More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
Six months into the job, Bradley Bennett, FINRA’s enforcement chief, said the regulator is at its “high-water mark” in enforcement actions, looking back five years, and now that its backlog of cases from the financial crisis is easing, it expects to focus on structured products, with a possible large inventory of cases arising after this summer.
Bennett (left), a former defense attorney, said that many structured products are represented as providing a significant uplift in returns while limiting risk. "They purport to provide the alchemy of lowering risk while increasing yield," Bennett said, "but the risk needs to be explained” both to the broker-dealer’s “sales force and customers, and be suitable given the customer’s financial circumstances.”
Moreover, it is during periods of great market volatility, Bennett (left) said in an interview with AdvisorOne, that suitability and marketing problems become most evident. "Investors must understand risk; brokers must fully discuss the risk” with those investors, he said.
In addition to structured products, Bennett says his staff will also stay on top of old-fashioned “pump and dump” schemes of unregistered securities, Bennett said.
“I love the spirit and the aggressiveness of the staff,” Bennett said. “Every day we are getting better at being quicker—and more aggressive when we need to be.”
That aggressiveness shows up in the numbers. For the first half of the year, the high number of cases and fines levied will continue, he said, from earlier tallies announced in April. The enforcement numbers through May are: 463 disciplinary actions filed and $28.1 million in fines levied.
"We try and do the most complicated cases in under three years, with the economic crisis cases of 2006-2008 finishing up in 2011," Bennett said. "We will be largely through the 2008 inventory by the end of the year.”
(The interview with Bennett took place prior to FINRA’s announcement of a $210 million settlement and fine regarding Morgan Keegan’s misleading sale
of certain bond funds to investors in 2006-2007.)
Fraud as a ‘Business Decision’
Bennett said he doesn’t measure the enforcement program by the number of actions it takes and fines it assesses, but by how well FINRA is working internally and how well it is staying on top of current developments in the market, all qualitative factors. “I believe that if we follow those guidelines," he said, "the numbers and the quantitative metrics will be there.”
Bennett said that his work on the other side of the securities industry enforcement table as a defense lawyer showed him that for some, fraud is a business decision, based on a calculation that there is a limited probability of being caught.
Attempts at fraud won’t ever go away, he said. He characterized the frauds FINRA continues to see as reminiscent of the schemes perpetrated in the 1930s that helped lead to the Securities Act of 1933 and the Securities and Exchange Act of 1934, he said. Modern-day fraudsters, he suggested, are just better at employing higher technology.
Bennet in particular lauded FINRA enforcement staff’s targeted efforts to get on top of fraud, crediting the regulator's market intelligence team for giving SEC the heads up on reverse merger schemes.
Bennett joined FINRA as executive VP of enforcement in January 2011. He previously was a partner at the law firm Baker Botts in Washington, DC, and served earlier in his career with the SEC’s Division of Enforcement.