7 takeaways from the SEC's $5B enforcement year

November 15, 2023 5:34 PM

Marketing and social media infractions, off-channel texting on WhatsApp and other messaging services and cryptocurrency scams all topped the SEC's list of regulatory priorities this past year.

The Securities and Exchange Commission confirmed on Tuesday that the nearly $5 billion in enforcement penalties it brought in in its 2023 fiscal year, which ended on Sept. 30, was the second largest haul in the agency's history. It was topped only by the figure for fiscal year 2022, when the Wall Street regulator collected more than $6.4 billion in fines and other charges.

The SEC was at pains to show in a release Tuesday that the smaller regulatory haul for fiscal 2023 did not result from any slackening zeal in its enforcement division. The roughly $4.95 billion in regulatory penalties and fines it levied came from 784 enforcement actions, a figure up 3% year over year.

"Last fiscal year's results demonstrate yet again the Division's effectiveness—working alongside colleagues throughout the agency—in following the facts and the law wherever they lead to hold wrongdoers accountable," SEC Chairman Gary Gensler said in a statement.

For more insight into trends and themes in the SEC's 2023 enforcement actions, scroll through the cardshow below.

To market

The SEC has wasted little time in letting advisors and brokers know it expects them to come in line with its new marketing rule, which took effect in November 2022. The rule generally applies to messages advisors send to two or more prospective or existing clients about new investing opportunities and similar matters.

Among other things, it prohibits financial planners from making claims about investment performance or projections that they can't back up with solid evidence. Advisors who advertise predictions about future returns must also adopt policies "reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience of the advertisement."

Firms have stumbled over both of those provisions. In September, the SEC hit nine advisory firms with more than $800,000 in penalties for advertising the hypothetical performance of proposed investments to a "mass audience," without taking individual investor needs into account.

That case came about three weeks after the SEC imposed a more than $1 million penalty on Titan Global Capital Management, a New York-based financial tech firm, for advertising hypothetical results in violation of the marketing rule. The firm stood accused of forecasting returns as high as 2,700% for its Titan Crypto strategy.

Amy Lynch, the founder and president of the regulatory consultant FrontLine Compliance, said in an interview on Wednesday that she has been surprised by how quickly the SEC has cracked down on violations of the marketing rule. Many times, she said, the agency will give firms a bit more time to ease into compliance with a wide-ranging regulatory change.

"This is the most aggressive I've seen the SEC be with a new rule," Lynch said. "Usually they give the industry a little bit of a pass."

Lynch said firms are getting in trouble not so much for not having the sorts of policies and procedures required by the new rule. Rather, it's that they aren't taking the additional step of making sure those policies are carried out to the letter. Too many firms, she said, are not training their staff on compliance with the rule and, possibly as a result, continue to put out marketing materials containing unsupported statements.

Famous for being famous

In a related trend, the SEC devoted a good deal of resources to cracking down on social media influencers who offered either highly dubious investment advice or failed to disclose payments they had received in return for their recommendations. The latter category included some big celebrities.

In February, for instance, the NBA Hall of Fame player Paul Pierce agreed to pay just over $1.4 million to settle SEC charges over his online promotion of the digital token EMAX. Pierce stood accused of failing to disclose that he had received a $244,000 payment in return for his endorsement.

In March, the SEC hit eight celebrities, including the actress Lindsay Lohan, with more than $400,000 in total penalties for similarly failing to disclose that they had received payments in return for touting the crypto assets TRX and BTT.

Pump and dump

But it wasn't only the famous who found themselves in the regulator's net.

In December, the SEC brought charges against eight social media influencers it accused of taking part in a classic "pump and dump" scheme. The young men were alleged to have colluded behind the scenes on plans to drive up the prices of certain cheap "penny stocks" and then dump the shares at a high price before any of their accolytes could.

Although each of the eight influencers had thousands of followers on sites like Twitter, they were hardly household names. Still, according to the SEC, they were able to use their social media presence, carefully curated under handles like @notoriousalerts and @LadeBackk, to herd investors into their schemes.

Get the message

If there's one outstanding theme in the SEC's fiscal year 2023 enforcement report, it's the ways that relatively new technologies can be abused to harm investors. That was true not only of social media and similar outlets but also of firm representatives' reliance on WhatsApp and similar services to send messages to each other and their clients.

