order and execution management system (OEMS, an electronic trading platform) provider that facilitated electronic trading for failing to register as a broker-dealer.
For a copy of the enforcement press release published by the Division, refer here.