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SEC Enforcement Actions Against RIAs on the Rise

The regulator reported 108 standalone actions against investment advisors/investment companies this fiscal year, compared to 82 in the prior year.

Nearly one-fourth (22 percent) of standalone enforcement actions brought by the Securities and Exchange Commission in fiscal year 2018 involved investment advisors and investment companies, up from 18 percent in fiscal year 2017, according to the agency’s latest enforcement report. The regulator reported 108 standalone actions against investment advisors/investment companies this fiscal year, compared to 82 in the prior year.

Sixty-three (13 percent) of the standalone actions were related to broker/dealer misconduct, the SEC said, compared to 53 (12 percent) last year.

State securities regulators are also seeing more bad actors at registered investment advisory firms than b/ds. According to the North American Securities Administrators Association, the voice of state securities agencies, 2017 was the first year in which enforcement actions against RIAs and their representatives significantly outnumbered those against b/ds and their reps.

The SEC cited a number of challenges facing the enforcement division this year, including a hiring freeze that led to a decline in enforcement staff and some unfavorable Supreme Court decisions. Due to the court’s decision in Kokesh v. SEC, for instance, the division estimates it lost up to $900 million in disgorgement. And a successful case brought by investment advisor Raymond Lucia “required the division to divert substantial trial and other resources to older matters, many of which had been substantially resolved prior to the decision.” Lucia, a San Diego-based radio personality, had been barred from the industry for life by an SEC judge for misleading investors about his “Buckets of Money” strategy,

Despite those challenges, the number of enforcement actions increased to a total of 821 actions, 490 of which were standalone. That’s up from 754 in the prior year and 784 in fiscal year 2016, excluding cases brought related to the SEC’s Municipalities Continuing Disclosure Cooperation Initiative.

Firms paid more than $3.9 billion in disgorgement and penalties to the agency for the year, and the SEC returned $794 million in restitution to investors.

One of the division’s major initiatives was its Share Class Selection Disclosure Initiative, meant to encourage RIAs to self-report undisclosed conflicts of interest and return money to investors. The SEC has brought more than 15 cases involving share class disclosures in the last five years. It announced the initiative earlier this year, and at the time, had about a dozen ongoing investigations related to 12b-1 fees.

In February, the SEC charged Ameriprise Financial Services for wrongly selling more expensive share classes of mutual funds to retirement plan customers and failing to waive those charges. UBS was charged for a similar violation by the agency last October. And in April, three corporate RIAs of b/ds settled charges for failing to disclose conflicts of interest and violating best execution duties, including PNC Investments, Securities America Advisors and Geneos Wealth Management.  

“Scores of investment advisers participated in the SCSD Initiative, which will result in charges against them,” the enforcement report said. “We expect investors to benefit greatly from money that will be repaid to them by participants in the initiative. Importantly, a goal of this initiative is to ensure that advisers and their affiliates properly disclose their conflicts of interest.”

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