Last week, Cornerstone Research released a new report, SEC Enforcement Activity Against Public Company Defendants, examining SEC actions initiated between fiscal years 2010 and 2015.
Utilizing data from the SEC Enforcement Empirical Database,
the report offers some detailed insights into SEC enforcement actions in recent years, such as:
- The number of enforcement actions continues to increase. In fiscal year 2015, the SEC initiated a record 807 actions, which represented a
7% increase over fiscal 2014, and a 10% increase over the median number of actions for fiscal years 2010 through 2015.
- Actions against public company defendants resulted in large penalties and disgorgements. Although actions against public company defendants
represented an average of 4% of actions from fiscal 2010 through fiscal 2015, these actions accounted for 18% of all SEC monetary penalties and
disgorgements during the period.
- The SEC has increasingly utilized administrative proceedings. In fiscal 2015, 76% of the SEC’s actions against public company defendants were
brought as administrative proceedings. The use of administrative proceedings by the SEC to seek penalties, which was enabled by the passage of
Dodd-Frank in 2010, has resulted in more streamlined and more prompt decisions according to the SEC. It is worth noting that the use of administrative
proceedings is under attack, with many critics questioning the constitutionality of the proceedings. The resolution of these challenges may negatively
impact the number and type of cases that are brought administratively by the SEC.
This report provides evidence of the powerful impact of law enforcement following the passage of Dodd-Frank, highlighting the SEC’s determination to
utilize all tools at its disposal in order to prevent corruption and to seek out wrongdoing wherever it occurs.
Last week, the Financial Industry Regulatory Authority (FINRA) released its regulatory and examination priorities for 2016. FINRA’s letter highlights five areas for examination
at brokerage houses and financial advisory firms, including standards of ethical behavior, alignment of firm and customer interests, and the management
of conflicts of interest. FINRA’s chairman also stated intentions to specifically examine the conflicts of interest that can arise in the sale of proprietary
investment products to clients. These conflicts have garnered increased regulatory scrutiny, including in a recent landmark action where our whistleblower client tipped the SEC to inappropriate client "steering"
at JPMorgan. One of the largest actions against an investment adviser, the matter resulted in a $267 million settlement with the SEC and an additional
$40 million to the CFTC in a parallel proceeding.
FINRA’s concentration on ethical culture marks an important first step in identifying the nature of corruption within the industry at large. As our
recent survey of financial services professionals revealed, the industry has a disregard for ethics and a deep-rooted culture of secrecy. While
regulatory oversight has played and will continue to play a critical role in dismantling the status quo, true and sustainable change requires organizations
to prioritize and demand integrity—from within and top down.
In developing a new paradigm for corporate ethics, companies need to begin by understanding that traditional reporting methods alone do not work. In a
New York Law Journal article, we previously discussed how too many compliance programs are designed to respond to problems after they have surfaced, and focus on
the latest reporting trends, rather than proactive, consistent, organization-wide change that puts a premium on transparency and ethical agency.
To be sure, creating such a culture is a substantial undertaking. But in an era of whistleblowers and empowered law enforcement, no organization can bear
the cost of noncompliance. As we reported earlier, the Ethics and Compliance Initiative recently examined certain key characteristics that are common to high-quality
compliance and ethics programs. These characteristics must be the admission standard for all commercial entities, but particularly those in the financial
In order to truly eradicate corruption, firms must embrace and develop comprehensive and clear ethical visions. We applaud FINRA’s decision to examine
corporate culture, and believe it signals an important shift in the financial services industry in recognizing the critical role of ethics in deterring
wrongdoing, protecting investors, and building stronger companies.
Earlier this week, the SEC’s Office of Compliance Inspections and Examinations (OCIE) released its 2016 examination priorities. The results of OCIE’s examinations of regulated entities are used
by the SEC to support rule-making, find and monitor risks, encourage compliance, and prevent and pursue misconduct. Since OCIE also regularly refers
matters to the SEC’s Enforcement Division, its priorities are an important and early indicator of the type of cases the Enforcement Division will bring
in future years.
