Episode 61: What Does the SEC Division of Enforcement's Annual Report Mean for Investment Advisers?

President Tito Pombra discusses the SEC Division of Enforcement's Annual Report on episode 61 of the CCO Buzz. 


CCO Buzz: Hello and welcome back to the Buzz! We have a special episode today with President Tito Pombra here to discuss the SEC Division of Enforcement’s 2019 Annual Report. Mr. Pombra will give an overview of the Report and provide great insight on what it means for Investment Advisers. There’s a lot of information to cover, so let’s get started. 

Tito Pombra: The Enforcement Division of the SEC every year comes out with the Annual Report, so they came out with the 2019 Annual Report on Wednesday, November 6th

And in the Annual Report, the two Co-Directors of the SEC, Stephanie Avakian and Steven Peikin talked [and] Stephanie said, “The report shows how the principles we have articulated inform our work to protect investors and ensure that the U.S. securities markets remain the safest and strongest in the world.” 

Steven said “The actions and initiatives described in the report reflect our deliberate, principled approaches to investigations, litigation, and case resolutions.”

It was a very successful year for the Enforcement. So here are some of the numbers from the 2019 Annual Report: 

  • 862 enforcement actions in total, a[n] increase from 2019;
  • Standalone enforcement actions - [there] were 526;
  • Suspended trading in the securities of 271 issuers;
  • 595 bars and suspensions obtained by the SEC;
  • 42 Individuals, or 6%, prosecuted for Insider Trading. 2018 was about 10%. The insider trading cases have decreased, and I think this is because there is a lot more focus on the insider trading. I think a lot of advisers, and hedge funds and private funds and other individuals have given attention to the focus and have put in compliance policies and procedures.
  • $1.2 billion dollars was returned to harmed investors. Some of this was probably from the investment company 12b-1 mutual fund share class initiative;
  • And $4.4 billion plus in disgorgement and penalties, up from 2018 and the highest actually ever in SEC’s enforcement history.

In addition, [and this] is a very relevant fact for investment advisors/investment companies, 191, or 36%, of the standalone actions were investment advisor/investment company related. This is more than a 50% uptick from 2018’s 22% standalone actions against IAs and ICs. 

[This is an] area of concern, [as] I think investment advisor enforcement action is significantly up this year, so it’s something to pay attention to.

Of the all the standalone actions, 70% involved investment advisory issues, securities offerings, issuer reporting/accounting and auditing collectively. 6-7% related to market manipulation, insider trading, [and] broker dealer misconduct. The remaining 11% [of cases] were spread across various issues.

Going back to the overall investment advisor/investment company large percentage of cases, I think the investment advisor should review some of the cases that the SEC had brought against advisors [to ensure] your firm’s compliance programs are up to par [and] that you don’t get into those kinds of issues in the future.

In addition to this, there are many other notable takeaways from the report. So, the two main areas that enforcement continued to focus on [were] protecting the retail investor [and] cybersecurity. Cybersecurity has been a hot topic for a long time and is going to remain a hot topic for a long time. So combating cyber threats is a focus.

The other was pursuing charges against employees at all levels, including executives. The SEC did go after a lot of C-level people in their enforcement and demonstrated [that] they’re focused on individual accountability.

We talked about the Share Class Selection Disclosure Initiative that resulted in 95 investment advisory firms voluntarily self-reporting [which] resulted in more than $135 million being returned to affected mutual fund investors.

Enforcement filed its first charges for unlawful promotion of ICOs. This is an area where there are companies who are going out and promoting ICOs and selling them, where they’re not registered as broker dealer[s] or investment advisors. And ICOs are not approved right now by the SEC as securities that can be sold. And some of those cases actually included a pair of celebrities.

This fiscal year also saw many enforcement actions against various auditor misconduct, including auditor independence violations and failed audits. This is going to remain the focus for the Enforcement [for] fiscal year 2020.

Enforcement also allocated 22 new slots to rebuild staffing levels that they lost previously. So 15 new Enforcement lawyers joined the SEC in fiscal year 2019.

So what does all of this mean? The reason we are doing this CCO Buzz on SEC’s Enforcement Annual Report is to basically alert all investor advisers and other wealth managers that they need to have a proactive compliance program to prevent these types of cases and to have a program that prevents, detects, corrects federal securities violations, but also mitigates the investigative risk. What I mean by that is that, you don’t want to give the perception to anybody outside the firm, especially the SEC, that there is something wrong in the firm.

One thing you can learn from this Enforcement Report is review your compliance procedures around similar issues that were pointed out by the SEC in these cases then update your policies and procedures and determine if there’s any material gaps and then fill those gaps.

The team here at Core Compliance can help ensure your firm is in compliance with the federal securities law, so that SEC enforcement actions can be avoided by your firms. Contact us at 619-278-0020 or info@corecls.com. Thank you very much.

CCO Buzz: Well that’s it for this week’s episode. If you’d like additional information, please check out our website at www.corecls.com. You can also follow us on Facebook, LinkedIn, or Twitter @CoreCls. Thank you, and we hope you tune-in to next week’s episode of the CCO Buzz.