SEC Performance Review: Behind The Enforcement Statistics
Since the Reagan administration, politicians have promised to eliminate fraud and abuse in government. To increase accountability of federal agencies, federal laws require that agencies use performance-based metrics in annual reports, testimonies, policy proposals, and budget requests submitted to Congress. Congress, in turn, uses these reports to set the amount of funding and the level of oversight. The Securities and Exchange Commissions (SEC) annual reports, for instance, tell a story of record enforcement activity, often showing significant increases over the prior fiscal year in the number of enforcement actions brought and amount of monetary penalties ordered. The data presented by the SEC show that the agency is ever tougher on crime, but can the statistics be trusted?
As corporate and financial managers know well, the greater is the incentive for hitting a performance target, the greater is the incentive to misreport. Federal agencies are no exception. Professor Urska Velikonja, after a thorough review of 15 years of SEC enforcement actions, finds that the widely-circulated statistics are invalid, and the metrics deeply flawed. Not only does the SEC double and triple count many of the enforcement actions it brings and overstates the fines it orders, it utilizes these measures to obscure the fact that enforcement remained steady between 2002 and 2014. In response to the study, the SEC changed its reporting to eliminate double and triple counting, but many of the problems Professor Velikonja identified persist.
Associate Professor of Law at Emory University (Atlanta)