The opinions of Kris Bennatti, data collected by Hudson Labs
In 2021, the SEC’s Division of Enforcement published the lowest number of “Accounting and Auditing Enforcement Releases” ever, tied with the year 2017. Has the agency become less effective over the last decade, or has it simply shifted priorities?
As SPACs crowd the market and retail investors flock to trading apps, a strong securities regulator is needed more than ever. I analyzed SEC enforcement action and comment letter data collected by Hudson Labs to understand how SEC activity has changed and whether the agency can rise to the occasion.
A decline in both enforcement and disclosure review
The quantum of SEC enforcement actions and litigation releases has decreased substantially from pre-2010. Enforcement activity isn’t the only area where SEC output has declined; the quantum of SEC comment letters produced by the Division of Corporate Finance has also seen a substantial decline from pre-2013.
The SEC’s Enforcement division publishes “Accounting and Auditing Enforcement Releases” or AAERs, shown in dark green above as well as Litigation Releases, found at the following links, https://www.sec.gov/divisions/enforce/friactions.shtml and https://www.sec.gov/litigation/litreleases.shtml, respectively. The above data was collected directly from the SEC.gov websites by Hudson Labs.
Both Accounting and Auditing Enforcement Releases (“AAER”) and Litigation Releases have slumped since the early 2000s. Many criticized Jay Clayton and the Trump administration for letting the SEC lose its teeth. Interestingly, the quantum of releases published was similarly low under chair Mary Jo White, appointed by the Obama administration. Under Mary Jo White’s tenure, the SEC published an average of 101 AAERs and 281 Litigation Releases per year from 2013 through 2016. Under Jay Clayton, the SEC published approximately 90 AAERs and 322 Litigation Releases per year from 2017 through 2020. In contrast, the years 2000 through 2008 saw an average of 178 AAERs and 495 Litigation Releases per year. From 2000 through 2008 the SEC was chaired by Harvey Pitt, William Dondaldson and Christopher Cox, consecutively, all of whom were appointed by the Bush administration. The drop in visible enforcement activity does not appear to be an issue of politics or at least not of the right vs. the left.
Obviously, the number of AAERs and Litigation Releases is an imperfect proxy for the effort and efficacy of the SEC’s enforcement arm. In general, we would expect a strong enforcement arm to uncover more malfeasance and therefore put out more releases but it is not a one-to-one relationship. Larger, more complex cases require more SEC resources and take more time. It’s possible that the decrease in releases is in part due to an increase in the complexity of enforcement cases handled by the SEC and does not reflect a decrease in the quality of enforcement. It is difficult to believe, however, that today’s enforcement environment is more complex than the dot-com era of the early 2000s.
Note that the SEC publishes annual reports with more detailed data on enforcement but the annual reports have only consistently published detailed enforcement data since around 2015. The figures shown in Table 1 have therefore been derived directly from the SEC public webpages.
The data on SEC comment letters (UPLOAD) information was collected directly from the EDGAR archives by Hudson Labs. SEC comment letters are not made public for 20 days or more after being issued, therefore, the 2021 figures are slightly undercounted.
Enforcement isn’t the only area where SEC activity has declined. The number of public SEC comment letters has dropped significantly over the past seven years. The number of letters has declined steeply every year since 2015 up until 2021. The increase in comment letters in 2021 was prompted by a dramatic increase in S-1 filings in the year (driven in part by SPAC mania).
SEC comment letters are published by the Division of Corporate Finance. The Division of Corporate Finance periodically reviews disclosure and provides comments “where the staff believes a company can significantly enhance its compliance with the applicable requirements”.
The decrease in comment letters shown above can be partially, but not entirely, attributed to the decrease in the number of relevant filings requiring review. The number of forms filed under form 10-K, 10-Q or S-1 decreased 16 percent from 2015 to 2020 but the number of comment letters decreased by 57 percent!
SEC comment letters are not made public immediately but rather after 20 days or more. Therefore, the 2021 figures shown in Table 2 are incomplete. It’s unlikely that thousands of comments are waiting in the wings so we will assume the figures shown above are relatively accurate. 2021 saw the highest number of S-1 forms in the history of EDGAR, as shown in Table 3. Given this dramatic increase in filings and the need for their review, the increase in SEC comment letters in 2021 appears insufficient.
Dramatic increase in S-1 forms filed in 2021.
Overall, SEC activity has slumped over the past decade in both enforcement and disclosure review and political priorities do not seem to be the driving factor. Some have indicated that the SEC is short-staffed. On the other hand, the SEC’s budget has increased by more than 60 percent since 2010. The question then is why? Where is the SEC putting its resources now, if not towards enforcement or disclosure review? As we look to 2022, we need an agency that is ready to protect investors in an unusual market environment where retail capital is more likely to be at risk.
In a time when the SEC has access to unprecedented quantities of data, the agency should be more effective than ever. As the CEO of Hudson Labs, a company that extracts hard-to-find information from securities filings, I know what’s possible with the help of advanced technology. Now is the time for the SEC to start leveraging technology to promote fair and efficient markets for the good of us all.
About us: Hudson Labs extracts red flags from SEC filings based on learned associations with downside outcomes. Our institutional dashboard analyzes annual and quarterly statements, 8-Ks, prospectuses and SEC comment letters for over 8,000 tickers. We process filings and render analysis in real-time.
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