The SEC has commenced proceedings against a barred investment adviser for fraudulent statements made during a note offering. The SEC alleges that the respondents concealed a barred adviser’s disciplinary history and industry bars by entering into a bogus operating agreement showing a 5% ownership interest when he had a 50% stake. The other partner to the venture had little to no securities experience. The SEC accuses the respondents of lying to investors to induce them to purchase promissory notes with their self-directed IRA accounts. The respondents allegedly lied about performance, safety, track record, and credentials.
This is exactly why the industry needs an active regulator. Only by ridding the industry of (alleged) liars and thieves like this can the investment industry instill confidence in the regulators, the clients, and the lawmakers. Ultimately, strong regulation facilitates growth as evidenced by the $20 Trillion in assets in registered funds and ETFs, the most regulated investment products on the planet.
The SEC has launched an online search took that includes a database of all individuals who have settled, defaulted, or contested an SEC enforcement action that resulted in a final judgement or order in federal court or an administrative proceeding. The new system called SALI – SEC Action Lookup for Individuals – includes any respondent/defendant and not just investment professionals. The current database extends back to 2014, although the SEC intends to expand the database.
OUR TAKE: The SALI database closes an information gap that made it cumbersome for investors to investigate charges against unregistered individuals. The system also facilitates research of wrongdoing by investment pros. This continues the regulators’ expressed goal of weeding out bad actors from the securities industry.
In a recent speech, the SEC Chairman, Jay Clayton, announced that the SEC is creating a searchable website of those individuals that have been barred or suspended from the securities industry. Mr. Clayton expressed concern that investors cannot uncover bad actors that have “shifted from the registered space…to the unregistered space.” Mr. Clayton explained that the website “is intended to make the prior actions of repeat offenders and fraudsters more visible to investors.”
OUR TAKE: This “Scarlet Letter” approach to prevention ups the ante for those barred from the industry in civil enforcement actions. It is unclear whether such a website will be any more or less effective than the CRD system, which reports disciplinary histories.