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 barred a broker from the industry and deferred to FINRA for fines and restitution arising from allegations that the broker recommended unsuitable in-and-out trading strategies and churned customer accounts. The SEC asserts that the broker did not disclose to his nondiscretionary clients that the recommended strategies, even if successful, were likely to exceed the commissions paid to him on the frequent trading. The SEC also claims that the broker placed trades without client consent. The broker, who had a disciplinary history, worked at 5 different firms over his 18-year career. The SEC worked with FINRA and the Montana securities regulator to bring the action. An SEC official warned, “We’re intensifying our focus on unscrupulous brokers and their harmful practices.”
The regulators have prioritized the prosecution of bad brokers. Earlier this year, FINRA advised firms to heighten supervision of brokers with a disciplinary history. This case shows the inter-regulatory cooperation to find and rid the industry of these bad apples. Also, compli-pros should note that “non-discretionary” accounts are not a compliance silver bullet.
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.
The SEC barred a broker from the industry for recommending an unsuitable in-and-out trading strategy that generated significant commissions. The SEC asserts that, given the costs, returns, and customers, the defendant had no reasonable basis to determine that a high volume trading strategy was suitable. According to the SEC, the broker should have known better because he attended firm-wide compliance training that addressed the importance of reasonable basis suitability.
OUR TAKE: Compli-pros should take comfort that the compliance training helped insulate the firm from liability against the rogue actions of this employee. Also, firm leaders should note that the SEC will prosecute individuals that violate the securities laws as part of its effort to root out bad actors.