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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?


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.


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.


SEC, Not FINRA, Brings Churning Case Against 2 Brokers

trust me


The SEC charged two brokers with churning and excessive trading in customer accounts.  The SEC accuses the brokers of engaging in excessive short-term trading that had little chance of benefiting customers after payment of fees.  Both brokers, who had significant disciplinary histories, used telemarketing and cold-calling to find clients who they pressured with pre-filled agreements and margin arrangements.  An SEC official commented, “This case marks another chapter in the SEC’s pursuit of brokers who deploy excessive trading as a strategy in customer accounts to enrich themselves at customers’ expense.”

OUR TAKE: It is very unusual for the SEC to bring suitability and churning cases against individual brokers.  These types of cases are usually FINRA’s jurisdiction.  Perhaps this is the beginning of the SEC moving to regulate retail brokers in response to the DoL fiduciary rule.


SEC Adopts Liquidity Risk Management Program Rule


The SEC has adopted a new rule requiring open-end registered funds to establish liquidity risk management programs.  New Rule 22e-4 will require registered funds to implement a program that assesses liquidity risk, classify securities into one of four liquidity categories, set a liquidity minimum, and report violations of overall portfolio illiquidity limits.  The liquidity risk program also requires Board oversight including the designation of a fund officer to administer the program.  The SEC also adopted new monthly portfolio disclosure rules for registered funds as well as a rule allowing funds to use swing pricing.  Fund complexes with more than $1 Billion in net assets must comply with the liquidity risk management rule by December 1, 2018.

OUR TAKE: The new rules will require a great deal of additional work for the folks in operations, legal and compliance.  The Oper-Pros will need to figure out how to pull and classify the data.  The lawyers will have to create additional disclosures.  And, the Compli-Pros will likely be the appointed officers to administer the programs.


SEC Filed Record Number of Enforcement Cases in Fiscal 2016


The SEC reported that it filed a record number of enforcement actions for its fiscal year ending September 2016, including the most ever cases against investment advisers and investment companies.  The SEC brought 868 enforcement cases, exceeding the 807 it filed last year, including 160 against advisers and investment companies, which cases included 8 significant cases against private equity firms.  The SEC also cited its related cases against securities markets gatekeepers (e.g. attorneys, accountants, administrators), while noting the success of the whistleblower program, which awarded over $57 Million to 13 whistleblowers.  The SEC obtained over $4 Billion in disgorgement and penalties. SEC Chair Mary Jo White boasted, “By every measure the enforcement program continues to be a resounding success holding executives, companies and market participants accountable for their illegal actions.”  She also explained that the SEC is “expanding the playbook bringing novel and significant actions to better protect investors and our markets.”

OUR TAKE: The SEC has become a litigation and enforcement machine rather than a traditional regulator.  Focusing on the number of actions filed and penalties collected, the SEC will continue to use “novel” interpretations of the securities laws to ensure that it files ever more cases.


Large BD Failed to Remedy Mini-Flash Crashes

Failed to Remedy Flash Crash

A large broker-dealer agreed to pay $12.5 Million to settle charges that it violated the market access rule (15c3-5).  The SEC charges that senior executives had discretion to set pre-trade controls at levels that allowed significant erroneous orders to reach the exchanges.  In several cases over a 3-year period, erroneous orders caused mini-flash crashes in the affected security.  Despite these events, which should have been red flags, the SEC faults the respondent for taking no action to address the market access until contacted by SEC staff.

OUR TAKE: This is the type of breakdown that can easily occur at large firms where compliance is left to individual business units, and no designated person has overall responsibility to monitor trading practices.