This year’s priorities, like those announced in 2015, are organized around three thematic areas:
- Protecting retail investors, including those saving for retirement
- Assessing issues related to marketwide risks
- Utilizing data analytics to identify and examine potential illegal activity
While the general themes of the examinations are carried over from 2015, OCIE’s 2016 priorities include several new areas of focus, including:
- Liquidity controls: In assessing marketwide risk, the SEC will examine exposure to potentially illiquid securities as well as examine liquidity providers
in the market.
- Public pension advisers: In 2014, the SEC brought its first case under pay-to-play rules for investment advisers, and the current examination priorities call for a focus on pay-to-play
and other risk areas related to public pension advisers.
- Promotion of products: Given the increase of new, complex and high-risk products available in the market, the SEC plans to focus on the promotion of
and sales practices related to these products to identify potential suitability and fiduciary obligation issues.
- Exchange Traded Funds and Variable Annuities: The SEC will examine sales strategies, trading practices, disclosure, and other issues related to these
These new areas of focus encompass some of the most common and critical issues currently facing investors, demonstrating the SEC’s continued commitment
to protecting and promoting the healthy and fair operation of our financial markets. To read the complete examination priorities from OCIE, please
In a recent piece on the FCPA Blog,
I discuss how the SEC Whistleblower Program is revolutionizing the securities industry. The evidence is apparent in recent enforcement actions, such
as a landmark case against JPMorgan announced just last month. The action, in which our client tipped the SEC to the misconduct, resulted in a $267 million settlement
by two of the bank’s wealth management subsidiaries, admission of wrongdoing, and another $40 million fine paid to the CFTC in a parallel proceeding.
The implications are clear. The SEC Whistleblower Program is working, as we knew it would, encouraging the good guys to come forward and making serious
headway against those who would commit fraud and try to hide wrongdoing. In fiscal 2015, the SEC received a record number of whistleblower tips — nearly
4,000 — and with high-value enforcement actions and whistleblower awards announced with more and more frequency, the whistleblower revolution
is here, at long last.
In our ongoing work to protect individual whistleblowers and bring wrongdoing to light, we never lose sight of our fundamental goal: to help establish
a culture in which corporations no longer retaliate against those who raise concerns about misconduct.
I was reminded of the importance of communicating this goal while serving as a panelist at the Thomson Reuters 4th Annual Corporate Whistleblowing Forum
last Fall. In a recent article highlighting our session, the author noted that whistleblower lawsuits are bringing hard truths to light
about the weakness of existing compliance programs. As I noted on the panel, building a culture of strong ethics begins with establishing consistent
communication and support to employees who raise concerns. As we gain greater understanding of the challenges faced by whistleblowers, most of whom
report wrongdoing internally first, companies have a responsibility, as well as an opportunity, to create corporate cultures in which compliance
and ethics are integral to operations.
Protecting whistleblowers is not only about catching bad actors, but also about revolutionizing the way in which we view corporate ethics. As recent history
has taught us, corporate misconduct can do more than alter the basic bottom line—it can lead to devastating consequences for individuals, companies,
and society at large.
Today, the SEC announced that two J.P. Morgan wealth management subsidiaries
agreed to pay $267 million to settle charges in an enforcement action initiated by information brought to the SEC by a Labaton Sucharow client, a J.P.
Morgan executive. The enforcement is one of the largest and highest profile actions initiated by an SEC whistleblower since the establishment of the
The SEC’s investigation uncovered that J.P. Morgan’s investment advisory business and its nationally chartered bank were steering clients to more expensive
in-house investments without proper disclosures of conflicts of interests. The troubling actions in this case occurred over several years, and deprived
JPMorgan's clients of necessary information to make informed investment decisions.
