Exclusive: Biggest SEC Enforcement Effort Is Advisor Misconduct

In 2011, thanks to the unit, 20% of the agency’s enforcement cases involved investment advisors or investment companies, for a total of 146 cases, Kaplan says, “which is twice as many as there were even three years ago.” It is a noticeable uptick from the historical rate of cases brought against advisory firms, which Kaplan says has run at around 10% to 11%.

Also notable, he says, is the “dynamic nature of private fund enforcement.” In 2011, Kaplan says, more than “50 cases were brought against private funds, whereas, when we started focusing on private funds in 2005, [the number of cases levied] was in the single digits.”

Kaplan says he attributes the unit’s “success” to three variables: hiring more staff members with industry expertise, the Unit’s focus on proactively identifying misconduct earlier, and “breaking down silos” by collaborating with other SEC divisions.

Not only has their been more training of the Asset Mangement Unit’s staff, more industry experts from outside the agency “who are non-lawyers” have been brought in “to help the division and unit be smarter about how the SEC prosecuted securities law violations,” Kaplan says. “In that regard, I don’t think there’s ever been a period when you had a group of lawyers at the SEC, in the Division of Enforcement, who better understood the products and the vehicles in the investment advisor space.”

To better identify misconduct in the advisor space earlier, Kaplan says the unit developed quantitative risk analytics and also launched a tool called the “aberrational performance inquiry,” which has been “successful in identifying hedge fund fraud before a tip came in, before the fund imploded, or before there was a lawsuit filed,” he says.

SEC Chairwoman Mary Schapiro is a “big believer” in breaking down silos between divisions, Kaplan says, so the unit took her advice and collaborates with other divisions like the Office of Compliance Inspections and Examinations (OCIE) and the Division of Investment Management in order to catch problems.