On November 14, 2023, the SEC announced its enforcement results for fiscal year 2023, which ended on September 30, reporting the following key metrics and highlights:

• 3% increase in number of actions filed. The SEC filed 784 total enforcement actions, representing a 3% increase over the prior year. Of the 784 actions, 501 were original (i.e., “stand-alone”) matters, an 8% increase over the prior year.
• $4.949 billion in financial remedies. This is the second highest amount in SEC history, only behind the record-setting financial remedies in FY 2022. Civil penalties accounted for $1.58 billion of the total money ordered and disgorgement of ill-gotten gains and pre-judgment interest thereon totaled $3.369 billion, both the second highest amounts on record.
• Individual accountability remains a priority. In FY 2023, approximately two-thirds of the SEC’s cases involved charges against at least one individual and Commission actions resulted in 133 individuals being barred from serving as officers or directors of public companies, the highest number in over a decade.
• Continued focus on meaningful cooperation. The SEC emphasized, at every opportunity, that it rewarded companies that took affirmative remedial measures and provided substantial cooperation to the SEC.
• Record-breaking year for Whistleblower Program. FY 2023 was the highest year for whistleblower awards, awarding nearly $600 million (and the largest single award in history). The SEC also received more than 18,000 whistleblower tips, the highest number on record and 50% more than the record-breaking year before.

Financial Remedies
Although not quite at the record-breaking level of FY 2022, the SEC continued to seek and impose outsized civil money penalties. More than $400 million in civil penalties resulted from actions against twenty-five registrants (i.e., investment advisers, broker-dealers and/or credit rating agencies) for committing violations of recordkeeping requirements of the federal securities laws. In addition, a global technology company also agreed to pay a $75 million civil penalty to settle charges related to an alleged bribery scheme.   

The SEC also obtained judgments from federal courts that ordered large civil penalties, including a $178.6 million penalty against a multinational financial services corporation to resolve charges that it failed to disclose risks and misled investors about its anti-money laundering compliance program.

Rewards for Meaningful Cooperation
While FY 2023 represents the second-highest level of financial remedies for the SEC, the agency again stated that it is committed to rewarding substantial cooperation in an effort to promote compliance and to encourage other firms to proactively self-report and remediate potential securities laws violations. To emphasize its claim, the SEC points to a settled action against a telecommunications company that did not include any civil penalty due to the company promptly self-reporting, taking affirmative remedial measures, and providing substantial cooperation related to charges for failing to disclose material information about unsupported adjustments that increased reporting operating income by 15% in three quarters. Similarly, the agency highlighted that one of the twenty-five entities charged in the SEC’s enforcement actions related to violations of the recordkeeping requirements was ordered to pay a significantly lower civil penalty than other entities charged for similar violations because it self-reported.

Likewise, the year-end press release cited to an action in which the SEC did not require a publicly-traded manufacturer to pay a civil penalty after self-reporting conduct related to failure to disclose $28 million in warranty-related liabilities and promptly undertaking remedial measures and cooperating with SEC staff by among other things, providing detailed financial analyses and explanations and summaries of factual issues; proactively identifying key documents and witnesses; and following up on several requests from the staff without requiring subpoenas.

Whistleblower Protections
The SEC brought numerous charges for violations of the Dodd-Frank whistleblower protection rule for raising impediments to whistleblowing. For example, the SEC settled charges that included the largest penalty on record for a standalone violation of the Dodd-Frank whistleblower protection rule ($10 million) related to a registered investment advisor raising impediments to whistleblowing by requiring employees to sign agreements prohibiting disclosures of confidential corporate information, without an exception for potential SEC whistleblowers, and by requiring departing employees to sign releases confirming that they have not filed any complaints with any government agency. The SEC also brought charges against both private and public companies for violations of the whistleblower protection rule by using employment separation agreements that required certain employees to waive their rights to financial whistleblower awards or by requiring departing employees to provide notice to the company if they received a request for information from the SEC.

