More On Legal & Compliancefrom The Advisor's Professional Library
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
- Advertising Advisor Services and Credentials Section 206 of the Investment Advisers Act contains the anti-fraud provision of the statute and ensures that RIAs advertising and marketing practices are consistent with the fiduciary duty owed to clients and prospective clients.
When it comes to lawsuits and sanctions, the SEC’s strategy has long been to push for settlement long before trial, thereby conserving time and resources. But more executives are “calling their bluff,” and the agency is struggling to cope with a surge in the number of executives and companies willing to go to trial to defend themselves.
The SEC’s office in Washington is actively litigating about 90 cases, up more than 50% in the past year, Matthew Martens, the SEC’s chief litigation counsel, said in an interview with Bloomberg. At the same time, Martens’ trial unit staff has stayed relatively flat at about 36, according to the news service. He recently added three more lawyers to his group and is looking to hire more.
Martens told Bloomberg it’s critical that his unit present a credible threat.
“At the end of the day, if we can’t win cases, then people don’t settle. That’s the reality,” he said.
The wave of litigation has two main sources, he said: more complex cases stemming from the 2008 financial crisis and a related increase in lawsuits filed against individual executives.
"The agency has brought more financial crisis lawsuits against executives—more than 50 so far—and individuals are often inclined to fight claims that could damage or end their careers. Those cases, which have required years of investigation, are central to the agency’s effort to restore its reputation after being battered for more than three years by lawmakers, judges and investors who claimed it hasn’t been tough enough in holding Wall Street to account," Bloomberg notes.
"Prolonged courtroom battles could sap resources from the SEC, which has said funding gaps have already diminished its ability to regulate securities markets. That puts regulators in a bind: They need to demonstrate to Congress that they need more resources while not showing any weakness to defendants."
“If you don’t have a legitimate trial threat, if you don’t communicate to the targets of your investigation that you’re prepared to go to trial, then you can be exploited,” SEC Enforcement Director Robert Khuzami said in recent testimony before the House Financial Services Committee. “Defendants will simply hold out for a softer settlement and not fear the alternative.”
The SEC is litigating at least four cases related to complex financial products linked to residential mortgages.
“It doesn’t take many cases to eat up limited resources,” Mark Schonfeld, the former head of the SEC’s regional office in New York who is now a partner at law firm Gibson Dunn & Crutcher LLP, told the news service. “It’s not just an expenditure of resources in the near term; these cases go on for years and years.”