Issuer reporting and disclosure violations reemerge as the dominant allegation

The U.S. Securities and Exchange Commission filed substantially fewer new enforcement actions against public companies and subsidiaries in fiscal year 2020 compared to the previous fiscal year, particularly in the spring as the COVID-19 pandemic hit the United States, according to a report released by the NYU Pollack Center for Law & Business and Cornerstone Research.

The report, SEC Enforcement Activity: Public Companies and Subsidiaries—Fiscal Year 2020 Update, analyzes data from the Securities Enforcement Empirical Database (SEED). The SEC filed 61 new actions against public companies and subsidiaries in FY 2020, which ended September 30, compared to a record-high 95 actions in FY 2019. The FY 2020 total was the lowest number since FY 2014.

Enforcement actions picked up in the second half of the fiscal year, with the SEC filing nearly one-third of all FY 2020 public company and subsidiary actions in September. Eighteen of the 61 total actions were filed in the last two weeks of the fiscal year.

Issuer reporting and disclosure allegations reemerged as the dominant allegation faced by public company and subsidiary defendants, accounting for almost half of the actions filed in FY 2020. The 30 issuer reporting and disclosure actions represented the most actions filed in any fiscal year in SEED.

The actions involving issuer reporting and disclosure allegations included the first two enforcement cases brought under the SEC’s new Earnings Per Share (EPS) Initiative.

“The actions involving issuer reporting and disclosure allegations included the first two enforcement cases brought under the SEC’s new Earnings Per Share (EPS) Initiative, which utilizes data analytics to uncover potential accounting and disclosure violations leading to improper reporting of quarterly financial results,” said report coauthor Sara Gilley, a Cornerstone Research vice president.

Although the number of new actions fell substantially from FY 2019, the SEC imposed $1.6 billion in monetary settlements on public company and subsidiary defendants, slightly surpassing FY 2019’s total amount. Almost two-thirds of this amount came from two actions that each had settlements of $500 million or more.

“Disgorgement was a major component of monetary settlements this past fiscal year,” said report coauthor Stephen Choi, the Murray and Kathleen Bring Professor of Law at New York University School of Law and director of the Pollack Center for Law & Business. “The SEC imposed $565 million in disgorgement and prejudgment interest for civil actions in FY 2020, the highest amount since the start of SEED in 2010.”

Additional Highlights

• The SEC brought 89% of enforcement actions against public companies and subsidiaries as administrative proceedings in FY 2020, while 11% were filed in federal court, consistent with the average of 10% over the last five fiscal years. However, 20% of issuer reporting and disclosure cases were filed in federal court.

• The SEC noted cooperation by 62% of defendants in FY 2020, below the record high of 77% the previous fiscal year (due to self-reporting under the agency’s Share Class Selection Disclosure Initiative, which focused on investment advisor disclosures), but above the average of 54% from FY 2010 to FY 2019.

• Actions targeting defendants in either the manufacturing or services industries accounted for a combined 41% of all SEC actions in FY 2020, increasing from 23% in the prior fiscal year. The largest number of actions in FY 2020 was filed against finance, insurance, and real estate defendants, accounting for 46%.

• The SEC opened more than 150 pandemic-related inquiries or investigations between mid-March 2020 and September 2020. The agency filed six enforcement actions related to COVID-19, but they are excluded from SEED because they involved only microcap companies and individuals.

Read the report, SEC Enforcement Activity: Public Companies and Subsidiaries—Fiscal Year 2020 Update.

Read Executive Summary: SEC Enforcement Activity: Public Companies and Subsidiaries