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SEC had a busy 2020, and the year’s not over!

SEC Division of Enforcement Publishes Annual Report for Fiscal Year 2020


The Securities and Exchange Commission’s (SEC) Division of Enforcement has been very busy – pandemic or no. That’s according to its just published 2020 Annual Report, which discusses significant actions and key areas of strategic change, particularly as it relates to the Division’s COVID-19-related enforcement efforts.

 Enforcement proceeds during the pandemic

According to SEC Chair Jay Clayton, “In addition to discussing the core types of cases brought by the Commission, the report shows how Enforcement took action at the onset of the global pandemic against wrongdoers who sought to take advantage of the uncertainty and volatility in the markets.”

 This year’s report discusses how the Division took affirmative steps to prevent potential fraud capitalize on it, while at the same time continuing to focus on the multitude of existing and new non-COVID-related enforcement issues arising in the normal course. 

 In fiscal year 2020, the SEC brought a diverse mix of 715 enforcement actions, including 405 standalone actions.  These addressed a broad range of significant issues, including issuer disclosure and accounting violations; foreign bribery; investment advisory issues; securities offerings; market manipulation; insider trading; and broker-dealer misconduct. As a result, the SEC obtained judgments and orders totaling approximately $4.68 billion in disgorgement and penalties – a record amount for the Commission – and returned more than $600 million to harmed investors. Through the Division’s efforts, the SEC also reported awarding a record $175 million to 39 whistleblowers in fiscal year 2020, both the highest dollar amount and the greatest number of individuals awarded in any fiscal year.

 According to the report, the Division brought actions against the following names – many of which have been featured in various Patrina blogs and eblasts. They include:

 Wells Fargo & Co.In a settled action, the Commission found that Wells Fargo misled investors about the success of its core business strategy at a time when it was opening unauthorized or fraudulent accounts for unknowing customers and selling unnecessary products that went unused. Wells Fargo was ordered to pay the SEC a $500 million civil penalty as part of a combined $3 billion settlement with the SEC and the Department of Justice.

 Telegram Group Inc. The Commission filed an emergency action and obtained a temporary restraining order against Telegram and its wholly-owned subsidiary TON Issuer Inc. for allegedly operating an unregistered offering of digital tokens called “Grams” in violation of the federal securities laws. On the Commission’s motion, the court issued a preliminary injunction barring the delivery of Grams. It also found the Commission had substantially proved that Telegram’s sales were part of a larger scheme to unlawfully distribute the Grams to the secondary public market. The defendants agreed to settle the action and were ordered to return more than $1.2 billion to investors and to pay an $18.5 million civil penalty.

 J.P. Morgan Securities LLC. In a settled action, the Commission found that J.P. Morgan fraudulently engaged in manipulative trading of U.S. Treasury securities. J.P. Morgan admitted the findings in the SEC’s order, and was ordered to pay disgorgement of $10 million and a civil penalty of $25 million to settle the action. The Department of Justice and the Commodity Futures Trading Commission also resolved parallel matters against the firm and some of its affiliates.

 Whistleblowers had a record year too

As of the end of Fiscal Year 2020, the Commission awarded 106 individuals approximately $562 million – a record. And just after the fiscal year closed (October 22, 2020), the SEC program issued the largest single award in its history – approximately $114 million to a single whistleblower.

 What about the SEC and the financial services community?

The SEC’s Enforcement Division has been watching carefully and acting quickly. One issue in the crosshairs has been an adviser’s fiduciary obligation to disclose to their clients’ material conflicts of interest. The importance of disclosures is illustrated by the Share Class Selection Disclosure Initiative (Share Class Initiative) that the SEC concluded during Fiscal Year 2020, which resulted in nearly 100 investment advisory firms that voluntarily self-reported to the Division to return more than $139 million to investors.

 Cash sweep arrangements also were targeted. This is when cash in advisory accounts is automatically swept into a money market mutual fund or a bank deposit sweep program. In some cases, an adviser either dually-registered or with an affiliated broker-dealer has a conflict of interest in recommending one cash investment over another. Those conflicts must be disclosed. In bringing settled charges against Fresno, California-based SCF Investment Advisors, Inc., the Commission found that SCF failed to disclose conflicts related to revenue sharing from cash sweep money market funds.

 Wrap fee programs also were targeted. In May 2020, the Commission found that Morgan Stanley Smith Barney had disseminated marketing and client communications that gave the misleading impression that wrap fee clients were not likely to incur additional trade execution costs, even when they did. In settling the charges, Morgan Stanley agreed to pay a $5 million penalty and create a Fair Fund to distribute the penalty moneys to harmed investors.

 What does the SEC’s 2020 Annual Report pandemic performance mean for the financial services industry?

That this is not a time to rest on compliance laurels! The regulators are still looking for chinks in your organization’s armor – albeit from their home offices. Which means that compliance continues marching on. And that’s where we come in. For more than 25 years, Patrina has been helping compliance professionals like you stay on the “straight and narrow” efficiently and cost-effectively.

 So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective, designated third-party services, our comprehensive, 8-module compliance solution, and compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered.