SEC proves its mettle in 2021 Enforcement Results

The US Securities and Exchange Commission (SEC) has published its enforcement results for the 2021 fiscal year. The results, which span 1 October 2020 to 30 September 2021, show the SEC to be taking clear action in emerging areas, from crypto to climate change and even the dark web.

Less new enforcement, but a higher cost

Over the course of FY 2021, the SEC reports a 7% increase in new regulatory actions, with enforcement actions standing at 697. These 697 actions comprised of 434 new cases, 120 against issuers who failed to make accurate filings and 143 ‘follow on’ administrative proceedings. While this marks a 7% increase overall, the total number of new actions actually shows a 3% decrease since FY 2020.

While the number of new enforcements has fallen, the amount issued in regulatory penalties actually increased year-on-year. In FY 2020, the SEC issued $1,091 in penalties, in 2021 this rose by 33% to $1,446 billion. So, while there are fewer actions being taken, the cost of non-compliance is on the rise.

First-of-their-kind enforcements

While the number of enforcements issued is not particularly striking, the topics of those enforcements paints a more dramatic tale – one of innovation and ingenuity from the SEC. As Director of the SEC’s Division of Enforcement, Gurbir Grewal notes:

“This year has seen a number of critically important and first-of-their-kind enforcement actions, as well as record-breaking achievements for our whistleblower program, which we expect will lead to even more successful actions in the future.”

Of these “first-of-their-kind” enforcements, the SEC highlights a number as being particularly pertinent:

Insider tips on the dark web

In one instance, in March 2021, the SEC charged an individual with selling ‘insider tips’ on the dark web. The dark web is notoriously difficult to navigate, let alone regulate, as it allows users to access the internet anonymously. This individual, James Roland Jones, posted so-called ‘insider tips’ on the dark web, for which users paid him in bitcoin and subsequently traded off the tips. The SEC poured resources into “piercing the cloak of anonymity” in order to change Roland Jones with violating the antifraud provisions of the federal securities laws.

Securities fraud within alternative data

In September, the SEC issued a landmark enforcement against alternative data provider, App Annie, for engaging in deceptive practices and making misrepresentations about how the company collected its alternative data.

Fraudulent crowdfunding for cannabis

Also in September, the SEC charged three individuals and an issuer with running a fraudulent scheme to sell $2 million of unregistered securities through two crowdfunding offerings in cannabis and hemp companies.

Bitcoin investment and crypto

The SEC charged three individuals – including the founder of Bitcoiin2Gen – for fraudulently inducing investors to buy digital asset securities by making false claims, such as it was “the largest Bitcoin exchange in euro volume and liquidity”. It also issued a number of other crypto-related enforcements.

As well as this, the SEC issued pioneering enforcements in areas including decentralized finance, the duties of municipal advisors and Forms CRS.

Enforcements against individuals

The SEC’s enforcement results are not only of interest because of the areas of enforcement, but also because of who those enforcements are against. There has long been speculation that financial regulators would turn their attention to the individuals who operate at the top of financial institutions, and in 2021 the SEC proved this to be true.

In particular, it charged a number of corporate executives, including the former CEO of Wells Fargo, the former head of Wells Fargo Community Bank, the founder and former CEO of truck manufacturing company Nikola – to name but a few.

CUBE comment

The US regulatory system is an enigmatic creature, difficult to predict and full of surprises. For many years, the US has lagged behind with regard to emerging regulatory areas – ESG, crypto and innovation, for example. While there was often talk of developments, there was very little in terms of proof.

Over the course of 2021, however, the US has slowly emerged as a leader in a number of fields. While their regulatory frameworks continue to lag in some areas, the regulatory actions they are taking – especially from the SEC – are some of the boldest that we’ve seen globally.

Take climate change, for example. Most financial regulators are scrambling to put in place a regulatory system to manage climate and environmental risk. The EU is considered to be leading the way with SFDR, and the UK is coming in a close second. However, what the US lacks in climate-risk regulation, it claws back in genuine regulatory action. If the rumours are true, the SEC in conjunction with BaFIN is taking concrete punitive action against firms that “greenwash”. Further, despite murmurings from global regulators about regulating crypto, the SEC is one of the only regulators actively charging bad actors in this space. The same can be said for its enforcement around alternative data.

Interestingly, instead of waiting on a new regulatory perimeter to manage areas such as crypto and climate, the SEC is using existing powers – predominantly those surrounding fraud and misrepresentation – to bring enforcement action. In turn, it is proving itself as a genuinely proactive regulator – enforcing while innovating, rather than letting malpractice slide because it doesn’t fit the regulatory mould.

Over the coming weeks, we will be publishing our annual Overview of Global Enforcement Trends Report, which will provide an in-depth look at global enforcement action, as well as an analysis of the trends to watch for 2022.

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