On November 2, the SEC’s Enforcement Division released its annual report detailing the facts and figures of its enforcement efforts in fiscal year 2018. At first blush, this year’s report looks strikingly similar to those from recent years, as the headline numbers in most categories are nearly indistinguishable from 2015, 2016, and 2017. This consistency may be surprising given that 2018 is the first such report reflecting exclusively the enforcement priorities of the Commission since it was reconstituted under Chair Jay Clayton.
But a closer examination of the report, including the components feeding into the top-line facts and figures and commentary by Division co-directors Stephanie Avakian and Steven Peikin, reveals a clear shift in priorities by the Division. These range from a philosophical shift in its mission to the reallocation of resources during a hiring freeze. We address here the most notable of these subtle but important changes.
Most critically, the 2018 report reflects a transition in the Division’s enforcement philosophy away from former-Chair Mary Jo White’s “cop on the beat” Wall Street-focused approach designed to pursue securities law violations large and small towards a stated focus on protecting retail, or “Main Street,” investors from outright fraud and other deliberate misconduct. The shift from “broken windows” enforcement and numerous strict liability and negligence cases to those highlighted in this year’s report is stark. Also in keeping with this shift, two high-priority Division initiatives rolled out in FY 2018, the Retail Strategy Task Force and the Share Class Selection Disclosure Initiative, allocated resources to conduct targeting retail investors, including “disclosures concerning fees and expenses” and “misconduct that occurs in the interactions between investment professionals and retail investors.” Similarly, FCPA-related enforcement actions—which received significant focus and attention during Chair White’s tenure—are down by nearly 40 percent from an all-time high in FY 2016, and FCPA enforcement is barely mentioned at all. Although Division leadership states that they do not “face a binary choice between protecting Main Street and policing Wall Street,” this year’s report is telling of a change in emphasis from the latter to the former.
The 2018 annual report also reveals a step away from a philosophy of deterrence through high monetary penalties in favor of a “wide range” of “investor-oriented” individualized remedies tailored to “the underlying charged conduct.” This is most obvious in the Commission’s use of undertakings in its headline-grabbing cases against Theranos and Tesla and their CEOs. Here, the Commission required the companies’ CEOs to temporarily or permanently relinquish significant control and the companies themselves to institute controls to monitor executives’ social media communications, return money to investors before profiting in a liquidation event, and retain securities counsel to advise on disclosure issues, among other undertakings. In line with the Division’s stated focus on protecting retail investors, these undertakings are described as providing “shareholders with greater protections in the future” with the additional goal of avoiding significant collateral financial consequences on investors and shareholders who did not benefit directly from the misconduct.
Also notable in this year’s report is the Division’s discussion of and response to recent constraints on the remedies the Commission may impose. Although courts to date have rejected the argument that the Supreme Court’s 2017 decision in Kokesh v. SEC placed disgorgement entirely outside courts’ equitable powers, the report observes that Kokesh has had “a significant effect on the Commission’s efforts to obtain disgorgement.” This impact is evident in the 2018 figures, which show a drop in disgorgement from $2.96 billion ordered in FY 2017 to $2.51 billion in 2018, of which $933 million came in the context of a single case involving Petrobras that settled in the final days of the fiscal year. The report noted several times that Kokesh may result in $900 million in lost disgorgement in matters already filed that could have been returned to investors.
Finally, the Commission has increasingly elected to provide guidance to the securities markets through non-enforcement measures. Since Chair Clayton took office, the Commission has used its authority to issue public notice to condition behavior and signal upcoming enforcement activity to the market, particularly in emerging areas such as cybersecurity and fin tech. For example, in February 2018, the Commission released its updated cyber‑disclosure guidance, and then settled its first-ever disclosure violation case for a cyber incident against Yahoo!’s successor a few months later. Similarly, in June 2017 and October 2018, the Commission released Reports of Investigation (so-called “21(a) Reports”) regarding digital assets and cyber threats, respectively, after having released no such reports in the three years prior. A year later, in TokenLot, the Commission brought its first enforcement action charging an unregistered broker-dealer for selling digital tokens. These Commission efforts, undoubtedly done in close consultation with Enforcement Division leadership, reveal a clear shift away from a “broken windows” approach that seeks to deter serious violations through a vigorous enforcement of even strict liability and negligence-based claims in novel cases to an approach in which guidance, rather than an enforcement action, is more regularly provided in the first instance.
That the Enforcement Division has become more creative in its guidance and remedies over the past year is not surprising given the resource constraints it faces. The 2018 report describes a Division that is working to do more with less, citing a workforce that has fallen 10 percent from its 2016 peak while at the same time being tasked with re-trying and resolving numerous administrative proceedings following the 2018 Supreme Court ruling in Lucia v. SEC. The report forthrightly states that the Division cannot pursue every possible priority given its scarce resources, and thus will focus its resources toward violations that disproportionately affect retail investors. Evidence of this reallocation includes the significant number of fraudulent ICO cases brought by the newly formed Cyber Unit and the high levels of activity against investment advisers and fund sponsors—comprising 108 (or 22%) of the 490 standalone actions in FY 2018—through a reoriented Asset Management Unit. The report’s discussion is a notable contrast to the approach of allocating resources to violations “spanning the entire spectrum” described in the Division’s 2016 report.
Finally, the 2018 report continues the Enforcement Division’s attempts to expand the metrics against which the Division’s results are measured from fine and penalty totals to the “nature, quality, and effects of the Commission’s enforcement actions.” It accomplishes this goal with some success by providing context such as a framework of five “principles”—focusing on retail investors, individual accountability, keeping pace with technological change, imposing tailored remedies, and reassessing resource allocation—and the import of the alternative remedies it ordered in some of its highest profile cases. But while the Division may want to prioritize the qualitative above the quantitative, the report effectively concedes that the Division is measured at least in part by its numbers, and defaults to familiar showcasing of statistics and dollar values.
In the end, the most notable takeaway from this year’s report is undoubtedly the Division’s confirmed reorientation and reallocation of resources toward “Main Street.” Looking ahead, absent market-altering events, we can expect the Division to continue to deemphasize quantitative evaluations in favor of qualitative considerations such as tailored remedies, market guidance, as well as a continued focus on investigating and prosecuting garden-variety fraud perpetrated on retail investors, whether directly or through intermediaries such as investment advisers and fund sponsors.
 137 S. Ct. 1635 (2017).
 In contrast, the single-highest disgorgement ordered in FY 2017 was for $457 million in the Commission’s case against Telia Company AB.
 138 S. Ct. 2044 (2018).