Rep. Bill Huizenga, Mary Jo White">

SEC enforcement officials say they focus on quality, not quantity, of cases

Regulator brought fewer actions in fiscal 2017, but touts a record $1 billion being returned to harmed investors

May 16, 2018 @ 2:02 pm

By Mark Schoeff Jr.

Securities and Exchange Commission officials told lawmakers Wednesday that even though total enforcement actions declined last year, it doesn't mean the agency is going soft.

In fiscal 2017, the SEC brought 754 enforcement actions, down from a 868 in fiscal 2016. The agency also returned a record $1.07 billion to harmed investors in fiscal 2017, which ran from Oct. 1, 2016, through Sept. 30, 2017.

But the agency shouldn't be judged strictly by the numbers, said Stephanie Avakian, co-director of the SEC Division of Enforcement.

"We should be measured on: Are we creating deterrence against wrongdoing?" Ms. Avakian said at a hearing of the House Financial Services Subcommittee on Capital Markets, Securities and Investment.

She said other criteria include whether the agency is stopping retail investor fraud, protecting a wider range of retail investors and targeting a broader spectrum of harmful practices.

"Some of these are measurable by statistics, but many are not," Ms. Avakian said. "It's more of a qualitative analysis."

The SEC's enforcement approach under chairman Jay Clayton, who took office in May 2017, drew praise from Rep. Bill Huizenga, R-Mich., chairman of the subcommittee.

He contrasted it favorably with the so-called "broken windows" philosophy (pursuing small infractions to establish a no-tolerance atmosphere to deter larger violations) of previous SEC chairwoman Mary Jo White, which he said focused more on the quantity of enforcement actions than their quality.

"I'm pleased to see that the division is shifting away from minor violations of securities laws and is instead taking a more selective approach to enforcement," Mr. Huizenga said. "After all, we should not evaluate the true effectiveness of a regulatory agency or its enforcement program solely based on how many headlines it can generate."

His criticism of "broken windows" echoed those made by Republican SEC member Hester Peirce in a speech last week.

The other SEC enforcement co-director, Steve Peikin, touted the more than $1 billion the agency returned to investors last year.

"We place great importance on putting money back into the pockets of harmed investors," Mr. Peikin said.

He cautioned that a recent Supreme Court ruling, which set a five-year limit on the time the SEC has to force disgorgement of ill-gotten gains, could "impact our ability to obtain recovery for harmed investors from long-running frauds." Mr. Peikin said that over the last year, the SEC has had to forgo about $800 million in disgorgement based on its calculations related to litigated and settled cases.

In response to questions from lawmakers, Mr. Peikin said the SEC doesn't have "a specific proposal for a legislative fix."

The SEC enforcement officials also indicated that over the last year, the agency has reduced its use of in-house administrative law judges to try cases.

The administrative process has been criticized for giving the SEC a substantial home-court advantage and is the subject of a Supreme Court case brought by an investment adviser.

"I'm very concerned about bias," said Rep. Ann Wagner, R-Mo.


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