Continued use of “Sweep” Investigations
As in years past, the SEC continued to rely on enforcement sweeps to conduct investigations and bring charges related to similar violations by multiple entities quickly and simultaneously. SEC Chair Gary Gensler recently highlighted one such sweep investigation that resulted in charges in FY 2023, and also categorized it as a high impact case. In discussing the recording-keeping violations cases that resulted in $400 million in penalties, he emphasized the broad reach of such sweeps in the context of recordkeeping alone, stating, “[s]ince December 2021, in part through an ongoing sweep for potential violations, we have brought cases against 40 firms, required significant undertakings, and ordered more than $1.5 billion in penalties.” The Director of the Enforcement Division, Gurbir Grewal, similarly highlighted the success and such sweeps during his remarks at the New York City Bar Association Compliance Institute on October 24, 2023 (the “Enforcement Director Remarks”), pointing to the ongoing off-channel communications sweep. In FY 2023, as part of a large sweep investigation, the Commission settled charges against twenty-five registrants for widespread recordkeeping failures. Additionally, the SEC brought charges against ten investment advisers as part of the SEC staff’s investigations as to non-compliance with the Marketing Rule, specifically related to the presentation of hypothetical performance.^[1]

Priority Areas of Enforcement
The SEC’s enforcement actions in fiscal year 2023 covered a broad spectrum of subject areas, including priority areas that were also a focus in FY 2022. Some of these priority areas include the following:

• Financial fraud and issuer disclosure. The SEC charged numerous companies and individuals for misleading investors. As an example, a global construction company agreed to pay $14.5 million in a civil penalty to settle charges related to accounting errors that caused it to materially overstate its earnings. Similarly, a consumer products company was charged for misleading investors about its sales growth, and agreed to pay $12.5 million in civil penalties, and four electric vehicle companies were also charged for making materially misleading statements about revenue projections, sales and product launches.
• Focus on gatekeepers. The SEC continues to focus its enforcement actions on gatekeepers, such as attorneys, auditors, and transfer agents. The charges against gatekeeps in FY 2023 included charges against an audit firm for quality control failures and violations of audit standards in connection with its audit work for hundreds of SPAC clients. An accounting firm was also charged for violating auditor independence rules and aiding and abetting its clients’ violations of federal securities laws.
• Abusive Trading Practices. FY 2023 included numerous enforcement actions focusing on insider trading, front-running, and market manipulation. For example, the SEC charged eight social media influencers for allegedly utilizing social media to manipulate exchanged-traded stocks as part of a $100 million securities fraud scheme. An executive of a healthcare company was also charged with insider trading for allegedly avoiding losses of more than $12 million after adopting a 10b5-1 plan while in possession of material nonpublic information.
• Crypto. Similar to FY 2022, the SEC continued to emphasize actions addressing a range of misconduct in the crypto asset securities space, including billion-dollar crypto fraud schemes, unregistered crypto asset offerings, platforms, and intermediaries, and illegal celebrity touting.
• Cyber security. FY 2023 brought an increased focus on ensuring reasonable disclosures of material cybersecurity risks and incidents. For example, a software company agreed to pay a $3 million civil penalty to settle charges for making misleading disclosures regarding a ransomware attack that impacted more than 13,000 customers.
• Environmental, social, and governance. As ESG matters have grown in importance to investors, the SEC has increased its focus on these issues. This has resulted in several actions touching ESG issues, including charges against a subsidiary of a large bank for making materially misleading statements about its controls concerning ESG products, resulting in $19 million in civil penalties, as well as charges against a large asset management firm related to policies and procedures failures involving funds marketed as ESG investments.^[2]
• Protecting Retail Investors. In its efforts to protect retail investors, the SEC brought actions alleging fraud targeting affinity frauds and Ponzi schemes.
• Conflicts Related to Affiliated Service Providers. In its perennial scrutiny of investment advisers and any undisclosed conflicts of interests with any of such advisers’ affiliates, the SEC brought enforcement actions against investment advisers – including an individual^[3] associated with an investment adviser – for failing to disclose or otherwise mislead investors with respect to undisclosed conflicts with affiliated service providers.

Looking Ahead
FY 2023 was yet another extremely active year for the SEC’s Enforcement Division. We see no reason to believe that FY 2024 will be different. In particular, we expect that, with the finalization of a number of significant rules, including the new private fund rules and cybersecurity disclosure rules, we will see a continued focus on both high-impact enforcement actions and enforcement investigative sweeps.

^[3] In the Enforcement Director Remarks, Director Grewal discussed three relatively rare circumstances in which the Division would recommend charges against a compliance officer and noting that the Division would not second guess compliance personnel’s good faith judgments based on reasonable inquiry and analysis.

Author: Goodwin

Source: JDSupra