On October 11, 2016, the Securities and Exchange Commission
announced that it prosecuted a record number of enforcement cases
against investment advisers and investment companies in the fiscal
year ended September 30, 2016.
During this period, the SEC brought a record-breaking 868
enforcement actions against companies and their executives and
gatekeepers for alleged misconduct. Of this amount, the SEC
targeted 160 ("the most ever") cases as involving
investment advisers or investment companies. The SEC also brought
98 ("the most ever") standalone, or independent, cases
involving investment advisers or investment companies. Add to this
a record of 548 standalone enforcement actions, judgments and
orders totaling more than $4 billion in disgorgement and penalties,
a record $57 million distributed to whistleblowers during the
First-of-their-kind actions. During fiscal year 2016,
the SEC brought several first-of-their-kind actions, including:
a case against a firm solely for
failing to file Suspicious Activity Reports when required;
a case against audit firm for auditor
independence failures based on close personal relationships with
audit clients; and
a case against a private equity
adviser for acting as an unregistered broker when selling fund
Advisers and funds. In its announcement, the SEC
tallied up its score card. Among other things, it:
brought eight enforcement actions
related to private equity advisers, bringing the two year total of
cases against private equity-related actors to 11;
charged an investment adviser and its
top executives with allegedly hiding its rapidly deteriorating
financial condition while raising more than $350 million from more
than 1,500 investors;
sanctioned three affiliated
broker-dealers for steering mutual fund clients toward more
expensive share classes allegedly so they could earn more
charged an investment adviser for
"parking" trades that favored certain clients over
sanctioned 13 investment advisers for
allegedly repeating false claims made by another investment adviser
about its flagship product without sufficient documentation to
support those claims.
Gatekeepers. The SEC went after "attorneys,
accountants and other gatekeepers" for alleged failures to
comply with professional standards. Among other things, the
charged an auditor and two of its
partners for ignoring red flags and fraud risks while conducting
deficient audits of publicly traded companies;
charged two auditing firms with
violating auditor independence rules; and
charged a private fund administrator
with missing or ignoring clear indications of fraud while it was
contracted to keep records and prepare financial statements and
account statements for two funds that the SEC charged with
Admissions of liability. The SEC emphasized that it has
demanded and obtained acknowledgements of wrongdoing under its
admissions policy in a number of areas.
Other areas. The SEC also commenced enforcement actions
involving insider trading, Foreign Corrupt Practices Act (FCPA)
violations, disclosure, market fairness, market manipulation,
multilayered marketing schemes, complex financial products, and
public finance markets.
Our take. The SEC has added more notches to its very
large revolver than in other years. Over the past few years, the
SEC has broken new ground and has shown that it will aggressively
go after corporate executives and gatekeepers, including fund
directors, lawyers, administrators, and accountants.
Yet, legislators continue to hound SEC Chair Mary Jo White.
While recent complaints lobbed by Senator Elizabeth Warren
("Today I am more disappointed than ever") and Senator
Charles Schumer ("You're hurting America") do not
directly accuse Chair White of being soft on wrongdoers, they imply
that the SEC is not doing enough to protect investors. The data
seem to contradict those characterizations.
We hope that in its zeal, the SEC enforcement division does not
begin to second-guess advisers and fund directors after the fact
for exercising their informed business judgment in making tough
calls when implementing the barrage of new regulations affecting
advisers and funds.
Because of the generality of this update, the information
provided herein may not be applicable in all situations and should
not be acted upon without specific legal advice based on particular
Allegations of corporate malfeasance may arise in myriad ways: whistleblowers, current or former employees, internal or external auditors, shareholders, the media, regulatory or law enforcement agencies, and/or the plaintiff 's bar.
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
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