SEC and CFTC FY2018 Results: Looking Back . . . and Looking Forward


Posted on November 29, 2018, by James G. Lundy, Mary P. Hansen and Nicholas J. Wendland in CFTC, Enforcement, SEC. Comments Off on SEC and CFTC FY2018 Results: Looking Back . . . and Looking Forward

Earlier this month, the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission issued their annual reports about their Divisions of Enforcement results for fiscal year 2018. Analyzing these reports is a helpful way for us to learn from the recent historical enforcement efforts by both financial regulatory agencies. Also, both reports provide guidance about the divisions’ objectives and initiatives for the upcoming fiscal year and beyond. Below we explore and summarize the important topics covered in both reports.

The SEC issued its FY2018 Annual Report earlier this month. The last several pages categorize and list every action filed by SEC Enforcement during FY2018; this provides a useful reference tool. In addition, this report continues to evolve and provide more information than in years past. Not surprisingly, the report highlights SEC Chairman Jay Clayton’s direction to SEC Enforcement to focus on “Main Street” investors. Thus, it was no surprise to see SEC Enforcement’s Share Class Selection Disclosure Initiative touted as a success.

If focusing on Main Street is Chairman Clayton’s top priority for SEC Enforcement, then policing cyber-related misconduct is the Chairman’s priority “1B.” In its Annual Report, SEC Enforcement specifically advised:

Since the formation of the Cyber Unit at the end of FY 2017, the Division’s focus on cyber- related misconduct has steadily increased. In FY 2018, the Commission brought 20 standalone cases, including those cases involving ICOs and digital assets. At the end of the fiscal year, the Division had more than 225 cyber-related investigations ongoing. Thanks to the work of the Unit and other staff focusing on these issues, in FY 2018 the SEC’s enforcement efforts impacted a number of areas where the federal securities laws intersect with cyber issues (emphasis added).

Regarding SEC Enforcement’s results, while the SEC seemingly tried to temper the increased results from last year and asked readers to avoid focusing on quantitative results, one thing that has become clear during Chairman Clayton’s tenure is that he has apparently not slowed down SEC Enforcement. Regarding the quantitative results, the SEC brought a diverse mix of 821 enforcement actions, including 490 standalone actions, and returned $794 million to harmed investors. A significant number of the SEC’s standalone cases concerned investment advisory issues, securities offerings, and issuer reporting/accounting and auditing, collectively comprising approximately 63 percent of the overall number of standalone actions. The SEC also continued to bring actions relating to market manipulation, insider trading, and broker-dealer misconduct, with each comprising approximately 10 percent of the overall number of standalone actions, as well as other areas. The agency also obtained judgments and orders totaling more than $3.945 billion in disgorgement and penalties.

The report also outlined the five core principles that serve to guide SEC Enforcement’s work. From here, we garner a glimpse into their focus and efforts going forward. These principles are:

  • Focus on the Main Street investor;
  • Focus on individual accountability;
  • Keep pace with technological change;
  • Impose remedies that most effectively further enforcement goals; and
  • Constantly assess the allocation of resources.

In concluding our discussion of the SEC Enforcement’s efforts and looking forward, with the continuing focus on the advisory and brokerage industries, we should expect SEC Enforcement to continue to focus its efforts and resources on the investment advisers and broker-dealers who serve Main Street.

Before turning to the CFTC, it is worth noting that both the SEC and the CFTC highlight the increased use of specialized proprietary tools they have developed to review data and bring enforcement actions. The SEC specifically stated that it “has continued to leverage its own technology to accomplish its enforcement goals.” These goals include using proprietary tools to conduct data analysis to identify and pursue a wide variety of misconduct, including insider trading, “cherry-picking” schemes, and the sale of unsuitable investment products or programs to retail investors. The CFTC highlighted its realignment of the Market Surveillance Unit, moving it from the Division of Market Oversight to the Division of Enforcement. Building and utilizing sophisticated analytical tools, the Market Surveillance Unit reviews data for instances of fraud, manipulation, and disruption. Moving the unit to the Division of Enforcement “reflects the data-centric approach the Division pursued during the last Fiscal Year, and expects to continue going forward.” Thus, the SEC and the CFTC will continue to increasingly employ sophisticated data analytics to pursue their enforcement objectives.

Turning to CFTC Enforcement, much like the SEC, CFTC Enforcement now provides much greater detail in its FY2018 Annual Report than in previous editions. Similar to the SEC’s results, quantitatively, CFTC Enforcement’s efforts in FY 2018 reflect significant increases. The number of enforcement actions filed increased year over year from 49 to 83 and monetary sanctions also increased from $413 million to $950 million. CFTC Enforcement  explained in the report a number of key initiatives started or continued during FY 2018, including cooperation and self-reporting, the use of data analytics, and the development of a set of specialized task forces focused on four  substantive areas — spoofing and manipulative trading, virtual currency, insider trading and protection of confidential information, and the Bank Secrecy Act.

Regarding the “Spoofing and Manipulative Trading” task force, the CFTC Enforcement Director provided additional information on this task force in a speech the day before the release of the FY2018 Annual Report:

Spoofing and Manipulative Trading: A little more than a decade ago, our markets moved from in-person trading in the pit, to computer-based trading in an electronic order book. The advent of the electronic order book brought with it significant benefits to our markets—it increased information available, reduced friction in trading, and significantly enhanced the price discovery process. But at the same time, this technological development has presented new opportunities for bad actors. Just as the electronic order book increases information available to traders, it creates the possibility that false information injected into the order book could trick them into trading to benefit a bad actor.

Efforts to manipulate the electronic order book—which can include spoofing—are particularly pernicious examples of bad actors seeking to gain an unlawful advantage through the abuse of technology. These efforts to manipulate the order book, if left unchecked, drive traders away from our markets, reducing the liquidity needed for these markets to flourish. And this misconduct harms businesses, large and small, that use our markets to hedge their risks in order to provide the stable prices that all Americans enjoy. The Spoofing Task Force works to preserve the integrity of these markets.

The CFTC’s efforts to detect market manipulation generally and spoofing in particular, however, were not limited to the creation of a task force. The FY2018 report identified 83 total actions filed, 26 (approximately 31 percent) of which were manipulation-based. This was a number second only to retail fraud (30 actions filed). While supervision is not discussed specifically as an initiative or a particular priority, CFTC Enforcement’s FY2018 Annual Report also identified 6 “Supervision” cases. Here is the breakdown by category:

From this table, it is a little unclear how the CFTC’s spoofing supervision cases were categorized and quantified in its FY2018 Annual Report. Regardless, based on the increased focus on supervision in this area— as previously reported—we can expect CFTC Enforcement to continue to investigate and bring charges for spoofing and related supervisory violations well into the future.

Finally, the CFTC Enforcement’s FY2018 Annual Report emphasizes its efforts to significantly ramp up its “coordination with our law enforcement and regulatory partners—in particular the criminal authorities.” These efforts included the announcement of the parallel actions involving spoofing and manipulative conduct filed together with the Department of Justice in January 2018. In those filings, the Commission charged three financial institutions and six individuals with manipulative conduct and spoofing. While the early 2018 joint filing was significant, the Commission’s coordination with criminal authorities was not limited to this filing. Joint filings with criminal counterparts were up significantly and may signal more to come:





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