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.
This case is Exhibit A for why there should be limits on the revolving door between the regulators and firms they are charged with regulating. An inherent conflict of interest exists when a former regulator represents a firm being examined or investigated. The Project On Government Oversight (POGO) published a report in 2013 titled “Dangerous Liaisons: Revolving Door at SEC Creates Risk of Regulatory Capture,” outlining the scope of the problem. At the very least, we would recommend a 12-month cooling-off period before a private firm could hire a former regulator and an outright ban if the firm is currently under investigation.
OUR TAKE: If you operate a state-registered (or unregistered) adviser, don’t assume the SEC doesn’t have the regulatory means to uncover and prosecute wrongdoing. The feds still have jurisdiction over the securities markets and any person providing investment advice.
Although the SEC only has civil enforcement powers, it can (and will) bring in the Justice Department if you lie to SEC investigators. Better to take your civil medicine (fine or industry bar) than to wind up a guest of the state.
OUR TAKE: Don’t tell the SEC that you have complied with their document requests unless you have conducted adequate internal due diligence. The Enforcement staff will not look kindly on reckless or intentional misrepresentations during investigations. Also, lying to the staff can result in criminal penalties.
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.
A private fund manager has pled guilty to obstruction of justice for misstatements made during an SEC administrative hearing. The SEC charges that the respondent misled investors about the use of funds and profitability of fund investments. During the ALJ hearing, the SEC alleges that the respondent lied under oath that he did not control a related company. The SEC asserts that the respondent set the company up in his son’s name because of the SEC investigation.
OUR TAKE: SEC investigations and hearings should not be taken lightly. Misstatements can lead to prison time.