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SEC Upholds FINRA Bar for Failing to Timely Respond


The SEC has upheld a FINRA bar of a registered rep for failing to timely respond to FINRA’s requests for information.  Following the filing of a U5 indicating the rep was terminated for failure to comply with firm policies and disclosure obligations, FINRA initiated an investigation.  The respondent repeatedly failed to respond to requests sent to his CRD address.  Eleven months after the initial request and 9 months after the bar became effective, the respondent sought relief from the bar on the grounds that health issues prevented his timely response.  The SEC rejected his argument because he continued to work and remain active and failed to timely respond as reasonably practical.

OUR TAKE: The regulators will proceed with penalties if you ignore their requests for information.  Once penalties, such as an industry bar, are imposed, it becomes very difficult to demonstrate good faith.


SEC Enforcement Division Targets Financial Executives

In its 2017 fiscal report, the SEC’s Enforcement Division cites individual accountability as one of its core enforcement principles.  The report expresses the Enforcement Division’s view that “individual accountability more effectively deters wrongdoing.”  Since Chairman Clayton took office, the SEC has charged an individual in more than 80% of standalone enforcement actions.  The report notes that it can be more expensive to pursue individuals, but “that price is worth paying.”  The report notes a modest decrease in filed enforcement actions and recoveries since 2016: 754 vs. 784 cases (excluding municipal cases) and $3.8 Million vs. $4 Million in total money ordered.

OUR TAKE:  “Just because you’re paranoid doesn’t mean they aren’t after you.” (Joseph Heller)  The data and the explanation imply that the SEC will prioritize prosecuting individuals, even if the money ordered is smaller than in institutional actions, because of the fear and deterrent effect.  If financial executives need another reason to engage a best-in-class compliance program, how about protecting yourselves from a career-ending enforcement action?


State Securities Regulators Escalate Enforcement Activity

The North American Securities Administrators Association (NASAA), the organization of state securities regulators, reported that state securities regulators imposed $914 Million in restitution, fines and penalties in 2016, as compared to $766 Million in the prior year.  In its Enforcement Report, NASAA also reported significant increases in criminal penalties including incarceration and probation.  The number of investigations and administrative actions also increased especially against investment advisers, which, according to NASAA, may be due to “heightened state interest in individuals and firms who have transitioned from broker-dealer registration to investment adviser registration in recent years.”  NASAA also reported significant information sharing with federal regulators.

OUR TAKE:  Over the last several years, the state securities regulators have expanded examinations and enforcement along with the SEC and FINRA, making it much more difficult for any adviser or broker-dealer to avoid regulatory scrutiny.  It’s worth noting that many state securities regulators have criminal enforcement authority.


Adviser Indicted for Lying During SEC Deposition

An investment adviser was indicted in part for making a false declaration in a court proceeding by lying to the SEC during a sworn deposition.  The deposition occurred during an enforcement case that alleges that the adviser defrauded retirees by lying about account balances, falsifying documents, and creating false wires.  According to the SEC, the adviser lied in a deposition about providing false documents to investors.

OUR TAKE: Once a formal enforcement proceeding commences, any misstatements under oath can lead to criminal proceedings for perjury or lying to a regulator.  It’s always wise to ensure that the lawyer defending the enforcement action has sensitivity to the possible criminal prosecution implications.  An enforcement action may results in fines and industry bars, but criminal proceedings could result in jail time.


FINRA Imposed $80 Million More in Fines in 2016

FINRA imposed nearly double the fines on the industry in 2016, assessing $173.8 Million in fines as compared to $93.8 Million in 2015, according to its annual report.  The increase in fines helped FINRA report over $57 Million in net income versus a $39 Million loss last year, even though operating income was lower in 2016.  FINRA also ordered another $27.9 Million in restitution.  FINRA uses fines collected for “capital expenditures and regulatory projects.”

OUR TAKE: Most of the financial regulators use their enforcement powers to collect funds to support their activities.  Rather than encourage this financial incentive to bring cases, policy-makers should consider other alternatives such as third party compliance reviews or user fees.


