The SEC’s fiscal year ended on Tuesday of this week. The end of any year offers a time for reflection on what has been accomplished in that span. The Wall Street Journal reported that the number of SEC enforcement cases in the just- completed fiscal year will represent the first year-over-year increase since 2011. Soon after Mary Jo White was sworn in as SEC Chair in April 2013, she pledged “aggressive and creative” enforcement. Some SEC commentators have suggested, however, that the increased enforcement activity “masks a scarcity of the blockbuster actions that should be a feature of an effective Wall Street cop.”
Chair White believes that the SEC’s Enforcement Division has been highly successful in the past year, and she has promised that aggressive enforcement will continue. The official tally of enforcement actions for the fiscal year ending on Tuesday is still being completed, but is well over the 686 reached in the previous 12-month period. The Wall Street Journal article credits Ms. White for recent progress on at least two of her priorities: her policy of requiring admissions of wrongdoing to settle SEC allegations, and her “broken windows” strategy of pursuing even small legal violations.
Senior SEC officials have said that the agency’s post-financial crisis strategy is to pursue wrongdoing on a broad range of matters, rather than focus on any particular area. Andrew Ceresney, SEC Enforcement Chief, has indicated that the types of cases being targeted include insider trading, market structure, microcap-stock fraud, pyramid schemes, municipal securities, complex financial instruments, investment-adviser fraud, and financial-reporting fraud.
So, what is likely in store for the SEC in the fiscal year that began on Wednesday? Chair White has stressed that, on the rulemaking front, the agency will focus on finishing the rules mandated by the Dodd-Frank Act and JOBS Act. In addition, although not mandated by Dodd-Frank, White has said that the agency will make a “threshold decision” this year on whether, and how, to move forward with a uniform fiduciary standard rule for brokers and advisers. Similarly, on the enforcement front, the Commission is likely to continue pursuing actions against investment advisers who breach their fiduciary obligations to their clients. Last week, for example, a New York-based private equity advisory firm agreed to pay $2.3 million to settle civil charges that it breached its fiduciary duty to two funds by improperly allocating certain expenses in their company portfolios - also an indication that the SEC is ramping up oversight of the private equity sector.
The SEC has sounded alarms about perceived widespread problems at private equity advisers surrounding the allocation of expenses, hidden fees and concerns with valuations and marketing. In part, the SEC has been ferreting out some of these problems through compliance exams of more than 150 newly registered investment advisers. In the area of expenses, SEC officials have said that some private equity advisers have been shifting expenses from themselves to their clients without proper disclosure.
Earlier this month, The Wall Street Journal reported that the SEC is in the process of preparing new rules to increase the monitoring and oversight of other asset funds, including hedge funds and alternative mutual funds. Importantly, the SEC’s proposed rules are being promulgated at the same time the SEC is conducting what it has coined a “national sweep exam” of alternative mutual funds to examine in greater detail how alternative funds value the “illiquid assets” held by the fund, among other things.
It has been suggested that the proposed sweep of alternative mutual funds is part of a larger strategy by the SEC to bring the alternative mutual funds, and similarly situated entities such as asset managers, hedge funds and private equity funds, under the same regulatory umbrella imposed upon large banks and similarly situated financial institutions in response to the 2008 recession. Those regulations were adopted to address the purported risk that the failure of one or more large financial institutions could debilitate the national economy.
The combined import of the SEC’s actions is that additional oversight and regulatory scrutiny are all but assured in the near future. Ms. White, a former federal prosecutor, seems to be making good on her promise of increased regulatory enforcement. Arthur Levitt, the SEC’s Chairman from 1993 to 2001, said recently that Ms. White has gotten off to a good start on enforcement, but that it is too early to judge the effectiveness of her efforts to make the SEC a tougher agency. In the meantime, however, financial services industry participants would be well advised to comply with their regulatory responsibilities and increase their efforts to avoid misconduct. Preparation will go a long way in dealing with what appears to be an expanding minefield of new regulations, and potential enforcement actions, from the federal government.