It looks like the SEC has not been completely above-board in how it figures success. A new study from an academic at Emory suggests that the SEC has been over-counting the number of actions it actually completes.
In the new research, Urska Velikonja, an associate professor of law at Emory University, reviewed 15 years of SEC enforcement actions and concluded that the SEC’s “widely circulated statistics are invalid because they do not measure what they purport to measure, and unreliable because they can be manipulated all too easily.”
Problem is over-counting of “follow-on” cases
To be fair, it should be pointed out that the SEC is now making an effort to improve the clarity of its disclosures.
In the 2015 SEC success figures, there was a new line noting that a record 507 of 807 total enforcement actions were “independent.” That total figure of 807 includes both “primary” enforcement actions and what she calls “derivative” or “follow-on” proceedings, that might, for example, make an effort to suspend the registration of an investment adviser.
Keep in mind that both actions are brought against the same offender, based on the same set of facts which makes it hard to argue that they should they be counted as two separate actions. According to the study, these “follow-on” cases have increased the SEC’s enforcement actions by 23% and 34% from 2002 to today.
It only makes sense that the SEC’s enforcement would be intense after the financial crisis and the Bernie Madoff and other scandals. Of note, from 2010 to 2014, the SEC brought an average of 121 enforcement actions a year against broker-dealers, which seems like a big increase from the average 89 a year it brought between 2000 and 2009. However, much of the increase is related to follow-on cases, as primary enforcement actions against broker-dealers actually moved down slightly during the four-year period.
“Inflated statistics thus suggest that the SEC is a much more serious enforcer in the financial industry than it really is,” Velikonja notes.
Velikonja goes on to argue that the SEC’s success metrics are inflated by “strict liability” cases, ie, cases that don’t depend on any negligence or intent to harm. One example of a strict liability case is the SEC moving to revoke the registration of companies that are late in filing their financial reports.
Industry insiders note that most these small-time firms don’t even bother responding to the notice of enforcement, but the SEC gets to rack up another action for the record. The SEC is just doing its job in these cases, but it still doesn’t seem right to define this as a “successful action”.
Statement from SEC
The SEC’s Division of Enforcement Director Andrew Ceresney noted in a statement: “We disagree with a number of the article’s observations. We have consistently and transparently reported our enforcement action numbers for years, including this year when we reported a record number of standalone cases after backing out delinquent filings and follow-on administrative proceedings. 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.”
See full report below.
H/T Bethany Mclean