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
In this podcast, Todd Cipperman questions whether the SEC has really abandoned its broken windows enforcement policy.
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.
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.