In early March, the SEC announced that it had settled a case against a small Minnesota investment advisor, Voya Financial. Unremarkably, the case involved allegations similar to many other cases the SEC has brought against advisors in recent years: failure to disclose to investors the fact that the firm was receiving fees from a third party.
The SEC’s allegation that such fees created a conflict of interest for the advisor was no different than many other cases the SEC pursued during President Obama’s administration under SEC Chairwoman Mary Jo White.
However, one aspect of the case—the penalty assessed–may signal the sort of shift many expect from a Trump administration SEC.
The SEC currently consists of only two out of five Commissioners, presided over by Acting Chair Michael Piwowar. President Trump’s nominee to head the agency, Jay Clayton, has his confirmation hearing on March 23.
For context, in the Voya case, the SEC alleged that the amount of undisclosed fees was just over $2.6 million, and the fine imposed was $300,000. So the fine was roughly 11% of the undisclosed fees the advisor received. That penalty contrasts with what the SEC imposed just over a year ago under Chair White in a factually similar case.
In that case, against Ohio-based Everhart Financial, the SEC imposed a fine against the advisor that was roughly 40% of the disgorgement amount. Does that mean that the SEC is now seeking penalties that are a quarter as large as the penalties it was seeking last year under the prior administration? It’s not that simple because each case has different facts, and the amount of the undisclosed fees does not always determine the amount of the penalty assessed.
But Acting Chair Piwowar’s comments and decisions on the issue of penalties suggest that we may in fact be witnessing a change away from higher and higher penalties against advisors and others.
Piwowar signaled his views on the penalty issue last November when the Commission, then consisting of Piwowar, Commissioner Kara Stein, and White, heard an appeal in another undisclosed fee case against an advisor called The Robare Group.
Unlike most of these cases, Robare decided to challenge the SEC’s allegations by litigating the case in front of an SEC Administrative Law Judge. According to briefs filed by the SEC’s Enforcement Division during that litigation, the enforcement division sought to recover $400,000 in undisclosed fees allegedly paid to Robare. When it came to penalties, the enforcement division swung for the fences, asking for a penalty of at least $650,000 for each of what it characterized as 11 violations, which would have meant a total penalty in excess of $7 million, or more than 1,700% of the undisclosed fees.
The SEC’s own ALJ rejected that request for penalties, and, indeed dismissed the entire case. As the rules permit it to do, the enforcement division appealed the ALJ’s dismissal to the full Commission for reconsideration. White and Stein ultimately decided a $50,000 penalty was warranted, i.e. just over $12% of the undisclosed fees. Interestingly, Commissioner Piwowar dissented on that issue and said the SEC should impose no penalty at all.
Only after the Commission brings a few more cases against advisors will we know whether the Voya case and its penalty of 11% of undisclosed fees represents a sea change or a one-off aberration.
It also remains to be seen how the SEC’s enforcement division—as distinct from the 5 Commissioners—may react to a change at the top. At the risk of getting out of sync with the views of the Commission, the division may simply continue to request penalties that are many multiples of the fees received.
In a 2015 speech addressing a host of topics relating to the way the SEC litigates cases, Commissioner Piwowar commented that the SEC’s “enforcement program could . . . benefit from a look through the lens of fairness.”
Piwowar and Clayton may have the opportunity to oversee such a change.
See this recent posting by Mr. Morgan: