Regulators eye more enforcement

SEC disciplinary unit brought record adviser cases in fiscal "12

Nov 18, 2012 @ 12:01 am

By Mark Schoeff Jr.

An enforcement unit at the Securities and Exchange Commission targeting investment advisers is starting to bear fruit.

Actually, it is more like a bumper crop.

The SEC said last week that it took a record 147 enforcement actions against investment advisers in fiscal 2012, which ended Sept. 30. That number was one more than the previous record, set in fiscal 2011. The 2012 figure also represented increases of 30% over 2010 and nearly 200% since 2002, when the SEC filed 52 cases.

The SEC also brought 134 enforcement actions against brokers, 19% more than in 2011.

The crackdown is being led by the SEC's Asset Management Unit, one of five such entities created within the Division of Enforcement in 2010. The teams include industry experts working with attorneys to pursue adviser malfeasance.


“This is really a great year for the specialty units,” said Jordan Thomas, a partner at Labaton Sucharow LLP and a former SEC assistant director of enforcement. “They're breaking records in the number and significance of the cases they're bringing.”

The asset management unit has strong internal backing, according to Amy Lynch, president of FrontLine Compliance LLC.

“This small group of attorneys is aggressive and well supported within the SEC,” Ms. Lynch wrote in an e-mail.

“It is much easier to refer an adviser case now than it was five years ago,” she wrote. “They are very hungry for these cases now, especially where the wrongdoing involves a specific money manager, CEO or other senior management that they can bring allegations against.”

In reporting its enforcement numbers, the SEC highlighted cases against UBS Financial Services of Puerto Rico and two of its executives for disclosure violations related to closed-end mutual funds.

It also touted a case against OppenheimerFunds “for misleading investors in two funds suffering significant losses during the financial crisis.”

UBS and Oppenheimer paid more than $26 million and $35 million, respectively, to settle the cases.

Overall, the SEC filed 734 enforcement actions in fiscal 2012, one short of a record 735 in fiscal 2011. Last year, the agency obtained more than $3 billion in penalties and disgorgements for harmed investors, an 11% increase from the previous year.

The SEC has obtained $5.9 billion in disgorgements and penalties over the past two years.

Despite the higher numbers, the agency is still dogged by criticism that it falls short when it comes to landing big perpetrators.

Just last week, the SEC lost a high-profile case against Bruce Bent and his son, Bruce Bent II. They operated the $62 billion Reserve Primary Fund, a money market fund that set off a run in the industry in 2008 when it broke the buck as a result of its heavy investments in Lehman Brothers Holdings Inc.

The SEC had charged the pair with misleading investors about the safety of the money market fund, but the team was cleared of fraud in a federal civil trial. The jury did rule that the company was liable for fraud and that Bruce Bent II was guilty of negligence.


“The litigated results have been a mixed bag for the commission,” said Barry Goldsmith, a partner at Gibson Dunn & Crutcher LLP and a former SEC chief litigation counsel.

The agency has been sharply criticized for not pursuing Wall Street executives allegedly responsible for the 2008 market collapse.

“Are they willing to stand up to Citigroup, Goldman Sachs, Merrill Lynch, with their armies of high-priced lawyers? The statistics don't tell me that,” said Tom Ajamie, managing partner of Ajamie LLP.

The SEC's enforcement surge is widely seen as a reaction to its embarrassment over major fumbles, such as the multibillion-dollar Ponzi schemes perpetrated by Bernard Madoff and R. Allen Stanford.

“The SEC is really trying to make amends for the cases it missed a couple years ago,” said Duane Thompson, senior policy analyst at Fi360 Inc., a fiduciary-training consulting firm.

The SEC said last week that it filed “29 separate actions naming 38 individuals, including 24 chief executives, chief financial officers and other senior corporate officers, regarding wrongdoing related to the financial crisis.”

Moves that bring one firm to heel can be brushed off by others, according to experts.

“What is that amount?” asked Steven Thomas, director of compliance at Lexington Compliance, a division of RIA in a Box LLC. “For [The Goldman Sachs Group Inc.], it's a huge number. For a small independent broker-dealer, if the sanction is a couple hundred thousand dollars — that could put them out of business.”

As the pressure to punish Wall Street firms continues, smaller ad-visers could feel the SEC's renewed focus on the sector. In addition to fraud, the SEC is zeroing in on areas such as valuations and trade al-locations.

“They're starting to look at more bread-and-butter issues that [advisers] deal with on a day-to-day basis,” Mr. Goldsmith said.

The agency is re-viewing these kinds of violations as a stand-alone proposition, re-gardless of consumer impact.

“They're getting more aggressive about potential enforcement, even if Mr. Smith or Mrs. Smith is not harmed,” said Dan Bernstein, director of research and development at MarketCounsel LLC.

It will need help from Capitol Hill if the SEC is to stay on an enforcement roll.

“The numbers that have been reached over the last couple years aren't going to go much higher unless Congress increases the SEC's budget,” Mr. Thompson said. Twitter: @markschoeff


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