SEC Enforcement Actions Against Investment Advisers Increasing

In the enforcement results summary recently issued by the Securities and Exchange Commission (“SEC”), it was noted that in fiscal year 2016, the SEC filed 868 enforcement actions against financial reporting firms related to misconduct by companies and their executives and misconduct by investment advisers and gatekeepers, as the agency continued to enhance its use of data to detect illegal conduct and expedite investigations.

Of significance in the report is that the SEC’s focus on uncovering misconduct of investment advisers and investment companies resulted in the SEC achieving a new single year high for enforcement actions for the fiscal year that ended September 30, which included the most ever cases involving investment advisers or investment companies (160) and the most ever independent or standalone cases involving investment advisers or investment companies (98).  Additionally, the SEC brought a record 548 standalone or independent enforcement actions and obtained judgments and orders totaling more than $4 billion in disgorgement and penalties.

“By every measure the enforcement program continues to be a resounding success holding executives, companies and market participants accountable for their illegal actions,” said SEC Chair Mary Jo White. “Over the last three years, we have changed the way we do business on the enforcement front by using new data analytics to uncover fraud, enhancing our ability to litigate tough cases, and expanding the playbook bringing novel and significant actions to better protect investors and our markets.”

Among the SEC’s most significant enforcement actions impacting investment advisers in fiscal year 2016 included a $267 million enforcement action against J.P. Morgan wealth management subsidiaries, for failing to disclose conflicts of interest to clients. It also brought eight enforcement actions related to private equity advisers, including cases against three private equity fund advisers within The Blackstone Group; Fenway Partners, LLC and four of its employees; Cherokee Investment Partners, LLC and Cherokee Advisers, LLC; JH Partners, LLC; Blackstreet Capital Management, LLC and its managing member and principal owner; WL Ross & Co. LLC; four private equity fund advisers affiliated with Apollo Global Management; and First Reserve Management, L.P. Including these actions, the SEC has now brought eleven private equity related actions in the last two years.

Additionally, the SEC sanctioned three AIG affiliates for steering mutual fund clients toward more expensive share classes so the firms could collect more fees, and charged Morgan Stanley Investment Management based on unlawful prearranged trades known as “parking” that favored certain clients over others made by one of its portfolio managers. In this matter, the SEC also charged the portfolio manager, SG Americas, and a trader at SG Americas who assisted the schemes.  Finally, the SEC sanctioned 13 investment advisory firms who were found to have violated securities laws by repeating the false claims made by investment management firm F­Squared Investments about its flagship product without obtaining sufficient documentation supporting these claims.

Finally, it should be noted that the SEC agency also brought a number of first of their kind actions in fiscal year 2016, including charges against a firm solely for failing to file Suspicious Activity Reports when appropriate; an audit firm for auditor independence failures predicated on close personal relationships with audit clients; municipal advisors for violating the fiduciary duty for municipal advisors created by the 2010 Dodd Frank Act and the municipal advisor anti-fraud provisions of the Dodd Frank Act; a private equity adviser for acting as an unregistered broker; and an issuer of retail structured notes for misstatements and omissions and the first federal jury trial by the SEC against a municipality and one of its officers for violations of the federal securities laws.