June 8, 2021

SEC Enforcement: Use of Data Analytics On the Rise

We’ve blogged a few times about the SEC’s use of data analytics in enforcement. This Troutman Pepper memo says that the SEC is increasingly data-driven in its approach to identifying potential enforcement targets for enforcement actions. This excerpt highlights some specific areas where the SEC’s data analytics tools are being brought to bear:

Recent enforcement actions suggest that the SEC is targeting quarterly public filings. Quarterly reports are not subject to the same accounting oversight as annual reports. Recent cases highlighted by the agency as examples of data-based enforcement actions suggest that the SEC’s focus with data-based investigations is on quarterly reports and other areas where manipulation may be more likely to occur.

Reading between the lines of the press releases surrounding recent enforcement actions and other SEC commentary, it appears that the targets for these new enforcement initiatives are relatively small manipulations to figures that can have an outsized effect by causing a company to meet analysts’ EPS expectations or attain other quarterly results that, while not necessarily material in and of themselves, can have a significant impact on analyst and investor expectations or outlooks.

The memo says that the takeaway from recent enforcement actions a recurring pattern of meeting or barely exceeding EPS estimates may attract the SEC’s attention, particularly if that performance seems to be driven by “a single category that may register as an outlier against a company’s previous filings.” That kind of targeting suggests that the SEC’s data analytics tools are allowing it to zero in on previously hard-to-detect violations that in the past would have required significant resources to identify.

John Jenkins