ARE HIGH ENFORCEMENT NUMBERS A MEASURE OF REGULATORY SUCCESS?
On November 15, 2022, the SEC issued a press release announcing their Enforcement results for the 2022 fiscal year (SEC.gov | SEC Announces Enforcement Results for FY22). There were 760 total enforcement actions, representing a 9 percent increase from last year, which translated into a total of $6.439B in civil penalties, disgorgement and pre-judgement interest. I supposed at this point we should say “wow” or “hooray for the SEC”, but we can’t.
Having to effectively police the largest and most active securities markets in the world in order to foster confidence and trust in investors for the capital markets is a prodigious responsibility for the enforcement divisions of all regulators, regardless of jurisdiction, and cannot be overstated.
However, every year regulatory bodies across the globe post enforcement reports with pride, somehow equating high enforcement numbers with success in regulation. In the report, SEC Chair Gary Gensler said, "I continue to be impressed with our Division of Enforcement…Enforcement results change from year to year. What stays the same is the staff’s commitment to follow the facts wherever they lead." The release paints a picture of a vibrant and successful enforcement program: initiating a significant number of new enforcement cases, recovering significant amounts of ill-gotten gains, and imposing hefty penalties on bad actors, not just as punishment but a warning to others. But, if it’s working, why are the year-over-year numbers getting higher? Gurbir S. Grewal, Director of the Division of Enforcement aptly pointed out that “A centerpiece of those efforts is ensuring that we are using every tool in our toolkit, including penalties that have a deterrent effect and are viewed as more than the cost of doing business. While we set a Commission record this past fiscal year for total money ordered at $6.4 billion, including a record $4.2 billion in penalties, we don’t expect to break these records and set new ones each year because we expect behaviors to change. We expect compliance.” But the numbers are telling a different story – could it be that we have the regulatory model wrong?
In our opinion high regulatory enforcement numbers magnify the need for additional regulatory improvements and changes to the model of regulation. For starters, how about a slower and more thoughtful rule development process that includes true industry engagement? Why not contemplate new regulation only after consideration is given to the existing regulatory burdens that seem to bury the industry? Let’s have more cooperation and better dialogue with industry.
Yes, there are very bad actors, and of course they should be subject to the full extent of regulatory enforcement capabilities, and perhaps even be charged civilly and criminally. But there should be more done. It is time to peel back the regulatory onion, take critical look at our regulatory model, and build it better.