After a record year for enforcement actions, investment advisors can expect continued close scrutiny from authorities at the SEC.
Investigators are taking a hard look at the RIA sector as they scan for breaches of fiduciary duty, undisclosed conflicts of interest and other transgressions, the head of the commission's enforcement unit told members of a House subcommittee on Thursday.
In testimony before a Financial Services Committee panel, Andrew Ceresney, director of the SEC's Division of Enforcement, put advisors and other financial players on notice that his team is reviewing industry practices and exploring new approaches in the cases it pursues, including requiring admissions of misconduct in certain cases.
INACCURATE REPORTING, ADVISOR FOCUS
In particular, the commission is on the lookout for inaccurate reporting that could overstate performance of a particular investment vehicle, or otherwise mislead retail investors and undermine confidence in the financial markets.
"Comprehensive and accurate financial reporting is critical to ensuring that investors have access to reliable information and can make informed investment decisions, because false or misleading financial information erodes the integrity of the markets," Ceresney told members of the Subcommittee on Capital Markets and Government-Sponsored Entities.
"We have intensified our focus on this area and recently have seen a significant increase in financial reporting and auditing investigations and filed actions."
And much of that scrutiny is trained on advisors, a segment Ceresney cited specifically in his testimony.
"Investment advisors and the funds they manage also remain a focus of the division, and we regularly investigate and bring actions against investment advisors for conflicts of interest, misrepresentations regarding performance or investment strategies, breaches of their duties to their clients, and other fraudulent conduct," he said.
In all, the SEC brought a record 755 enforcement actions in fiscal 2014, and collected $4.16 billion in penalties.
While Ceresney touted that number as an indicator of his division's "vigorous" approach to enforcement, he also stressed that his team is pursuing new methods of policing the industry, including bringing in more outside experts, making better use of data analytics to identify and investigate bad actors, and, in some cases, offering an expedited settlement process. In that last category fall many offenses that previously might not have risen to the level of a full-on investigation, but, in keeping with the "broken windows" philosophy of enforcement, are now on the commission's radar, even as it struggles with limited resources.
"To maximize its impact and send a strong message of compliance while still conserving investigative resources, the [Enforcement] Division in some of these areas is pursuing streamlined investigative and settlement efforts that provide incentives to wrongdoers to resolve charges quickly," Ceresney said in his written testimony.
And the commission is looking to grow its ranks. Ceresney put in a plug for the SEC's budget request that would increase its appropriation by 7%, saying that he hopes to use the additional funding to hire 93 more enforcement staffers. Of those, roughly 50 would be accountants, lawyers and other specialized professionals who would help with the division's investigation activities. About 20 would be trial lawyers, and another 20 would serve as data specialists, helping the division make better use of its considerable data assets to sharpen the focus of its investigations.
At one point, Ceresney faced questioning about a fiduciary proposal underway at the Department of Labor, which claims jurisdiction over advisors working in the retirement space, from one of the most vocal critics of that proceeding on Capitol Hill.
Rep. Ann Wagner (R-Mo.) tried more than once Ceresney into offering an opinion on the DoL's proposal to extend fiduciary duties to retirement advisors, saying that she is "worried about the effects that such a rule would have on low- and middle-income Americans seeking financial advice for their retirement."
Ceresney would not engage.
"In the Enforcement Division we're in charge of enforcing the rules and the laws as they exist right now, I think what you're referring to is a policy question as to what the law should be in the future," he told Wagner.
Wagner has re-introduced a bill that would bar the Department of Labor from proceeding with its fiduciary rulemaking until the SEC has completed its own work on establishing a uniform standard that would apply in equal measure to advisors and broker-dealers. Investor advocates have charged that Wagner's bill is just the latest in a series of efforts to derail the Labor Department's proceeding, which they argue is a necessary consumer protection.
ADMINISTRATIVE PROCEEDING BIAS?
Much of the hearing focused on the venue and procedures the SEC uses in adjudicating its enforcement actions. Many Republicans on the subcommittee took issue with the use of internal administrative courts, arguing that defendants don't get a fair shot in those forums. Last year, the SEC won every case it brought in its administrative proceedings, while it won just slightly more than 60% of the jury cases it brought in U.S. district court.
"Do you think there could be any correlation when you actually hire the judges, and you set the rules, that you win all the cases? Do you see a correlation there?" said Rep. Sean Duffy (R-Wis.) "You might say, 'You know what, I want to bring more cases in front of the judges that I hire and abide by the rules that I set, as opposed to letting these cases go into federal court.' And lo and behold, 'wow, I win 'em all.'"
Ceresney noted that the undefeated record the SEC enjoyed in administrative proceedings last year was an aberration, pointing out that the commission had just lost one such case the day before, and that his team still favors district court as its venue.
"I will just say this, we are not afraid to try cases in federal court," he said. "We still bring the majority of our cases in district court, so we're not shying away from using district court."
Kenneth Corbin is a Financial Planning contributing writer in Washington.
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