Avoiding required registration will not long go unnoticed. Eventually, the state securities regulators or the feds will find you. Your risk goes up exponentially if an aggrieved client has lost money or a competitor raises eyebrows.
It is notable that FINRA intends to prioritize Regulation BI in the first year. Usually, the regulators give some time for firms to put operations in place before conducting regulatory sweeps for compliance with new laws and regulations.
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.
We laud the CFP Board for commissioning this Task Force to issue a public report this critical. However, this Report will cause big problems for the CFP Board and the industry. The CFP Board must take action to create a credible enforcement program or risk a diminution of its public perception. The industry can now expect the involvement of yet another supervisory body that can conduct audits and impose penalties.
Regardless of administration, the SEC Enforcement Division continues to set new enforcement records. Nothing suggests any changes for the current fiscal year. If you haven’t received the memo, it’s time to get your compliance house in order.
We don’t relish the idea of a regulator that has to fill a large financial deficit, especially since it could use fines to fill some of this hole. We expect the lower fine numbers during the last 2 years to be more of an aberration.
Three CCS professionals – Jocelyn Dalkin, Jason Ewasko and Bridget Garcia – recently attended the IA Watch’s 21st Annual IA Compliance: The Full 360° View East conference in Washington. If you were unable to attend, you should review their summary of the most significant sessions including Dan Kahl’s summary of Enforcement Priorities, a top panel’s views on SEC rulemaking, and more specialized sessions on cybersecurity and custody. If you want more information, feel free to contact Jo, Jason or Bridget
The CFTC’s regulatory sphere has greatly expanded with the emergence of swaps, derivatives, cryptocurrencies, and alternative hedge funds. The CFTC, like the SEC, has ramped up its enforcement activities to historic levels.
The SEC Enforcement Division filed 32% more standalone enforcement cases against investment advisers and investment companies in fiscal 2018 (through September 30), as compared to 2017. Cases against investment advisers and investment companies (the second largest category) and broker-dealers (fourth largest) represented 35% of all standalone actions filed. Overall, the SEC Enforcement Division brought 490 standalone cases in fiscal 2018, a 10% increase over 2017. Excluding the municipal disclosure initiative, the Enforcement Division filed more cases than it did in 2016 and 2015, the last two years under the prior administration. The Enforcement Division obtained $3.9 Billion in penalties and disgorgement, which is consistent with amounts obtained during the prior several years. The Enforcement Division outlined five core principles, including a focus on individual accountability because “holding culpable individuals responsible for wrongdoing is essential to achieving our goals of general and specific deterrence and protecting investors by removing bad actors from our markets.”
The Enforcement Division continues to pursue its active litigation agenda, especially against the investment industry. Apparently, the Jay Clayton SEC is not much different from the Mary Jo White SEC when it comes to enforcement cases against adviser, funds, and broker-dealers.