This case powerfully demonstrates the vast potential of the SEC Whistleblower Program to find and eradicate wrongdoing early and often. Because of
the unique protections and incentives of the program, our client chose to report the securities violations at J.P. Morgan to the SEC. In doing so,
the individual was able to protect J.P. Morgan clients and improve the sales culture of the organization, while avoiding retaliation and blacklisting.
And as awareness of the SEC Whistleblower Program grows, so does the likelihood that more individuals will step forward to reveal violations. The program’s
broad international reach and ability to report anonymously provide enormous opportunities to uncover misconduct wherever it occurs. In designing this
innovative program, the SEC understood that employees represent a critical first line of defense against wrongdoing. To learn more about the SEC Whistleblower
Program, please see here.
Working at the forefront of whistleblower advocacy, we have previously discussed the numerous
ways companies hinder or actively retaliate against individuals who choose to bring corporate misconduct to light. In fact, according to the Ethics
and Compliance Initiative’s National Business Ethics Survey,
more than 1 in 5 respondents said they experienced retaliation after reporting internally. We also continue to witness companies developing new and sophisticated strategies to discourage employees from reporting possible violations.
To be sure, though, the majority of companies want to behave ethically, and are potentially stymied by antiquated internal policies or a lack of guidance
regarding appropriate and effective compliance measures.
As part of its continued dedication to improving the current state of corporate ethics, last week the ECI released a new report which examines key characteristics of high-quality compliance and ethics programs. According to the report, common practices of organizations with
strong ethics and compliance cultures include:
- Creating an environment in which employees are encouraged and able to speak up. Management in such organizations not only offers ample opportunity
for employees to voice concerns, but also takes retaliation seriously through actively engaged HR, legal and compliance departments.
- Acting quickly and maintaining accountability when misconduct occurs. These organizations develop a plan of action in which suspicions are
thoroughly investigated, and confirmed misconduct leads to consistent consequences, regardless of the employee’s position.
- Treating compliance programs as central to business strategy. Misconduct poses dire business risks. As a result, an organization that is serious
about ethics will ensure that the compliance department is not only responsible for meeting legal requirements, but also works to help management
understand and establish integrity to benefit the organization’s overall mission.
It is apparent that companies must demonstrate greater leadership in building ethical cultures, and we applaud the focus and continued work by the ECI
to help advance this goal. In our ongoing effort to root out misconduct in the workplace, the ECI’s report provides a solid foundation of principles
and practices on which we can continue to build.
Among the many exciting trends examined in the recent annual report of the SEC Office of the Whistleblower, I was particularly impressed by the substantial growth in the number
of tips received by the Commission. The nearly 4,000 tips—a record—not only illustrates growing public awareness of the program, but also
demonstrates public action. Simply, a startling and increasing number of individuals are coming forward to stop corruption in the workplace. We are
living in the age of the whistleblower, because so many courageous individuals take on this responsibility as law enforcement’s first line of defense
Thinking about this topic, I was reminded of an interview I gave to Chief Investment Officer for an informative article, If You See Something, Say Something: A Whistleblowing Choose Your Own Adventure. In
addition to referencing our recent landmark study of the financial services industry, the article cleverly lays out various options available to whistleblowers.
As the article makes clear, fraud persists, and the question of how and when to blow the whistle is an extraordinarily complex one. If you are interested
in reading more about key considerations for potential whistleblowers, click here.
In a recent piece in The New York Times, I discuss some of the key considerations for SEC whistleblowers including when, how and what to report,
and how to navigate the high pressure environment of the whistleblower’s workplace. To read the full article, see here.
Late yesterday, the SEC Office of the Whistleblower issued its annual report to Congress chronicling the program’s activities during the prior fiscal year.
We summarized the results in a piece for the FCPA Blog here. Looking at the eight whistleblower awards issued this past year, there are two notable firsts: the first whistleblower award
to a company officer and the first time the Commission flexed its muscle by issuing an award to a whistleblower who suffered retaliation. We are so
gratified to note that both of these landmark actions involve Labaton Sucharow clients. For more information on the whistleblower program results,
see the full report here.