The SEC and FINRA Proclaim: Trust No One!

As of the writing of this article, 74 of the 129 SEC press releases year-to-date announce enforcement actions, settlements and other financial professional misdeeds. Mind you, these are not press releases of the Division of Enforcement within the SEC, but the SEC as a whole. The other 55 generally speak to administrative matters or announce that the revolving door of staff has spun another cycle.

FINRA’s press releases year-to-date paint a similar picture, mainly focusing on fines, cease-and-desist orders and industry bars. Collectively it appears as if our regulators are conveying to the investing public the same ominous warning that Deep Throat conveyed to Fox Mulder in the X-Files TV series: “Trust no one.” 

On the one hand I can’t entirely blame the SEC or FINRA. As the SEC itself reminds us in the About Us section of its website, “First and foremost the SEC is a law enforcement agency.” There also hasn’t exactly been a shortage of sensational examples of despicable “advisors” that prey on their clients in the worst possible ways.

On the other hand, I don’t think our industry deserves to be painted by the brush of the lowest common denominator or be subject to the overreaching regulatory wrath that is typically unleashed after a dramatic but isolated individual failure.

Perhaps the most poignant example of the “Trust no one” trend is the recent actions taken by the SEC against chief compliance officers. Commissioner Daniel Gallagher recently penned a public statement on this very trend, and in it chastised the SEC for “cutting off the noses of CCOs to spite its face.”

He notably voted against two recent enforcement actions tagging CCOs (Blackrock and SFX), arguing that the SEC was playing “Monday morning quarterback” and resolving regulatory uncertainly through enforcement actions.

Much of the regulatory uncertainty arises from arguably the most fundamental rule in the Investment Advisers Act: 206(4)-7. The SEC has never issued guidance about how to comply with Rule 206(4)-7, and it has made an inferential leap from CCOs’ responsibility to administer an adviser’s compliance program (which is what the rule calls for) to CCOs’ apparent responsibility to implement the compliance program.

The latter responsibility, Commissioner Gallagher contends, lies with the advisory firm in totality, not just the CCO. 

Whether an enforcement action involves a CCO or not, the “broken windows” approach to SEC enforcement has shown its true colors. Harkening back to Chair Mary Jo White’s 2013 seminal speech, she drew a firm line in the sand by declaring that “it is important to pursue even the smallest infractions.”