The SEC's rules on advisors' communications are pretty clear. Firms must keep a comprehensive record of any messages discussing clients' business or transactions. In other words, there's a strict ban on any so-called off-channel communications that take place on WhatsApp or other messaging services and aren't preserved.

Still, firms repeatedly ran into the buzzsaw of the SEC's ban on off-channel communications this past year. The SEC hit six firms, including Baird and Interactive Brokers, and their affiliates with nearly $80 million in penalties for their employees' misuse of WhatsApp and similar messaging services. The month before, it had imposed $289 million worth of penalties on Wells Fargo and eight other firms and their affiliates over similar allegations.

Lynch said she has no doubt that more of these cases will be coming down the pike. In the coming year, she wouldn't be surprised to see regulators turn their attention from the brokerage side of the industry to smaller advisory firms.

"Broker-dealers are most likely to run afoul of this just by the nature of the work they do," Lynch said. "But it happens on the advisor side, too."

One firm did come in for special praise from the SEC for cooperating with regulators. New York-based Perella Weinberg Partners, which was among the firms fined last month, brought its off-channel messaging lapses to the attention of the SEC on its own and helped in the subsequent investigation. Its penalty amount of $2.5 million was substantially smaller than those of any of the other accused firms.

Crypto

Of course the biggest recent story in the crypto world has been the bankruptcy of the FTX trading exchange in November 2022 and the subsequent downfall and trial of its founder, Sam Bankman-Fried. The SEC has an outstanding case against Bankman-Fried, who was found guilty on Nov. 2 of seven counts of fraud following the collapse of FTX.

The SEC has meanwhile been pursuing various less prominent cases. In February, for instance, it accused the crypto company Terraform Labs and its former CEO Do Hyeong Kwon of orchestrating a multibillion-dollar fraud scheme.

Gensler has long held that most cryptocurrencies are securities falling under the jurisdiction of the SEC. Speaking in October at the Securities Enforcement Forum in Washington, D.C., he said many digital assets are essentially investment contracts.

"Congress could have said in 1933 or in 1934 that the securities laws applied only to stocks and bonds," Gensler said. "Yet Congress included a long list of items in the definition of a security, including 'investment contract.'"

ESG

Rarely have three letters been able to stir up so much controversy — and regulation — in the investment world. ESG — which refers to the practice of investing not only to make money but also to further certain environmental, social and governance causes — figured heavily in the SEC's enforcement agenda this past year.

In September, it reached a $25 million settlement with Deutsche Bank's U.S. investment advisory subsidiary in part over allegations that it had not been doing the monitoring or research needed to ensure it was living up to the ESG-related promises it had made to clients. And in November 2022, Goldman Sachs agreed to pay $4 million to settle allegations that its asset management unit hadn't given environmental, social and governance factors proper weight in some of its investment products.

Holding firms to their ESG-related claims is likely to continue to be a priority for the SEC. In September, the commission approved a change to its decades-old "names rule" meant to ensure that investment funds' names actually shed some light on their investing goals and strategies. In adopting the rule, SEC commissioners said they were particularly eager to make sure ESG funds weren't falling short on their environmental, social and governance promises.

By the numbers

Of the 787 enforcement actions the SEC took in its fiscal year 2023, 501 were "standalone," meaning they were initiated by the agency on its own. That figure was up 8% from the previous fiscal year.

The SEC also pursued 162 "follow-on" proceedings seeking to bar professionals from the financial services industry after criminal conviction, civil injunction or similar order. The remaining 121 actions were taken against people who were delinquent in making required regulatory filings.

Of the nearly $5 billion in penalties the SEC collected, roughly $3.4 billion came in the form of disgorgement of allegedly ill-gotten gains and prejudgment interest and nearly $1.6 billion was in civil penalties. The agency handed back $930 million to harmed investors, marking the seventh year in a row its distributions exceeded $900 million.

Setting a record, the SEC barred 133 people from serving as officers and directors of public companies. It also paid out an all-time high of $600 million to whistleblowers who brought misdeeds of their own employers to regulators' attention. The SEC said it received a record number of 18,000 whistleblower complaints in its fiscal 2023.

As for its total for all tips, complaints and referrals, it reported getting more than 40,000. That figure was up 13% year over year.