SEC Going After Corp. Subsidiaries

The Securities and Exchange Commission is particularly focused on the subsidiaries of financial services firms.

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Riding a spike in Securities and Exchange Commission civil enforcement actions against corporate subsidiaries, the overall number of SEC enforcements against public companies and their units rose more than 50% in fiscal year 2015, according to a new survey.

In fiscal 2015, the SEC filed 52 actions against corporate subsidiaries compared with an average of 18 actions a year between fiscal 2010 and 2014, the report, issued by the NYU Pollack Center for Law & Business and Cornerstone Research, found. Among its actions against subsidiaries, the commission focused mostly on financial firms.

Overall, the SEC brought 84 actions against public companies and their subsidiaries in FY 2015, compared with 55 actions in the previous fiscal year. (Of the hundreds of enforcement actions the commission brings each year, most are against individuals.) In the first half of FY 2016, the SEC filed 43 new enforcement actions against public companies and their related subsidiaries. (See graphic below.)

01_SEC Actions by Defendant Type (1)

Within the financial services sector, the SEC appears to favor going after the subsidiary rather than the parent company. The researchers found that the commission has brought more charges against the subsidiaries of such companies than their publicly traded parent corporations, according to the report.

“What’s happening is that actions against financial firms have increased and most of the actions against financial firms are brought against their subsidiaries,” a senior vice president of Cornerstone Research and a co-author of the report, said in an interview.

Why is the SEC going after the subsidiaries of financial services firms? “That’s a question we want to investigate. It could have something to do with the way financial firms are set up — with lots of different subsidiaries,” he said.

While the abundance of actions against financial firms could be a “post-crisis” wave of SEC enforcements, Marcus said, “it is a long time after the financial crisis. So at this point it’s not clear to me exactly what’s driving that.”

In another finding, the SEC continued to bring the vast majority of its actions as administrative proceedings rather than as civil court cases. In 2015, 92% of the actions were heard by SEC administrative panel judges while 8% were tried in U.S. district courts, according to the report.

In 2010, by contrast, 67% of SEC enforcement actions against public companies and their subsidiaries were held in federal court and 33% as administrative proceedings. Despite a “perceived home court advantage” for the SEC in administrative proceedings alleged by critics, their percentages have continued to skyrocket, according to Marcus.

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