77% increase in SEC Enforcement Actions against RIA’s (Fiscal year 2019 vs. 2018 data)
In November 2019, the SEC released its Division of Enforcement 2019 annual report which highlights 862 enforcement actions pursued during this recent fiscal year. This report confirms continued focus on “retail investor protection” and no signs of change in the near future. In the SEC’s 2019 fiscal year, they filed 526 standalone enforcement actions, 210 follow-on administrative proceedings, and 126 enforcement actions related to delinquent filings.
Point of focus: Increased Enforcement Actions Against RIA’s
Standalone enforcement actions pursued against Registered Investment Advisors / Investment Companies is nearly a 77% annual increase compared to the 108 standalone enforcement actions filed in the 2018 fiscal year.
Source: 2019 SEC Division of Enforcement 2019 Annual Report
I see this same trend among other regulatory agencies as well.
Focus on the Retail Investor: Share Class Selection Disclosure Initiative
The major contributor to the increase of enforcement actions against RIA’s is the 95 investment advisory firms that self-reported misconduct as a result of the share class selection disclosure initiative, click here to view the details of this initiative on the SEC’s website.
According the the report:
“Under the Initiative, the Division agreed to recommend standardized settlement
terms for investment advisory firms that self-reported failures to disclose conflicts of interest
associated with the selection of fee-paying mutual fund share classes when a lower- or no-cost
share class of the same mutual fund was available. The majority of these actions were brought in
March 2019, just over a year after we announced the Initiative, with the remainder brought in
September 2019.”
The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) staff has continually listed the “mutual fund share class disclosure initiative” as a top priority from 2017 – 2019. I believe that mutual fund share class selection will remain in the spotlight for awhile. An RIA firm in a position to choose between different share classes needs to fully evaluate and fulfill the fiduciary standard requirements; as well as implement major focus on compliance in this realm.
Focus on Cyber-security
The report has numerous cyber-security related investigations in 2019. Basically, entities did not have proper cyber-security infrastructure in place which resulted in enforcement actions or mainly warnings by the SEC. There also was a specific investigation involving email compromises. According to the report, they didn’t recommend enforcement action, however the Commission strongly noted that cyber-related issues and manipulated electronic communications exist and need to be addressed when developing and maintaining their compliance policy in this area.
In their 2019 top examination priority list, the OCIE noted they will emphasize cyber-security practices within RIA’s with multiple branch offices, including those that have recently merged with other investment advisers, and continue to focus on governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.
As always, the Chief Compliance Officer of an RIA needs to continually ensure that compliance programs are being designed, implemented and fully documented to help prevent activity which could lead to potential enforcement action.
