More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- How to Avoid Sabotaging Your Compliance Exam There is much more to compliance examination survival than knowing all of the rules. It helps to understand why the rules were put in placeand to recognize that examiners are not the enemy.
Securities and Exchange Commission Chairwoman Mary Jo White recently warned advisors and broker-dealers that one of the agency’s top goals is to ensure that its enforcement program “is—and is perceived to be—everywhere, pursuing all types of violations of our federal securities laws, big and small.”
Retail investors in particular, White stressed at the Securities Enforcement Forum in Washington in early October, “need to be protected from unscrupulous advisors and brokers, whatever their size and the size of the violation that victimizes the investor.”
The approach of going after “even the smallest infractions,” White said, is not unlike the one taken in the ‘90s by then New York City Mayor Rudy Giuliani and Police Commissioner Bill Bratton, back when White was the United States Attorney for the Southern District of New York.
“The same theory can be applied to our securities markets. Minor violations that are overlooked or ignored can feed bigger ones and, perhaps more importantly, can foster a culture where laws are increasingly treated as toothless guidelines,” White said.
As a former federal prosecutor, White’s focus on bolstering the agency’s enforcement division shouldn’t come as too much of a surprise. However, with the agency lacking adequate funds and exam staff, one has to wonder how the securities regulator can achieve such an ambitious goal of being “everywhere” and, as White also noted, “expanding” the agency’s reach. Help from a self-regulatory organization (SRO) possibly?
Former SEC Chairwoman Mary Schapiro, who’s now a managing director and chairman of Promontory Financial Group’s governance and markets practice in Washington, told me in an email message that the SEC “clearly needs additional resources and certainty of funding,” and an SRO “can leverage the agency’s capabilities and is an obvious option to respond to [the SEC’s] resource constraints.”
Steve Crimmins, a partner with K&L Gates in Washington, who served for eight years as the SEC’s Deputy Chief Litigation Counsel, told me recently that while it remains to be seen if the idea of naming FINRA as a self-regulatory organization to help the SEC examine advisors will regain political steam next year, “SROs have long been the SEC’s partner in identifying possible violations.”
(Read about one of the SEC's other top goals, the fiduiary rule.)
White has herself conceded that the SEC’s resources “are not infinite. Indeed, they are not nearly sufficient to the enormity and scope of the responsibility we have.” But, she said in her early October comments, the agency is “making better and better use of our resources.”
The co-heads of the SEC’s enforcement division, George Canellos and Andrew Ceresney, White said in her comments, “are working to build upon the strength of the division by ensuring that we pursue all types of wrongdoing.”
Ceresney noted at the same event that part of the division’s strength are the five specialized units that were created by his predecessor, Robert Khuzami. The specialized units are “a wonderful innovation that has worked extremely well,” said Ceresney, who was appointed co-director along with Canellos by White in April.
Schapiro said helping to ensure that the agency could “remain vigilant” in enforcing securities laws “was one driver for our creating specialized units in enforcement and cross-agency task forces.”
While the division will retain the units—which include asset management, market abuse, foreign corrupt practices, municipal securities and public pensions, and structured products—they will likely be “retooled.” For instance, Ceresney said that the structured products unit was recently renamed the complex financial products unit, as “structured products are less prominent” now.
Indeed, Crimmins noted that the asset management unit has been “aggressive” in bringing investment management cases—146 such cases in 2011 and 147 in 2012.
Yet another measure being used by the SEC to be “everywhere” is the enforcement division’s compliance initiative, which Stephen Cohen, the associate director of the division, said recently is aimed at bringing enforcement actions against investment management firms lacking effective compliance programs.
Cohen said the initiative is a joint effort of the National Exam Program, the Investment Management Division and enforcement’s asset management unit. “To date, the commission has brought six actions arising out of this initiative, which is particularly timely because hundreds of private fund advisors have recently registered with the commission” under the Dodd-Frank Act.
Cohen said there are more such actions in the pipeline. He said that quality compliance programs will reduce penalties and the likelihood that the SEC will bring charges.
Crimmins with K&L Gates also told me that he sees the SEC increasing exam “sweeps,” much like the one that agency just completed regarding short selling abuses under Rule 105.
“As the SEC strives to bring enforcement cases involving small and technical violations, the SEC’s sweep dealing with Rule 105 short selling issues [in September] will likely provide at least one model we will see used,” Crimmins said.
The SEC, he said, “will send simple and direct requests for information to quickly gather the evidence it needs from a number of different entities without significant use of SEC resources.” The agency will then “offer a template settlement that is scalable to the size of the violation but otherwise non-negotiable. Many entities will be reluctant to litigate with their regulator, particularly if the evidence is relatively clear.”
David Tittsworth, executive director of the Investment Adviser Association in Washington, says the SEC is using various methods—such as technology, better coordination between inspections and enforcement staff, and leveraging its whistleblower program—to ensure that it can cover more territory under limited resources.
Indeed, Crimmins said that the SEC’s recent award of a whopping $14 million to a whistleblower will “get peoples’ attention” and will serve as a “game changer” for that division in terms of the number of tips it receives.