On November 14, 2023, the SEC announced that it had filed 784 total enforcement actions during fiscal year 2023, a three percent increase over fiscal year 2022. Enforcement actions are intended to protect investors and enhance public trust in the securities markets.
The SEC’s press release summarized the scope of the Commission’s enforcement actions:
The stand-alone enforcement actions spanned the securities industry, from billion-dollar frauds to emerging investor threats involving crypto asset securities and cybersecurity, and charged violations by diverse market participants, from public companies and investment firms to gatekeepers and social media influencers. The SEC also brought numerous enforcement actions addressing conduct that undermines oversight of the securities industry, including actions to protect whistleblowers and actions to enforce recordkeeping requirements and other investor protection requirements applicable to industry participants, including broker-dealers and investment firms.
According to SEC Chair, Gary Gensler, the Division of Enforcement works as a cop on the beat. The Commission’s enforcement approach is to follow the facts and the law wherever they lead, so it can hold wrongdoers accountable.
Specific actions impacting Registered Investment Advisers (RIAs)
Among the enforcement actions specifically cited by the SEC, the Commission reported that it sanctioned 25 RIAs, broker-dealers, and/or credit rating agencies that violated the federal securities laws’ recordkeeping requirements. These firms agreed to pay combined civil penalties of more than $400 million to settle those charges.
The SEC also took note of its efforts to enforce the Marketing Rule. As part of those efforts, the SEC brought enforcement actions against nine RIAs. The SEC alleged that each of the charged firms advertised hypothetical performance on their websites to mass audiences without having the necessary policies and procedures. Each of the firms settled the charges against them and paid combined civil penalties of $850,000.
In addition, the SEC’s enforcement statistics report highlighted its action against a FinTech investment adviser. The RIA agreed to pay more than $1 million in sanctions, including a civil penalty, disgorgement, and prejudgment interest. According to the SEC’s order, the RIA made misleading statements on its website regarding hypothetical performance. The RIA advertised annualized performance results for its crypto strategy and claimed that the returns were as high as 2,700 percent. The SEC alleged that the RIA’s advertisements were misleading because they did not include material information regarding how the annualized performance results were calculated.
In its report, the SEC noted that the Division of Enforcement is working diligently to ensure that market participants reasonably disclose material cybersecurity risks and incidents. SEC registrants, including RIAs and broker-dealers, possess an enormous amount of electronic data about entities and individuals, such as:
- Personal identifying information;
- Sensitive account information; and
- Other information that might be misused by bad actors.
The SEC’s report reminded RIAs of the charges it brought against an investment adviser arising from undisclosed conflicts of interest. The adviser failed to disclose a cash sweep program operated by its affiliated custodian and its receipt of millions of dollars in revenue-sharing payments from third-party custodians. The RIA agreed to pay a civil penalty of $9.5 million, as well as disgorgement and prejudgment interest of more than $8.5 million to settle the charges.
Another notable enforcement action was brought against an RIA for misleading the trustees of a fund they managed. The RIA was able to obtain $20 million in rescue financing to avoid possible bankruptcy. In addition to other remedial measures, the RIA’s CEO agreed to pay a $400,000 civil penalty and was barred from association with an investment adviser.
Takeaways
The SEC’s enforcement efforts depend in part on whistleblowers. During fiscal year 2023, the SEC took forceful action to protect whistleblowers’ rights and to ensure their ability to report potential securities laws violations to the Commission. The SEC settled charges against an RIA for impeding whistleblowing by requiring employees to sign agreements that prohibited them from disclosing confidential corporate information to third parties. The agreements made no exception for potential SEC whistleblowers. Furthermore, in order to receive deferred compensation, departing employees were required to sign releases affirming that they had not filed any complaints with any government agency. The RIA was ordered to pay a $10 million civil penalty to settle the enforcement action.
The SEC also brought enforcement actions against firms for using employment and separation agreements that violated the whistleblower protection rule. Those agreements required certain employees to waive potential whistleblower awards or obligated former employees to notify the RIA if they received a request for information from the Commission’s staff.
The SEC’s enforcement statistics can be found HERE.
About RIA Compliance Group: RIA Compliance Group is an investment adviser compliance consulting firm based in Delray Beach, Florida. The firm’s mission is to provide affordable, timely, practical, and cost-effective compliance advice. We help investment advisers to comply with the myriad of state and SEC regulations and compliance obligations facing their firms. RIA Compliance Group takes pride in giving personal service and real world compliance advice, not theoretical concepts and legalese. The firm interacts on a daily basis with SEC and state securities regulators.
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