Compliance problems that generate a Securities and Exchange Commission rebuke for investment advisers and brokers may now lead to a full-fledged enforcement case.
On Wednesday, SEC Chairman Mary Jo White said the commission will zero in on minor infractions to stop larger violations.
For advisers, the detection of small infractions could spur interest in whether there are more serious violations, such as misleading registration information, inaccurate portrayals of investment performance and philosophy and improper fee disclosure, according to Eugene Goldman, a partner at McDermott Will & Emery LLP. For brokers, it could be net capital violations or selling away.
“A logical conclusion from reading her speech is that the deficiency letter would likely be a blueprint for follow-up by enforcement,” said Mr. Goldman, a former SEC prosecutor. “Investment advisers and broker-dealers have to be even more diligent and employ the necessary resources in advance of exams and inspections.”
Stephen Crimmins, a partner at K&L Gates LLP, said that Ms. White is signaling that something less than fraud could result in charges.
“We will see great attention by the enforcement staff on bringing cases that were formerly handled as regulatory matters,” said Mr. Crimmins, a former SEC deputy chief litigation counsel.
Ms. White's speech left a lot of room for interpretation. Daniel Nathan, a partner at Morrison & Foerster LLP, said that failure to follow appropriate supervision and suitability procedures and lapses in record-keeping and reporting could cause SEC enforcement action.
“It's something that sounds appealing,” said Mr. Nathan, a former enforcement official at the SEC and the
Financial Industry Regulatory Authority Inc. “When you scratch the surface, you don't know whether they have the resources to do it or how they're defining the low-level violations.”
In a speech before the Securities Enforcement Forum 2013 in Washington, Ms. White sent a pointed warning to investment advisers and brokers.
“Minor violations that are overlooked or ignored can feed bigger ones, and, perhaps more importantly, can foster a culture where laws are increasingly treated as toothless guidelines,” Ms. White said. “Retail investors, in particular, need to be protected from unscrupulous advisers and brokers, whatever their size and the size of the violation that victimizes the investor.”
If investment advisers want to avoid such problems, they need make compliance a daily task, according to Brian Hamburger, president of MarketCounsel LLC.
“Compliance does not belong in a silo,” Mr. Hamburger said. “It needs to be integrated in all the firm's operations.”
While advisers increase their focus on compliance, Mr. Hamburger worries that going after the smallest infractions may spread the SEC's enforcement attention too thin by making each violation as important as any other.
“I don't want them spending time on the fact that an adviser didn't send a privacy-policy notice to its clients when you have an adviser two floors up conducting major fraud,” Mr. Hamburger said.
Ms. White's initiative demonstrates her support for the work of the Asset Management Unit in the enforcement division, according to Mr. Crimmins. That specialized force brought 147 cases against investment managers in fiscal year 2011 and 147 cases in fiscal 2012.
“Mary Jo is saying she likes what she sees,” Mr. Crimmins said. “For people in this industry, it's a further wake-up call that the new leadership of the SEC is very committed to enforcement in the asset management space.”
