A temporary reprieve program, which asks advisors to self-report past indiscretions, could serve as a blueprint for a new approach to enforcement at the SEC.
Over the last three months, the regulator’s Share Class Selection Disclosure Initiative has encouraged advisors to self-report failures to disclose conflicts of interest relating to mutual-fund share classes. As long as advisors self-report by June 12 and “promptly return money to harmed clients,” the SEC says that it will not seek monetary penalties against advisors who come forward with information.
Enforcement Division co-chairs Stephanie Avakian and Steven Peikin say they have tried to shift their division away from pursuing cases against every infraction they unearth, regardless of how small, in favor of a strategic approach with the overarching goal of curbing widespread industry abuses and returning money to consumers who have been cheated by a financial service provider.
"We place great importance on putting money back into the pockets of harmed investors," Peikin told members of the House Financial Services Committee on Wednesday.
In the advisor arena, there is no more vivid illustration of the commission's new approach than its mutual fund share class initiative. Under that program, the agency is offering advisors favorable settlement terms if they promptly report past sales of high-cost fund shares when cheaper but otherwise comparable share classes were available.
SEC examination and enforcement officials have found numerous instances of advisors failing to disclose conflicts stemming from compensation for different share classes over the years. The Division of Enforcement has brought "a number of cases" over the years in which it has assessed penalties against the offending advisor, Avakian said, but that approach has failed to curb the behavior across the industry, so her team is trying something else.
"Ultimately what we're trying to do here is take a problem we identified on a broad scale — investigations that take a substantial amount of time to complete — and instead say, 'All of you who have this problem, come forward, identify it to us,'" Avakian said. That way, the commission hopes to "attract and get a much larger universe with way fewer staff resources invested in it and money back into the pocket of investors."
It's a problem that the SEC has observed across the spectrum of the RIA universe.
"We've seen it from the smallest financial advisors to the biggest financial services firms, almost," Peikin said.
Avakian has said in the past that she envisions taking a similar approach to the share class initiative in other compliance and enforcement challenges the commission faces.
In framing their approach as a significant shift in enforcement, Avakian and Peikin put some distance between their work and the so-called "broken windows" view of securities enforcement that held sway under former SEC Chairwoman Mary Jo White. In that approach — the term borrowed from a hyper-vigilant philosophy of policing city streets — enforcement authorities worked under the mandate that no infraction was too small to escape their attention.
That is a welcome shift to some members of Congress who argued that White's enforcement policies were more successful at boosting the commission's caseload than they were at making the financial services sector safer for investors.
"In my mind, I believe that this misguided approach to enforcement appears to have only been successful at boosting statistics versus meaningfully improving investor protections," said Rep. Bill Huizenga, a Republican from Michigan and chairman of the Subcommittee on Capital Markets, Securities and Investment. "I'm pleased to see that the division is shifting away from minor violations of securities laws, instead taking a more selective approach to enforcement."