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Regulation and Compliance > Federal Regulation > FINRA

The SEC and FINRA Proclaim: Trust No One!

By Chris Stanley

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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.”

Drawing the analogy to New York City Mayor Rudy Giuliani’s approach to law enforcement through beat cops in the nineties, the Chair embraced the pursuit of infractions at every level: “from street corner squeegee men to graffiti artists to subway turnstile jumpers to the biggest crimes in the city.” 

My between-the-lines reading of Commissioner Gallagher’s statement is that the recent enforcement actions against CCOs were not “the biggest crimes of the city,” nor were the CCOs “street corner squeegee men” or “subway turnstile jumpers” that warranted career-capsizing enforcement actions.

Rather, as Gallagher states, “For the vast majority of advisers, CCOs are all we have. They are not only the first line of defense, they are the only line of defense.”

There will always be advisors (and CCOs) that exploit the elderly, steal clients’ life savings for personal gain, and generally ruin the good name of the financial services industry. And they deserve to be burned at the stake for all I care.

But for those that are genuinely trying…trying to do what is right…the regulatory mixed messages are unsettling.

Advisors and CCOs can take some solace in the fact that roughly 10% of advisers are examined every year, and of those examined only about 10% to 15% are referred to enforcement. This is a pretty small minority of advisors.

And I do genuinely believe that many SEC staff appreciate the honest work that the vast majority of advisors and their CCOs do on behalf of the investing public.

But judging from the totality of what the SEC chooses to convey to the investing public and the industry, that minority inferentially sets the standards by which the law-abiding majority is to be judged.