Security - Check Permissions

MFDF - Mutual Fund Directors Forum - SEC Inflates Enforcement Statistics, Researcher Finds

Member Login



Request an account

Sample Banner 2

SEC Inflates Enforcement Statistics, Researcher Finds

In a forthcoming article in the Cornell Law Review, Urska Velikonja argues that the SEC’s enforcement metrics “are deeply flawed,” and that its method of reporting “consistently overstates the SEC’s enforcement output, masks trends, obscures real problems in enforcement, and reveals non-existent ‘problems’ that the SEC then tries to resolve.” Velikonja reviewed fifteen years’ worth of enforcement actions (9,679) and recalculated the Commission’s reported statistics, finding that “core enforcement has remained steady since 2002” and that enforcement has shifted “towards easier-to-prosecute strict-liability violations.”

For fiscal year 2014, the SEC reported that it filed 755 enforcement actions and “obtained orders totaling $4.16 billion in disgorgement and penalties,” a ten percent and twenty-two percent year-over-year increase, respectively. However, Velikonja argues that the SEC-reported statistic “monetary penalties ordered” is misleading “because it includes disgorgement orders offset by restitution ordered in a parallel criminal prosecution, civil fines imposed by and paid to FINRA or the exchanges, and penalties ordered but waived due to defendant’s financial inability to pay.” Further, the SEC was only able to collect between 29.8% and 74.2% of monetary penalties between 2004 and 2014.

Velikonja also criticizes the way that the SEC tabulates “enforcement actions.” She argues that the Commission’s numbers count both “primary” and “derivative” actions. She suggests that “primary” actions are those in which the SEC tries to establish that the defendant(s) violated the federal securities laws, while “derivative” actions are “follow-on” actions in which the SEC is attempting to take some action against the defendant(s) based on the same set of facts as the primary action, such as impose a suspension or revoke a registration. By counting both, the SEC is “boosting the overall number of enforcement actions by between 23% and 34%.” She also suggests that that the SEC is doublecounting by including actions filed in both administrative court and district court due to the limitation on the remedies that it may pursue in each venue, and by counting both an original and refiled action both based on the same facts. Removing these cases yields an increase of enforcement actions between 2000 and 2014 of 31 percent, instead of the SEC’s claimed 50 percent increase.

The article further argues that the SEC appears to be pursuing a higher number of easier to prosecute actions in the form of contempt proceedings and delinquent filings. She suggests that contempt orders “prosecute violations of remedial orders, not violations of securities laws” and are thus derivative. While the SEC stopped including contempt proceedings in its enforcement statistics for fiscal year 2013, it did not retroactively remove the cases from prior years’ statistics.

Though delinquent filings proceedings are not derivative, Velikonja argues that they “are very different from other primary enforcement actions” because they are strict liability offenses, carry different remedies, and are resolved by default more than two-thirds of the time because the companies fail to respond. According to Velikonja, these cases have significantly padded statistics in recent years. Removing delinquent filings and follow-on cases from the statistics, Velikonja finds that the SEC filed 400 enforcement actions in fiscal year 2014. While that number represents an increase of almost 19 percent from fiscal year 2013, it is less than the 403 actions filed in 2009 and the 420 cases filed in 2007, and inconsistent with the overall growth portrayed by the SEC in its reporting.

The article also examines the SEC’s reporting of defendants in enforcement actions. Velikonja suggests that the SEC counts each time a defendant is named in an action instead of counting each defendant only once overall. She finds that counting only discrete defendants in non-derivative cases nearly halves the SEC’s statistic. Further, the SEC includes “relief defendants” in its tally who are named because they “received property that was originally obtained illegally and to which they have no legitimate claim.” While some relief defendants challenge the SEC’s actions, their inclusion skews the statistics because “non-culpable individuals are, by definition, not securities violators that the SEC punishes.”

Velikonja offers some sympathy for the SEC as it seeks to justify its budget before Congress each year and is thus incented to show more and more progress in enforcing the securities laws. To improve the reporting accuracy, she suggests that Congress should approve the SEC’s budget on a multi-year basis and not punish the agency with a smaller budget when statistics do not show growth. Additionally, she argues that “[l]ike financial reporting, performance indicators regarding important non-financial items should be removed from agency discretion and, to the extent possible, standardized across agencies.” Alternatively, the SEC should make raw data regarding its enforcement activities available to researchers, as such a public database does not currently exist.

In a statement provided to Bloomberg, SEC Enforcement Director Andrew Ceresney said that “from our preliminary review, we disagree with a number of [the article’s] observations.” Ceresney continued that “[w]e have consistently and transparently reported our enforcement numbers for years, but as we have emphasized, first and foremost is the quality of our cases, which span the securities industry, include first-of-their kind actions, aggressive use of industry and other types of bars, and demonstrate successful pursuit of wrongdoers.”