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SEC Enforcement Division Hits New High with $4.3 Billion in Monetary Penalties in Fiscal 2019

 

The SEC Enforcement Division ordered over $4.3 Billion in monetary penalties for the fiscal period that ended September 30, thereby setting a modern record, according to its 2019 annual report.  Total penalties exceeded amounts ordered during each of the prior four years.  The SEC also brought 826 total actions and 526 standalone actions, surpassing totals for 2015, 2017 and 2018 and nearly equaling the 868 cases filed in 2016.   The most cases (191; 36% of total) were brought against investment advisers and investment companies.  The Enforcement Division continues to prioritize charging individuals (69% of cases) and to pursue referrals to law enforcement (400 investigations).  The SEC also imposed 595 bars and suspensions.  The Co-Directors lauded the Division: “By any measure, we believe the Division had a very successful year.”

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. 

SEC Judge Draws Negative Inference When Respondent Invokes Fifth Amendment

An SEC Administrative Law Judge determined to infer adverse conclusions to questions that a respondent refused to answer by invoking his Fifth Amendment privilege against self-incrimination.  The respondent refused to answer every question in the proceeding including background and foundational questions.  He also did not invoke the Fifth Amendment during the SEC’s investigation.  The ALJ explained that an administrative proceeding as well as a district court could draw such adverse inferences in order to prevent a witness from gaining an unfair litigation advantage.

The Fifth Amendment to the U.S. Constitution states that no person “shall be compelled in any criminal case to be a witness against himself” (emphasis added).  A court or an ALJ cannot make you testify if it would compromise your case in a parallel criminal action, but the judge can draw negative conclusions from invoking the Fifth.  In other words, don’t invoke the Fifth Amendment just to be petulant in front of an ALJ.  Consult your counsel to determine whether invoking the Fifth makes litigation sense given your civil and criminal predicament. 

IA Watch Compliance Conference: The CCS Summary

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

SEC Prosecutes Unregistered Fund Manager for Over $1 Million

 

An unregistered investment adviser/fund manager and its principals agreed to pay over $1 Million in disgorgement, fines and interest for engaging in conflicted transactions that were not properly disclosed.  The SEC accuses the respondents of using fund assets to invest in a company that the principals controlled and then buying out the ownership interest at a loss, all without consent of the limited partners or any relevant disclosure.  The SEC also asserts that the respondents engaged in undocumented personal loans and payment of overhead expenses in contravention of the fund’s disclosure documents and limited partnership agreement.  Although the firm (which had less than $25 Million in AUM) was not registered, the SEC argues that it engaged in investment advisory activities, owed the fund and its investors a fiduciary duty, and, therefore, violated the Advisers Act’s anti-fraud rules.

OUR TAKE: Just because you are not eligible (or fail) to register as an investment adviser, does not mean that the Advisers Act does not apply.  In fact, most of the antifraud provisions apply to unregistered and state-registered advisers, thereby allowing the SEC to assert its enforcement jurisdiction.

 

SEC Chair Calls for “Zero Tolerance” Enforcement

zero-tolerance

In a recent speech, SEC Chair Mary Jo White called for “zero tolerance” for white collar enforcement and advocated for changing the law to make it easier for prosecutors and regulators.   Ms. White described the SEC’s “priority that we are placing on establishing individual liability” with a focus on holding corporate officers accountable as the “core pillar of any strong enforcement program.”  Ms. White argued for changes in the law that would allow prosecutors and regulators to punish an executive without showing that s/he participated or caused the wrongdoing.   Ms. White lauded the UK regime that allows prosecution of senior executives for misconduct in their areas of responsibility if they failed to take reasonable steps to prevent the misconduct.  Ms. White also expressed her support for deferred compensation arrangements that hold back compensation until a possible prosecution period has run.  Ms. White also expressed support for a more-empowered SEC: “Although I often wish it were otherwise, the SEC does not have the authority to send anyone to jail.”

OUR TAKE: While the regulatory emphasis may change with a new Administration, both parties appear to favor heavier-handed enforcement against individual corporate actors.  Other developed economies (e.g. UK, Japan, Canada, France) take a much more pro-government approach to private sector enforcement.

https://www.sec.gov/news/speech/chair-white-speech-new-york-university-111816.html