Enforcement Statistics

Anyone paying attention can’t help but notice that the SEC’s Enforcement Division is not producing nearly as many enforcement actions as it had in the recent past.  Penalties collected against securities law violators are way down as well.  The facts are not altogether unsurprising in a pro business administration—enforcement actions, particularly those against business entities, just aren’t going to be as common.  But the degree of the decline is much greater than most expected.  Because the number of Enforcement staff has remained somewhat constant and the productivity of the staffers probably hasn’t changed much, an interesting question is what has caused the dramatic decline in the number of enforcement actions?

I think there are multiple culprits. Without a doubt, the Commission is ultimately responsible for the drop off in cases. After all, the Enforcement Division reports to the Commission. The Commission (primarily through the Chairman) sets enforcement priorities and allocates resources as it sees fit.  This Commission signaled that it planned to be kinder and gentler than its predecessors when it came to enforcement of the securities laws.  This naturally has resulted in fewer enforcement matters brought. Moreover, presumably because there is now a full compliment of Commissioners, it has become even more challenging to get actions successfully completed.  A full set of Commissioners means more meetings, followed by more briefings, followed by still more meetings and briefings and then follow up meetings and briefings.  Following these briefings, Commissioners often seem to want to know what other Commissioners are asking about and this can result in still more meetings and follow up meetings.  As a staff person, this absurd and exhausting process often seems like it will never end.

The Enforcement Division co-directors also share some of the blame for the dramatic fall of enforcement actions.  I don’t know exactly what the co-directors are doing, but perhaps the low output is occurring because the directors are still getting use to their new roles or are more cautious than they really ought to be.  The issue is probably not one of diligence or competence.  For some Enforcement executives, it takes considerable time before they are fully comfortable making non-controversial decisions without soliciting views from defense counsel, subject matter experts (other SEC divisions), trial unit personnel, colleagues, and economists. It’s hard to tell what’s going on from the outside looking in, but the co-directors bear significant responsibility for the Enforcement Division’s tangible productivity (or lack thereof).

I also know that the trial unit is continuing to gum up the works. As I have advocated before, the Home Office Trial unit model should be disbanded. Trial unit personnel spend way too much time conjuring up litigation risks and too little time actually litigating cases.  Perhaps they should spend some of their time finding holes in the putative defendants’ cases.  Putting forth an opinion that a judge won’t like a particular case or that a particular defendant would present well before a jury is not really a particularly enlightening observation, particularly from someone who has little experience actually trying cases and little insight into the personalities of the relevant judges.  The current trial unit set up is not a good use of spare resources and not good for the enforcement program (to the extent that the goal is actually to bring cases in a timely manner).

Getting an enforcement case to the finish line is, as one attorney colorfully noted, a lot like “pushing a pig through a python.” It seems as if the python has grown much longer under the current Commission. My guess, though, is that in the not too distant future the trend will start to reverse, as those in charge begin to realize the political hazard of fewer enforcement cases.  I believe that some time soon, enforcement staff will be told that more cases need to be brought to beef up enforcement statistics, even though the staff hasn’t actually been causing the holdup.  Expect to see a significant uptick in the number of cases brought in the coming months—before the end of the fiscal year. Inevitably, in the rush to generate enforcement cases and favorable statistics, some of the actions brought (so-called stat generators) will be properly seen as a dubious use of the resources of the federal government.