The Shutdown Ends For Now – The FY Q1 Enforcement Numbers

The partial government shutdown has ended, Federal government employees who day-in and day-out provide the hard work that moves this country forward and provides vital services to people across the nation will return to the job. Unfortunately, the threat of another partial shutdown looms large in two weeks. Political leaders will hopefully lead and move forward to a sensible solution.

As the Commission and its staff return to their offices it is good to take stock. The SEC was approaching the close of the first quarter of the government when the partial shutdown struck. Since all but a few days of that quarter had been completed it is appropriate to consider the work done as the agency renews its efforts in critical areas.

First, by the end of the last fiscal year the Commission had filed 490 stand-alone enforcement actions. That is an average of about 122 cases per quarter. Most of those cases were filed in the last two quarters as the statistics reflect. Likewise, from about May 2018 to the end of that fiscal year no contested administrative proceeding was instituted, according to findings announced at the Federal Enforcement Forum on December 5, 2018 (video and audio of the discussion his here) — every contested case was filed in federal court. The key areas of focus through the end of the last fiscal year were offering fraud actions and cases involving investment advisers with, respectively, 25% and 22% of the total cases instituted.

Second, in the first quarter of the current fiscal year the Commission filed about 85 stand-alone enforcement cases. That is less than the average of about 122 cases filed each quarter last year. Two caveats are important however. Initially, the first quarter followed the incredible push to file cases undertaken at the end of the last fiscal year. That effort could well be expected to have left the cupboard bare.

Equally important, the first quarter was cut short by the start of the shutdown. During the last several business days of the quarter the Enforcement Division was not able to file any cases. Those days did run through the holidays which may have mitigated the number of filings, although many who are publicity conscious may have preferred to settle and have their case filed in that period to minimize publicity.

Finally, while the focus of the Enforcement Division remains keyed to retail investors, the case mix changed. During that period offering fraud cases remained the largest category at about 20% of the cases, but that category was followed by market manipulation cases at about 19%, insider trading at about 14% and investment advisers at approximately 12%. In addition, the agency filed 9 settled post-Lucia cases, clearly just the beginning of those actions.

Whether the mix of enforcement actions will continue to shift over the next three quarters is unclear at best. Retail investors can be expected to remain the key focus. Continuing to bring more actions centered on investment advisers would be consistent with that focus as well as recent trends. Yet the agency is facing significant head-winds which include the threat of another shut-down and two potentially significant Supreme Court decisions (here). Evaluating the overall trends will require waiting for those developments, at a minimum.