Be prepared for a tougher SEC
The Securities and Exchange Commission has blundered badly in the past decade, missing several major scandals, including the Enron fraud and the Madoff Ponzi scheme. Most recently, its proposed settlement with Citigroup Inc. was rejected by a federal judge.
The Securities and Exchange Commission has blundered badly in the past decade, missing several major scandals, including the Enron fraud and the Madoff Ponzi scheme. Most recently, its proposed settlement with Citigroup Inc. was rejected by a federal judge.
No surprise, then, that the commission is trying to re-establish its credibility as the regulator of most aspects of the securities business. One way it is doing that is by picking on what appear to be soft targets, such as investment advisers.
The advantage to the SEC of this target group is that many of the enforcement actions involve inadequate paperwork that can be quickly spotted, so it can rack up a significant number of “successes” in a relatively short period of time and prove to Congress that it is working hard to protect the average investor. The evidence of this approach, as reported in last week’s InvestmentNews, is that the agency reported that it had filed a record 140 actions against investment advisers in fiscal 2011, a 30% increase over the previous year.
The SEC’s actions also may help it uncover small cases of fraud before they grow to embarrassing proportions. If SEC staff members simply had asked to see the appropriate documents related to the purported trades made by Bernard Madoff’s wealth management operation, they would have discovered his fraud years before the Ponzi scheme collapsed under the weight of the financial crisis — and before the losses totaled an astonishing $65 billion.
AVOIDING TROUBLE
The SEC’s increased scrutiny of investment advisory firms should prompt such firms to step up their compliance efforts to avoid trouble. It also might head off Congressional moves to establish a self-regulatory organization for advisers. The new aggressiveness might suggest to Congress that the SEC’s asset management unit can do the job and that an SRO is therefore unnecessary.
Whatever motives have driven the SEC’s new aggressiveness, the effort should be good news for conscientious investment advisers and all investors.
That’s because advisers who pay attention to detail and do the right thing have nothing to fear from the SEC’s efforts. They follow the rules. They have well-prepared compliance programs and don’t cut corners, and they act solely in the interests of their clients when they make investment decisions or recommendations.
Greater scrutiny from the SEC’s asset management unit should pressure firms that are lax in their compliance efforts or record keeping.
Best of all, it should drive out of the business the marginal players, the short-cut takers and those who walk close to — or step over — the ethical lines. This will protect the reputation of the investment advisory industry and get rid of the fly-by-night competition.
BENEFITS OF SCRUTINY
For investors, the SEC’s efforts should lead to a safer investment environment where they will receive unbiased advice and their assets will be better protected from mistakes, mismanagement or outright fraud.
Unfortunately, there always will be those who are tempted to take advantage of unsophisticated investors. But the SEC’s stepped-up surveillance should make it much harder for another would-be Bernie Madoff to turn an investment advisory firm into a giant shell game.
The SEC will have to work hard to keep up the intensity of its scrutiny as the years pass, the memory of Bernard Madoff begins to fade and Congress becomes distracted by other issues. It will have to be vigilant to prevent the SEC staff from coming to identify more closely with those it regulates and investigates, and with whom they meet regularly, than with investors whom they never meet, but to whom they owe their allegiance.
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