SEC Fiscal Year Enforcement Results

October 17, 2016

The U.S. Securities and Exchange Commission (SEC) last week announced enforcement results for its 2016 fiscal year, which ended September 30, 2016. The results include new single-year records for total cases filed and cases against investment advisers and investment companies. The SEC’s full release is here

This ACA alert summarises the enforcement results, analyses the reasons for the record results, and discusses potential implications for CCOs and compliance programs.
The SEC’s 2016 Enforcement Results
The SEC filed a total of 868 enforcement cases against firms or individuals in fiscal year 2016, an all-time record for the agency. The cases spanned the spectrum of U.S. securities laws violations and included insider trading, market manipulation, financial fraud by public companies, violations of the Foreign Corrupt Practices Act, violations of professional standards by accountants, municipal finance fraud, Ponzi schemes, and affinity fraud (particularly targeting the elderly) among other types of violations.
The case total included 160 enforcement actions filed against investment advisers or investment companies, which is also an all-time record.  The types of enforcement actions filed against investment advisers included:

  • Failure to disclose material conflicts of interest;
  • Improper allocation of expenses;
  • False or misleading advertising;
  • Failure to disclose certain client fees;
  • Breach of fiduciary duty in favoring certain clients without disclosure;
  • Insider trading by hedge fund managers; and
  • Failure to implement appropriate compliance policies and procedures.

Reasons for the Increase in Cases Against Advisers
Several factors contributed to the increase in SEC enforcement cases against investment advisers, including:

  • Aggressive tone at the top.  SEC Chairman Mary Jo White has empowered SEC enforcement to be highly aggressive in conducting investigations and pursuing cases including actions against investment advisers.
  • Specialised enforcement expertise.  The SEC’s Asset Management Unit is a specialised group within the enforcement division that focuses exclusively on investigations against investment advisers. The industry expertise within this unit and its exclusive focus on cases against asset managers has led to an increase in cases in this area.   
  • Enhanced examination capabilities.  The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) has undertaken initiatives to examine a higher percentage of registered investment advisers by, for example, hiring more examiners, redeploying broker-dealer examiners to conduct investment adviser exams, and attempting to be more efficient in conducting risk-based exams.  OCIE has also become more sophisticated in understanding the operations of hedge funds and private equity funds, which has resulted in more private fund referrals to enforcement.
  • Increased use of data analytics.The SEC has become more sophisticated in using data analytics regarding investment advisers, which has led to an increase in enforcement referrals and investigations.

Implications for Compliance Programs
Investment advisers with robust compliance programs and conscientious CCOs should not be unduly concerned about the SEC’s record enforcement year. The results, however, do highlight the SEC’s aggressive approach and willingness to pursue enforcement investigations on a broad range of topics, and even absent evidence of intentional fraud. Given this aggressive approach and the increasing likelihood of being chosen for an SEC exam, CCOs may wish to evaluate whether their firm and compliance program are fully prepared if the SEC shows up for an exam.  Questions CCOs might consider asking in light of the SEC’s recent enforcement results include the following:

  • Has the firm taken steps to identify all current conflicts of interest that could possibly impact clients, and have the identified conflicts either been eliminated or mitigated and clearly disclosed?
  • Has the firm reviewed controls with respect to advertising, particularly regarding presentations of firm performance data?
  • Has the firm reviewed controls with respect to charging fees and allocating expenses?
  • Does the firm have a robust insider trading prevention program that is tailored to the firm’s particular material nonpublic information risks?
  • Has the firm undertaken a review at least in the last year of written compliance policies and procedures to ensure that they address all material compliance risks and reflect any regulatory or business changes?
  • Has the firm provided appropriate compliance training to all employees at least in the last year?

More Information
For questions about the SEC’s enforcement results or any item in this alert, please contact Andrew Petillon or by phone +44 (0) 207 042 0500.