Does the CFP Board’s Enhanced Enforcement Efforts Mean More Discipline?

Does the CFP Board’s recent creation of the position and appointment of a new director of investigations create yet another level of securities enforcement scrutiny for financial planners?  On the surface, it sure looks like it.

A recent Advisor One article entitled “CFP Board’s Keller Says New ‘Top Cop” Will Beef Up Investigations” quotes CFP Board CEO Kevin Keller stating that the reason for the position was not because of an increase in the number of compliance cases or violations of CFP rules but to “to build our capacity to achieve our mission of benefiting the public.”

Translation. What this means is that given its membership growth expect number of enforcement cases to rise.  More recently, the Board’s enforcement efforts have focused on bringing cases against members who have had bankruptcies or who have disclosures in FINRA or SEC matters that involve claims of misrepresentation or fraud.  Also, the number of cases the CFP Board opened in 2011 (1,569 cases) increased from the 1,472 cases opened in 2010.  Although most CFP investigations do not result in enforcement actions, expect a continued  increase in the number of investigations with the new appointment.  

 

 

 

DOL Enforcement and ERISA Plan Advisers

A recent article in AdvisorOne entitled “DOL Cracks Down on Retirement Plan Advisors For Fiduciary Negligence,” quoting Andy Larson of the Retirement Learning Center, focuses on the large number of civil, and some criminal, enforcement actions bought by the Employee Benefit Security Administration (EBSA) against advisers for fiduciary negligence.

According to Larson, in addition to recognizing that the DOL has jurisdiction over them, advisers must ensure they have a “strong documentable fiduciary process.” From the plan sponsor’s side, Larson recommends that “the plan sponsor should be asking advisors what they can do to help my plan comply with the DOL rules”  to minimize the DOL liability for their employers.

The article cites a white paper published by the Columbia Management Learning Center warning plan sponsors of their fiduciary duty to comply with the DOL regulations and that the probability that the DOL could audit their plan is increasing.  To emphasize this point the paper notes, that during 2010, the DOL audited more than 3,100 plans finding that 73% of them were required to restore losses to the plan or take another type of corrective action to correct plan deficiencies.

With New SEC Unit and Data Mining, Advisers Face Closer Scrutiny in 2012

With a renewed focus on analytics and more readily available data, expect the SEC’s scrutiny of investment advisers, including advisers to mutual funds, hedge funds, and private equity funds, to get  tougher.

In December, in a speech before the Consumer Federation of America’s Financial Services Conference, the SEC’s Director of Enforcement, Robert Khuzami, once again emphasized many of the organizational and structural changes that have already occurred and that will continue to impact the way investment advisers and mutual funds will be watched and regulated going forward.  Moreover, advisers may begin to feel the heat from these changes in a deeper, and for their investment adviser reps, and more personal way.  With changes to its organizational structure, the SEC created the Asset Management Specialized Unit to evaluate data and risk-based analytics.  One of the investigative practices the unit is implementing involves adopting a kind of early-warning framework to detect what Khuzami says is the kind of “retail fraud” that may foreshadow more serious problems within assets management and mutual funds.    

Utilizing a retail approach, what might the SEC’s enforcement division be looking at for potential signs of fraud?  Khuzami gives a few examples.  One involves the SEC scouring an adviser’s Form ADV to determine if they’ve lied about their educational achievements, their business affiliations, and their assets under management.  “For us, it’s advisers who lie about graduating Phi Beta Kappa, conceal their association in a past failed business venture, or inflate their assets under management who might well be the same persons who outright steal your money when the markets turn against them,” says Khuzami.

A second approach, for mutual funds, might involve the SEC reviewing databases in an effort to identify poor performance, when at the same time, the fund has relatively high fee arrangements, for them and their sub-advisers.  This, Khuzami says, may suggest excessive fee arrangements that can eat away at the mutual fund investment returns.  See More……

 

After Citigroup, Will Settling SEC Enforcement Actions become Harder? SEC Press Release

The Securities and Exchange Commission’s Director of Enforcement, Robert Khuzami, today, issued a press release regarding a New York federal district court’s recent rejection of an SEC’s settlement with Citigroup.  Khuzami announced that the SEC is appealing the lower court’s ruling to the U.S. Court of Appeals for the Second Circuit.

In the Citigroup case, U.S. District Judge Jed Rakoff refused to accept a settlement between the SEC and Citigroup in a case involving the bank’s sale of mortgage-backed securities that cost investors almost $700 million in losses while the bank garnered profit of about $160 million.  Rakoff ruled that  the underlying allegations were ‘unsupported by any proven or acknowledged facts,’ and rejected a $285 million settlement between the SEC and Citigroup.  The SEC claimed that the settlement reasonably reflected the relief it would likely have gotten had it won at trial.

Khuzami’s press release argues that Rakoff has created a “new standard” that is “at odds with decades of court decisions that have upheld similar settlements by federal and state agencies across the country. ”  He is correct that courts have routinely approved SEC settlements in which a defendant does not admit or expressly deny liability, thus providing incentives for both the SEC and defendants.  However, Citigroup’s failure to acknowledge wrongdoing is actually what bothered Judge Rakoff.  Rakoff concluded that the settlement “is neither fair, nor reasonable, nor adequate, nor in the public interest.”

In a period when the public has become ever more skeptical about the fairness of financial bailouts and deals between governmental agencies and banks, Judge Rakoff’s decision appears to channel that same skepticism.  Might this be the beginning of the end of the SEC’s practice and policy of settling cases with defendants without requiring the defendant to admit to liability of some kind, even if modest?  For at least one judge, that appears to be the case.  And, if it is the beginning of a trend, this could mean more trials and fewer settlements.  If so, the danger of changing the SEC’s settlement approach to these cases could prove time consuming and expensive not just for the SEC and defendants but also for federal judges like Judge Rakoff.