Press Releases

SEC Enforcement Actions Against Public Companies Remain at Near-Record Levels Despite Government Shutdown

Henry Kaufman Management Center

The Share Class Selection Disclosure Initiative accounted for almost half of the 52 new actions filed in 1H FY 2019

The impact of the Share Class Initiative has been notable—we saw a record number of actions with Investment Advisor/Investment Company allegations and lower-than-average monetary settlements.

The Share Class Selection Disclosure Initiative accounted for almost half of the 52 new actions filed in 1H FY 2019

U.S. Securities and Exchange Commission enforcement actions against public companies and their subsidiaries remained at near-record levels through the first half of the 2019 fiscal year, which ended March 31. According to a report released today by the NYU Pollack Center for Law & Business and Cornerstone Research, enforcement actions reached these levels despite the federal government shutdown that led to a one-month period during which the SEC suspended non-emergency enforcement operations. Enforcement activity was largely fueled by the SEC’s Share Class Selection Disclosure Initiative (Share Class Initiative), in which investment advisors self-reported inadequate disclosures concerning the sale of mutual fund shares.

The report, SEC Enforcement Activity: Public Companies and Subsidiaries—Midyear FY 2019 Update, analyzes data from the Securities Enforcement Empirical Database (SEED).

Filings
Continuing a resurgence in activity that began in the second half of FY 2018, the SEC filed 52 enforcement actions against public companies and their subsidiaries in the first half of FY 2019. Of these, 25 were related to the Share Class Initiative. The 52 new actions filed in the first half of FY 2019 was comparable to the 55 actions filed in the second half of FY 2018, but represented a 225% increase over the 16 actions filed during the same period of the prior fiscal year.

Allegations
The report found that 52% of public company and subsidiary actions in the first half of FY 2019 involved Investment Advisor/Investment Company allegations, by far the highest percentage for that category in any half-year tracked by SEED, which covers data since FY 2010. This increase was driven by self-reporting as part of the SEC’s Share Class Initiative.

Enforcement Venue
The SEC filed every public company and subsidiary action in the first half of FY 2019 as an administrative proceeding, up from 85% in the second half of FY 2018. This was the only time in any half-year tracked by SEED that all actions were filed as administrative proceedings and none were filed as civil actions.

Settlements
In the first half of FY 2019, 88% of public company and subsidiary defendants cooperated with the SEC, the highest percentage in any half-year tracked by SEED. Though all of the defendants involved in the Share Class Initiative cooperated by self-reporting, cooperation by the other public company and subsidiary defendants was also high (79%) relative to the FY 2010–FY 2018 average of 51%.

Monetary settlements in public company and subsidiary actions totaled $742 million in the first half of FY 2019, down 24% from the half-year average of total monetary settlements over the prior three fiscal years. Of the $742 million, $75 million (10%) stemmed from Share Class Initiative settlements.

Author Commentary
Stephen Choi, the Murray and Kathleen Bring Professor of Law at the NYU School of Law and Director of the Pollack Center for Law & Business: “The impact of the Share Class Initiative has been notable—we saw a record number of actions with Investment Advisor/Investment Company allegations and lower-than-average monetary settlements. Monetary settlements averaged $15 million for 1H FY 2019, and only $3 million for Share Class Initiative settlements, compared to the historical average settlement of $29 million per action during FY 2010–FY 2018.”

Sara Gilley, Cornerstone Research Vice President: “None of the 25 monetary settlements for actions brought under the Share Class Initiative included civil penalties, consistent with the SEC’s stated incentive to recommend no civil penalties for self-reporting. In comparison, 88% of the other 26 monetary settlements in 1H FY 2019 included civil penalties.”

David Marcus, Cornerstone Research Senior Vice President and head of the firm’s finance practice: “In March 2019, a record 30 new public company and subsidiary actions were filed, 25 of which were under the Share Class Initiative. This is the largest monthly total in the fiscal years covered by SEED. We will continue to monitor the impact of the initiative.”

About the SEC’s Share Class Selection Disclosure Initiative
The Share Class Selection Disclosure Initiative “is intended to identify and promptly remedy” situations “in which an investment advisor failed to make required disclosures relating to its selection of mutual fund share classes that paid the advisor (as a dually registered broker-dealer) or its related entities or individuals a fee pursuant to Rule 12b-1 of the Investment Company Act of 1940 (‘12b-1’ fee) when a lower-cost share class for the same fund was available to clients.”

About the Securities Enforcement Empirical Database (SEED)
The Securities Enforcement Empirical Database (SEED) tracks and records information for SEC enforcement actions filed against public companies and their subsidiaries. SEED also includes information on individuals who are named defendants in these actions. Created by the NYU Pollack Center for Law & Business in collaboration with Cornerstone Research, SEED facilitates the analysis and reporting of SEC enforcement actions through regular updates of new filings and settlement information for ongoing enforcement actions.

About the NYU Pollack Center for Law & Business
Established in 1997, the NYU Pollack Center for Law & Business is a joint venture of the NYU School of Law and the Stern School of Business. Its mission is to enrich the teaching curriculum at both schools in areas where law and business intersect; to facilitate professional interaction and academic research by faculty who share an interest in the structure, regulation, and function of the market economy; and to contribute to the public welfare by supporting scholarship that assists governmental and private policymakers in their pursuit of enhanced business productivity.

About Cornerstone Research
Cornerstone Research provides economic and financial consulting and expert testimony in all phases of complex litigation and regulatory proceedings. The firm works with an extensive network of prominent faculty and industry practitioners to identify the best-qualified expert for each assignment. Cornerstone Research has earned a reputation for consistent high quality and effectiveness by delivering rigorous, state-of-the-art analysis for thirty years. The firm has 700 staff and offices in Boston, Chicago, London, Los Angeles, New York, San Francisco, Silicon Valley, and Washington.

www.cornerstone.com
Twitter: @Cornerstone_Res