Ramped up SEC enforcement targets fund industry
Commission said to be addressing substantial risks in the market that have gone unchecked; 'there's going to be a lot of trouble ahead'
The mutual fund industry will be one of the targets of more-aggressive enforcement by the Securities and Exchange Commission, according to experts who spoke today at an Investment Company Institute conference in Palm Desert, Calif.
As part of its efforts to reorganize and strengthen its Division of Enforcement, the SEC has established groups that concentrate on specific parts of the market. The largest of these is the assets under management unit.
“There’s going to be a lot of trouble ahead, in terms of that unit, for the industry,” said Philip Kirstein, senior officer and independent compliance officer at AllianceBernstein Mutual Funds.
He was one of several experts on an ICI panel who said that the SEC is putting more emphasis on patrolling funds.
“You have people who recognize there are significant risks in investment management that have gone unaddressed,” Thomas Biolsi, practice leader in asset management at accounting giant PwC, said after the presentation.
The specialized enforcement unit is part of an overhaul of the enforcement division ushered in by its director, Robert Khuzami, over the last two years.
In testimony before a House Financial Services subcommittee this month, Mr. Khuzami touted the SEC’s enhanced market policing. The SEC collected $2.85 billion in disgorgements and penalties in 2010, a 176% increase from 2008. It also returned $2 billion to harmed investors.
Those results are a reflection of a more-aggressive posture in which the enforcement division tries to anticipate problems and investigate cases on its own, rather than just react to problems flagged by the Office of Compliance Inspections and Examinations, according to panelists at the ICI conference.
“They are very much, in enforcement, attempting to be proactive,” said Joan McKown, a partner at Jones Day and a former SEC chief counsel in enforcement.
One example of the new enforcement approach is the creation of the Office of Market Intelligence, which is housed in the division. With a staff of about 35, it offers a central location for gathering tips, complaints and referrals — and a focal point for following up on those that might lead to big cases.
“Enforcement is where the action is,” said ICI senior associate counsel Tamara Salmon. “We’re talking about a revolution, not an evolution.”
The momentum, however, is being slowed by the SEC’s budget constraints. The agency has been operating on at its fiscal 2010 funding levels since October, when Congress failed to pass a fiscal 2011 budget.
While the spending battle continues on Capitol Hill, the commission has been tightening its belt by curtailing hiring and slashing travel expenses. Evidence of the travel cutback was on display at the ICI conference.
Eileen Rominger, director of the Division of Investment Management, and Jennifer McHugh, special advisor to SEC Chairman Mary Schapiro, addressed the conference via satellite. Robert Plaze, associate director of the Division of Investment Management, was piped in through an audio feed while a bobble-head doll provided a physical representation on the panel in which he participated.
For the first time in the history of the ICI conference, the enforcement session did not feature an SEC official — either in person or via electronic means.
The travel reductions have a significant impact in enforcement because travel represents half of the division’s budget, according to Ms. McKown. The situation undermines the ability of SEC lawyers to go out of town to take depositions and do other fact gathering.
In addition, risk-based investigations may be cut back.
“Those suck up an enormous amount of resources,” Ms. McKown said. “You might not get as much bang for the buck because they can be dry holes.”
While the SEC budget stagnates, its enforcement demands are set to increase under the mandates of the Dodd-Frank financial regulatory reform law. Although the commission is transferring investment advisers with less than $100 million assets under management to state jurisdiction, it is taking on oversight of private-equity and hedge fund advisers.
“The firms they’re getting are very large and very complex,” Mr. Biolsi said.
Its domestic struggles notwithstanding, the SEC is exerting influence internationally by being the standard setter on enforcement, according to participants at the ICI conference. Following the SEC’s lead, fines are going up across the globe.
“There’s a real risk that you get hit with something in the U.S. and everyone says, ‘Me, too,’” said Adam Shapiro, director of Promontory Financial Group LLC, referring to the SEC’s global counterparts. “Historically, there are three sets of people you don’t want to cross in the world, and they’re all in the U.S. — one is the Department of Justice, another is the SEC and another is state attorneys general.”
Stateside, investment advisers need to make sure that they’re following all of the investor protection regulations that the SEC enforces in order to keep it at bay.
“This is the year of the compliance process,” said Lawrence Stadulis, a partner at Stradley Ronon Stevens & Young LLP.
Learn more about reprints and licensing for this article.
