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What can we learn from the SEC's enforcement actions in 2019?

Posted by Jon Yarker on 21-Jan-2020 15:21:56

What can we learn from the SEC's enforcement actions in 2019?

Looking back, the Securities and Exchange Commission (SEC) had an extremely busy 2019. Over the year the SEC carried out 862 enforcement actions, obtained $4.3bn in disgorgement and penalties and was able to return $1.2bn to harmed investors. 


Compared to other years, these numbers aren’t hugely significant. But by drilling a little deeper it’s clear that the SEC is particularly active around one area of its regulatory mandate and this shouldn’t be ignored by regulated firms going into 2020.

A considerable 17% of all the SEC’s enforcement activities for 2019 (up from the previous year) were all about issuer reporting/accounting and auditing matters. As we already know, the SEC and FINRA have put in place considerable regulations around record keeping.

As part of the Securities Exchange Act 1934, rules 17a-3 and 17a-4 list all the kinds of information regulated firms have to keep records of and the way in which these records are stored (you can learn more about 17a-3 and 17a-4 by reading our cheat sheet below).

In 2019 a number of enforcement actions were to do with failings around record keeping. In April, marketplace lender Prosper was fined $3m for miscalculating and overstating annualized net returns for investors. Through these faulty records, investors were misled into making additional investments. A sizeable penalty but this would be dwarfed just a few months later.

In June, following an extensive enforcement campaign, Walmart was charged with having violated the Foreign Corrupt Practices Act (FCPA) after failing to sufficiently investigate certain anti-corruption risks regarding its international subsidiaries. The retail giant agreed to pay around $282m to settle these bribery charges and consented to the SEC’s order that it had violated the records and internal accounting control provisions of the Securities Exchange Act 1934. At the time, Charles Cain – chief of the SEC Enforcement Division’s FCPA Unit – said:

“Walmart valued international growth and cost-cutting over compliance - the company could have avoided many of these problems, but instead Walmart repeatedly failed to take red flags seriously and delayed the implementation of appropriate internal accounting controls.”

And while it didn’t involve a massive fine or settlement, 2019 also included the resolution on a long-running matter regarding Tesla CEO Elon Musk and his use of social media. A settlement with the SEC was reached that now requires all Musk’s communications about Tesla that is distributed via social media, Tesla’s website, press releases and investor calls to be preapproved by a securities lawyer.

This had all followed a tweet from Musk in 2018 declaring funding had been secured to take Tesla private for a predetermined share price. This flaunted previously established rules over Musk’s social media and the SEC took him back to court, culminating in him stepping down as chair on the board of Tesla, paying a $20m fine and seeking approval to publishing all future communications that could be relevant to Tesla shareholders.

Each of these instances are very different but it’s clear the SEC is more active than ever in its enforcement of how record keeping rules are met. With the regulator already introducing further changes to 17a-3 and 17a-4 for 2020 (you can read more about them here), common sense dictates the SEC will continue to focus on this area for the immediate future.

Therefore, the need for reliable and best practice record keeping and archiving solutions has never been clearer. Leading financial services firms are using the MirrorWeb Archiving Platform to help solve these challenges. The platform enables you to capture, archive and monitor electronic communications to meet the compliance requirements of MiFID II, FCA, GDPR and FINRA. 

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Topics: Banking, Financial Services, Digital, sec

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