The Securities and Exchange Commission (SEC) periodically reports on its performance to the public and Congress, emphasizing metrics such as the number of enforcement actions (“cases”) filed (see, e.g., SEC, 2018, 2020). Former co-directors of the Division of Enforcement acknowledge the potential dangers of focusing on quantitative measurements: “the raw number of cases filed or the total amounts of fines and penalties assessed during an arbitrary time period such as a single fiscal year—cannot adequately measure the effectiveness of an enforcement program…[and] can result in a misalignment of incentives and objectives” (SEC 2018). We examine this concern by testing whether the SEC changes enforcement behavior in September, the last month of the SEC’s fiscal year.
We construct a dataset of over 12,000 SEC case filings against firms and individuals for the SEC’s fiscal years 2000 through 2020. Our sample cases include civil actions and administrative proceedings across various violation categories, including broker-dealer, Foreign Corrupt Practices Act, insider trading, investment advisers, issuer reporting, market manipulation, public finance abuse, and securities offerings. We use text-based searches to measure various case characteristics across the full sample of standalone cases and hand collect data on financial sanctions for over 2,100 defendants across a subsample of approximately 1,300 standalone cases in the post Dodd-Frank era (i.e., 2011-2020).
Our first set of analyses reveal a significant increase in cases filed in September relative to the average number of cases filed in other months. Overall, 17.0 percent of cases are filed in September, which is approximately double the average in other months (see Figure 1 below).
This “September spike” exists for all case types (e.g., standalone administrative proceedings, civil actions) and major violation categories, but varies in size across time. Notably, the September spike is larger (smaller) when case volume through August is ahead of (behind) prior year case volume, suggesting that prior-year case volume can serve as a performance benchmark.
Given that the SEC has a fixed budget and staff, we examine how enforcement staff might use discretion over aspects of the enforcement process to strategically file an abnormal number of cases before fiscal year-end. First, we find that staff uses discretion over case timing and venue to increase volume at fiscal year-end. Staff accelerates case filings by pulling forward cases that might otherwise have been filed in the first month(s) of the next fiscal year, although this effect does not fully explain the increase in volume. We also see a higher proportion of standalone cases filed in administrative court, a favorable venue for the SEC.
Second, we consider how enforcement staff prioritizes standalone cases at year-end by examining differences in case characteristics for those filed in September relative to other months of the year. We find that the average September case is less resource-intensive and involves less severe allegations. Cases filed in September are more likely to reference defendant cooperation (22.5 percent vs. 14.5 percent) and name only companies as defendants (25.6 percent vs. 22.2 percent). We find that 50.0 percent of cases filed in September include a Rule 10b-5 allegation, compared with 55.4 percent of cases filed in the other 11 months. Cases filed in September are also significantly less likely to involve parallel criminal proceedings (18.7 percent vs. 16.5 percent). The differences in September case characteristics only exist in “high spike” years, consistent with enforcement staff shifting its case priorities in years in which it seeks to increase case volume in September.
Finally, we analyze whether enforcement staff approaches its negotiations with defendant(s) differently in September. We find the SEC files a higher percentage of cases as settled charges in September than in other months (71.3 percent vs. 65.7 percent). This finding is consistent with the staff pursuing cases for which defendants are more willing to settle (i.e., a case selection effect) and staff compromising in negotiations in order to file the case by year-end (i.e., a leniency effect).
Our evidence on case characteristics supports a case selection effect, but we also provide evidence of potential regulatory leniency in September in terms of non-financial and financial penalties. With respect to non-financial penalties, we find that defendant undertakings (e.g., requirements to appoint an independent compliance monitor) and defendant censure are less likely in September, but only in high-spike years. With respect to financial penalties, we find that, while September cases are more likely to settle with financial penalties, the amount of the penalties is lower, which is largely driven by smaller amounts of disgorgement. However, we find that September cases are less likely to have large civil penalties. While we cannot observe the true counterfactual, our evidence suggests SEC staff may compromise on settlement negotiations to file cases before fiscal year-end. These findings are important to the extent penalties reduce repeat violations and deter future misconduct.
Our findings should be of interest to academics, legislators, and the SEC. First, we find inconsistency in regulatory behavior at fiscal year-end, which relates to previous research on regulator behavior. Second, despite different institutional features in the public sector, we find that periodic reporting can affect regulator behavior. This finding relates to previous research on the effect of periodic reporting on organizational behavior. Third, we examine a broader set of SEC enforcement cases than typically considered in prior research, including cases against individuals. Studying enforcement against all parties is important, given the SEC’s emphasis on individual accountability.
Securities and Exchange Commission (SEC), 2018. Annual Report. Division of Enforcement. https://www.sec.gov/files/enforcement-annual-report-2018.pdf (accessed 7 July 2021).
Securities and Exchange Commission (SEC), 2020. Annual Report. Division of Enforcement. https://www.sec.gov/files/enforcement-annual-report-2020.pdf (accessed 7 July 2021).
This post comes to us from professors Dain C. Donelson at the University of Iowa and Matthew Kubic and Sara Toynbee at the University of Texas at Austin. It is based on their recent paper, “The SEC’s September Spike: Regulatory Inconsistency with the Fiscal Year,” available here.