Welcome to Financial Advisor IQ
Follow

Will the SEC Drop Broken Windows Enforcement?

By Miriam Rozen December 20, 2017

In the Trump era, will the SEC’s enforcement division continue to pursue its “no broken windows” policy — which calls for its prosecution of minor infractions by institutions and individuals? Lawyers warn advisors to heighten their senses over the watchdog’s enforcement activities.

Any prediction in answer to that question could be wrong if it hinges on either of the rare public comments made in October by the co-directors of the SEC’s enforcement division. Those co-directors are Steven Peikin, a former Sullivan & Cromwell partner appointed by Trump, and Stephanie Avakian, a holdover from the Obama administration.

On Oct. 26, at the 2017 Securities Enforcement Forum in Washington, D.C., Peikin said the SEC should tell securities lawyers and their clients more about how to benefit from cooperating with the commission in an enforcement action.

Observers interpreted his comments – made during a Q&A – as an indication the agency will become less aggressive about seeking sanctions against, and admissions of wrongdoing from, violators, moving away from its “broken windows” policies. The Wall Street Journal headlined a story based on Peikin’s remarks: “SEC Signals Pullback from Prosecutorial Approach to Enforcement.”

But at the same forum on the same day, Avakian read a formal speech, the transcript of which was posted on the SEC’s website, sounding a different note. She stressed as false the notion that the SEC’s enforcement policy is some kind of “a trade-off between ‘Wall Street’ and ‘Main Street,’” and that big financial institutions’ minor violations no longer remained the focus of agency’s enforcement. Avakian also stressed the SEC is going after abuses by both individuals and institutions that hurt the retail investor as well as those the agency can identify with digital analytics. She listed some of the violations specifically in the SEC’s purview, including failure to disclose “trading away” costs, putting clients in inappropriate investments long-term, failing to disclose all fees of highly-structured products, and garden-variety churning.

J. Bradley Bennett heard both SEC co-directors speak. A lawyer and partner in the Washington, D.C. office of Baker Botts who until January served six years as Finra’s chief of enforcement, Bennett puts more weight on Avakian’s formal speech rather than Peiken’s off-the-cuff remarks.

“I expect to see a strong retail focus overall,” he says about the SEC’s enforcement efforts. Among the likely allegations that will catch the SEC’s attention are those that include monkey business with advisors’ expense accounts and any misuse of client funds.

Doug Davison, a lawyer and partner in the Washington, D.C. office of Linklaters, who previously served as counsel to then-SEC chairman Arthur Levitt, agrees that the SEC’s enforcement focus will be about retail investors. That focus may play out harshly for individual advisors caught in the SEC’s enforcement division’s wheelhouse.

“They are very focused on retail,” Davison says about the SEC enforcement teams. “It seems like their focus is going after the individuals rather than institutions but it’s a little early to tell. Given that apparent focus on individuals, if I were working in the industry I would have heightened concerns,” Davison says.

Ali Rashid, a former senior partner for New York City-based Apollo Management, whom the SEC filed a federal complaint against in October, has moved past "heightened concerns" to fight-back mode, according to his lawyer, R. Brian Timmons, from the Los Angeles office of the law firm Quinn, Emanuel, Urquhart, Oliver & Hedges.

In its complaint, the SEC alleged Rashid spent $290,000 of client money on family vacations, visits to a hair salon, and purchases of designer clothing and high-end electronics.

“It’s not really fair to draw any conclusions about the current administration or commissioners because this case is a relic of the past,” says Timmons. It doesn’t signal which direction the SEC will go with enforcement but rather where the agency has previously made erroneous judgments, the defense lawyer says. His client denies the allegations and plans to file a motion to dismiss the SEC’s complaint, Timmons says.

Also battling the SEC is Daniel H. Glick, an investment advisor whom Finra barred from the industry and whose CFP and CPA designations have been revoked for his prior conduct. In its complaint filed earlier this year, the SEC alleges Glick used client funds to purchase a Mercedes-Benz and repay personal loans.

(Getty)

Although the SEC asked the court to freeze Glick’s companies' assets and ordered him to return money from overseas, Glick prevailed in September when he asked the judge to unfreeze $22,000 so he could pay his defense lawyer, Peter Shaeffer of Barrington, Ill. Shaeffer did not return a call for this story.

Other individual SEC targets this year, however, have not put up a fight.

In April, Kevin J. Amell, a former Eaton Vance portfolio manager, pleaded guilty and was sentenced to 18 months in prison for allegedly using clients’ money to benefit his own trades. According to the SEC, Amell used a fraudulent matched-trades scheme in which he prearranged the purchase or sale of call options between his own account and the brokerage accounts of the fund he was responsible for managing. The trades were at prices disadvantageous to the fund and advantageous to him. In one series of trades involving Amazon securities, Amell allegedly generated a $23,000 profit for himself in less than 23 minutes, at the fund’s expense. Karen Pickett, his defense lawyer in the civil case, did not return a call for this story.

What do statistics show about the SEC’s enforcement activity in recent months?

In the six months prior to Sept. 30, the SEC filed 231 new enforcement actions – slightly more than the 225 during the same time period in 2016. But broker-dealers and investment advisors were more likely to be targets of the federal agency in 2017, compared to the previous year. In the six months prior to Sept. 30 this year the agency initiated 83 actions against broker-dealers and 72 against investment advisors, compared to 69 for each category during the same time period in 2016.

But former Finra enforcement chief Bennett says what the SEC initiates matters less than what it prioritizes, particularly since the agency has trimmed enforcement staff.

“They have an inventory of cases,” Bennett says, “but they get to decide which of these cases they are going on move on.”