SEC Chairman Re-Commits to Examinations and Enforcement

In recent testimony about the SEC’s proposed 2018 budget, Chairman Jay Clayton emphasized enforcement and examination activities.  Mr. Clayton noted that 50% of requested budget resources will go to enforcement and examinations.  He said that the SEC is on track to deliver a 20% increase in adviser examinations and plans a further 5% increase.  He noted that the staff will put a special focus on cybersecurity efforts.  Mr. Clayton also committed to continue the SEC’s “vigorous enforcement efforts to investigate and bring civil charges” including critical areas such as “investment professional misconduct.”

OUR TAKE:  It appears that the Clayton SEC will continue the examinations and enforcement focus of the Mary Jo White SEC.  The more things change, the more they stay the same.


Supreme Court Limits SEC Disgorgement

The U.S. Supreme Court has ruled that the SEC cannot seek disgorgement with respect to ill-gotten gains received more than 5 years ago.   A unanimous Court held that disgorgement is a “penalty” under the statute of limitations because (i) the SEC brings public cases not intended to remedy individual harm and (ii) disgorgement is imposed for punitive and deterrent purposes.  The Court rejected the SEC’s argument that disgorgement is used for restitution because disgorgement orders often exceed the defendant’s gains.  The Court has previously held that SEC penalties are also subject to the 5-year statute of limitations.

OUR TAKE: The Supreme Court significantly constrains the SEC’s enforcement power to demand huge settlements based on multi-year violations.  The SEC will have to move more quickly to investigate and file.


SEC Chairman Calls for Active Securities Enforcement


Acting SEC Chairman Michael Piwowar strongly supports the SEC’s use of enforcement as the mechanism to ensure fair capital markets that enable economic growth.  In a recent speech, he said that “appropriate enforcement efforts” including a willingness to “assess penalties where appropriate and take back proceeds of fraud from the bad guys” facilitate capital markets by ensuring a fair and level playing field, thereby lowering the cost of capital.  He also advocated for enforcement as the best way for regulators to focus “limited resources on a risk based approach to addressing the problems in the market, in contrast to burdensome and ultimately futile attempts to regulate away the problems.” Mr. Piwowar also believes in complete and transparent disclosure but cautions against overregulation that impedes capital formation.

OUR TAKE: It does not appear that the new SEC administration will pull back from its heavy enforcement agenda that dominated the last several years.  If anything, Mr. Piwowar suggests a greater enforcement push coupled with lesser regulation and enhanced disclosure.


CEO Hid Solicitation Payments and Then Lied to Clients and the SEC



The CEO of an investment adviser admitted wrongdoing and agreed to pay over $575,000 and an industry bar for paying undisclosed solicitation fees.  The CEO also faces criminal charges for misleading SEC enforcement investigators, thereby obstructing proceedings of a federal agency.  The respondent admitted to paying a lawyer-friend a referral fee without disclosure to the referred client as required by Rule 206(4)-3 of the Advisers Act.  The pair conspired to conceal the payments through sham legal invoices.  Upon hearing rumors of securities enforcement, the respondent sent false emails to clients claiming that the SEC had cleared the firm of any wrongdoing.  The CEO’s firm agreed to pay disgorgement but avoided more damaging penalties because it discovered the conduct, disciplined the CEO, and reported the conduct to the SEC.  The lawyer-solicitor was also fined and barred from the industry.

OUR TAKE: Failure to disclose the solicitation payments would have resulted in a disgorgement penalty and enhanced disclosure.  Lying to clients and the SEC triggered the criminal prosecution and the increased fines and industry bar.


SEC Enforcement Director Stresses Individual Liability in FCPA Cases


The SEC’s Enforcement Director, Andrew Ceresney, recently described how the SEC has prioritized FCPA (Foreign Corrupt Practices Act) enforcement with a focus on individual liability.  Mr. Ceresney said the SEC has brought 21 FCPA cases and has taken “a lead role in fighting corruption worldwide.”  Describing some recent FCPA enforcement cases, Mr. Ceresney highlighted the Enforcement Division’s “renewed emphasis on individual liability,” which includes holding CEOs accountable for ignoring red flags.  Mr. Ceresney explained that “pursuing individual accountability is a critical part of deterrence.”

OUR TAKE: Individual liability should be a significant concern when the SEC and DoJ enforce the FCPA, which can carry criminal penalties.  Firms should ensure a monitoring system that includes adequate follow-up on potential red flags.