(Article from Registered Funds Regulatory Update, January 2023)
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On November 15, 2022, the SEC announced its enforcement results for fiscal year 2022. Over the year, the SEC filed 760 total enforcement actions, up significantly from the 697 actions filed in the 2021 fiscal year. Penalties, disgorgement, and pre-judgment interest jumped to a record $6.439 billion, up 67% from the previous year. According to Division of Enforcement Director Gurbir S. Grewal, this robust enforcement signifies the SEC’s ongoing determination to protect investors and deter wrongdoing in the U.S. financial markets.
The SEC issued enforcement actions against a wide variety of market participants, including broker-dealers, investment advisers, auditors, and individuals. Notably, the SEC focused on compliance in the evolving cybersecurity and ESG spaces, including charges against Morgan Stanley for failing to protect the personal identifying information of its customers and charges against BNY Mellon for materially misleading statements and omissions about its consideration of ESG principles in making investment decisions for certain mutual funds. Some of the year’s largest penalties, totaling $1.235 billion, were issued as a result of the SEC’s actions against JP Morgan Securities LLC, 15 other broker-dealers, and one investment adviser for widespread and longstanding failures to maintain and preserve work-related communications on employees’ personal devices.
Another significant focus of the SEC has been on private funds and the rapid growth of private fund assets managed by advisers. The SEC took action on undisclosed conflicts of interest, fee arrangements, valuation procedures, and the protection of material nonpublic information. In the 2022 fiscal year, the SEC charged Allianz Global Investors U.S. LLC and three of its portfolio managers for failing to disclose various trading strategy risks. It imposed a penalty in excess of $1 billion and over $5 billion in restitution to investors.
The SEC also issued several enforcement actions against registered investment advisers for failing to (i) accurately update Forms ADV; (ii) comply with the 1940 Act Custody Rule; (iii) offset management fees; and (iv) fully disclose to investors the different fees and expenses charged. The SEC also charged broker-dealers and registered investment advisers for failing to disclose conflicts of interest under the 1940 Act and for violations of Regulation Best Interest.
While the SEC acknowledged the punitive record it set for fiscal year 2022, Director Grewal stated that he does not expect the Enforcement Division to set new records each year. Rather, he stated that he believes the 2022 enforcement results will have a deterring effect, which will ultimately result in changed behavior and increased compliance.
SEC Announces Enforcement Results for FY22, SEC Press Release (Nov. 15, 2022), available at: https://www.sec.gov/news/press-release/2022-206.