The Securities and Exchange Commission’s enforcement program is highly focused on investment advisers for an obvious reason: they manage more than $67 trillion in assets for approximately 30 million clients. In addition, because the SEC examines a far smaller percentage of investment advisers than broker-dealers, and there is no self-regulatory organization, like the Financial Industry Regulatory Authority, that also regulates investment advisers, enforcement plays a prominent role in sending a message to the investment management industry about the areas of concern to the Commission.
In recent years, it has not been unusual for the SEC to bring more than a hundred cases against investment advisers in a single year. In the SEC’s most recent fiscal year, which ended on September 30, 2016, almost one in every five enforcement actions was against an investment adviser. An entire unit in the SEC’s Division of Enforcement is focused on bringing cases against investment advisers; advisers are subject to routine and for-cause examinations by the SEC examination staff; and the Commission now has access to voluminous data regarding their activities and sophisticated technology to analyze that data. Moreover, because investment advisers are fiduciaries, the standards for establishing liability are modest: in an SEC enforcement action, intentional, knowing or reckless misconduct is not usually necessary to prove a violation of the Investment Advisers Act.
We discuss the Commission’s 2016 enforcement actions against investment advisers under the categories listed below, which are similar but not identical to the categories we used in articles reviewing the Commission’s enforcement programs in 2014 and 2015:
- Conflicts of Interest
- Fees and Allocations of Expenses
- Trade Allocations
- Best Execution
- Principal Trades and Agency Cross Trades
- Insider Trading
- Valuation of Securities
- Disclosures Related to Performance, Assets under Management, and the Adviser’s Background
- Failure to Disclose Changes in Investment Strategy
- Disclosures to the SEC and to Issuers Rather than to Clients
- Failure to Register as an Investment Adviser or Broker-Dealer
- Custody Violations
- Safeguarding Client Information
- Business Continuity
- Foreign Corrupt Practices Act Violations
- Firm Procedures and Individual Supervision
At the end of each section, we provide one or more key “takeaways.” After the section on procedures and supervision, we include a checklist of questions that advisers may wish to ask about their own practices in light of these actions. Finally, we conclude with a few brief observations about the enforcement program and an educated guess about the program under a new administration.
Click here to read the full alert.