What will enforcement look like in the Trump era?
As a candidate, Donald Trump’s bellowing campaign theme was built around disrupting the Washington establishment. As president, Trump has set the wheels in motion to reverse decades of regulatory continuity.
While some longtime SEC watchers were prepared for a period of high uncertainty at the commission, many anticipate that the new chairman, Jay Clayton, will take the agency in a deregulatory direction, potentially easing some rules and enforcement actions and holding off on new ones.
"Every time we have a change in administration this comes up, but this is far more than a change in administration," says Bill Singer, a veteran securities attorney who runs the Broke and Broker blog.
"After 35 years on Wall Street after every election cycle, I've had some confidence in saying to investment advisory representatives and registered representatives that there will be some continuity in regulation," Singer says. "For the first time in my career I don't think that's an intelligent comment for me to make, because I think that there will not be any continuity."
ENFORCEMENT PATTERNS HAVE SHIFTED
Despite SEC uncertainty, so far this year, enforcement activity at the commission has been fairly brisk, particularly in the broker-dealer sector. According to an analysis by Cornerstone Research, the number of enforcement actions brought against broker-dealers in the first half of fiscal 2017 increased 20% over the same period in 2016. Actions against investment advisers and investment companies saw a more modest increase of 4%.
Actions against brokers and advisers or investment companies comprised the two largest enforcement categories, accounting for 47% of all the cases the commission brought in the first half of 2017, according to Cornerstone's analysis.
Cornerstone declined to discuss its research, but observers look at the firm's statistics on enforcement actions and point to a number of potential scenarios, including that regulators will try to remain vigilant in policing the brokerage sector.
"They'll continue to find lucrative hunting grounds for broker-dealers," says Brian Hamburger, president and CEO of MarketCounsel, a legal and compliance firm.
"Broker-dealers are under fire," he says. "What they're selling — let's be blunt about it, it's fallen out of favor."
Hamburger has observed a shift in how the SEC has handled enforcement over the last year or so. He says that he has seen SEC enforcement staffers get involved earlier in the examination process — what he described as "pre-enforcement."
Where there was previously "a very clear line between examination or investigation and enforcement," he says , "we're seeing that line really blurred over the last several months."
Now, following an examination, it is common for an examiner to summon a firm's principals to an SEC office for a meeting attended by enforcement attorneys, creating a "slippery slope between examination and enforcement that we didn't used to have to deal with," he says.
A spokesman for the SEC declined to comment or make an official available for an interview.
NEW ACTIONS HAD BEEN “PERCOLATING”
Enforcement officials recently have been talking up their efforts to build cases against bad actors, however, and have even set up a formal initiative dubbed "investigate to litigate," through which enforcement attorneys are involved early in an investigation, working to compile court-admissible evidence.
The commission notes that the investigate-to-litigate program is solely an initiative of the Division of Enforcement and does not affect the routine examination process, which is handled by the Office of Compliance Inspections and Examinations.
OCIE, known as the eyes and ears of the commission, has been shuffling its internal resources, moving broker-dealer exam staff over to the RIA side as it has acknowledged that that sector is growing both by number of advisers and assets under management, while the SEC's examination rate remains anemic.
"The assets are steadily going over to adviser side, so I think that's where you're going to see increasing enforcement activity." -- Duane Thompson, senior policy analyst, Fi360
"The assets are steadily going over to adviser side, so I think that's where you're going to see increasing enforcement activity," says Duane Thompson, a senior policy analyst at Fi360, a fiduciary training firm.
Viewed that way, the recent rise in enforcement actions against broker-dealers could be a lagging indicator, given that those cases have been in the works for some time.
"Obviously these are actions that have been percolating for a year or two in their investigation," Thompson says . "So I wouldn't be surprised to see more activity going over to the adviser side."
He cautions advisers to keep an eye on some of the issues that the SEC has identified as priorities for its examination and enforcement programs, including cybersecurity and data privacy, senior investors and retirement planning, and placing clients in the appropriate fund share classes.
"They are, it seems to me in the last few years, looking at share classes, so that means advisers, whether you're fee-only or not, you're a fiduciary, and it goes beyond just picking a suitable investment," Thompson says . "I've been following the SEC for 20 years, and I don't remember the same amount of attention paid to costs in the past that they do today."
NOT IF CHANGE, BUT HOW DRAMATIC
Of course, looking to the recent past as a guide for what the future might hold can be problematic in the context of a new administration that has put disruption and deregulation at the heart of its domestic agenda.
"I don't see Clayton as continuing the policies of his predecessor," Singer says .
"I have a feeling that we're going to see a very dramatic change," he says . "I think that the SEC is going to basically become a more business-friendly regulator."
At his confirmation hearing in March, Clayton gave little indication of how he might handle specific enforcement, though he did profess a "zero-tolerance" approach to enforcement and vowed to carry that message to the SEC.
Count Singer as a skeptic. He anticipates a steady diet of actions against RIAs who flagrantly violate their fiduciary duties (the "low-lifes, individuals who are taking money and not investing it and using it to buy cars and go to casinos"), but a generally more lax approach to enforcement, particularly when it comes to the big Wall Street players.
"Instead of Merrill Lynch being investigated, it would be Smith and Jones." -- Securities attorney Bill Singer
"Instead of Merrill Lynch being investigated, it would be Smith and Jones," he suggested.
As for the recent pronouncements of senior staff regarding new enforcement priorities and initiatives like the investigate-to-litigate program, Singer cautioned that the new political leadership could very quickly snuff out those.
“I think that the SEC is sort of living in a fantasy world. I don’t think they understand that the tsunami hasn’t hit them yet,” he says .
"Of course they're going to continue to enforce, but I would think that we're going to see a lot less edginess," Singer added. "To use the baseball analogy, I'm expecting small ball."