SEC Enforcement in Financial Services: Industry Trends and Priorities

SEC Enforcement in Financial Services: An Overview for Industry Professionals

The U.S. Securities and Exchange Commission, commonly referred to as the SEC, plays a crucial role in regulating and overseeing financial markets and services. As part of its mission, the SEC actively investigates and brings enforcement actions against individuals and companies suspected of violating securities laws.

In recent years, SEC enforcement efforts have heavily targeted misconduct within the financial services industry. This article aims to provide a helpful overview of key enforcement trends, priorities, and actions relating to financial services firms and professionals.

Increased Scrutiny of Investment Advisers

A major enforcement focus for the SEC has been identifying and stopping wrongdoing among investment advisers. Advisers who provide poor advice or defraud clients face SEC charges and penalties.

Some common issues drawing SEC attention include:

• Advisers prioritizing their own interests over clients’ interests through excessive trading to generate commissions (“churning”) or cherry-picking profitable investments for personal accounts over client accounts.
• Misleading advertising and marketing materials that exaggerate adviser qualifications or historical performance.
• Charging excessive, inadequately disclosed fees that don’t align with services provided.
• Insufficient due diligence on investment recommendations and inappropriate advice given a client’s risk tolerance.
• Misuse of client assets or improper use of client funds.
• Inadequate oversight and compliance procedures.

The SEC often publicizes enforcement actions with penalties and disgorgement orders in the millions of dollars for advisers engaging in this type of misconduct. For instance, in 2021 the SEC charged several investment advisory firms with various violations including overcharging fees, deceptive marketing, and compliance failures. The firms paid over $30 million combined to settle the charges [1].

Cracking Down on Broker-Dealer Abuses

SEC enforcement against broker-dealers is also a top priority. The SEC regularly brings cases against brokerage firms and brokers for unfair practices harming retail investors.

Some common broker-dealer enforcement issues include:

• Recommending unsuitable investments that are excessively risky for a client’s profile and goals.
• Excessive, undisclosed markups and fees eroding client returns.
• Churning client accounts solely to generate commissions.
• Unauthorized trading or other improper transactions.
• Failing to disclose conflicts of interest.
• Poor oversight of representatives.

For example, in 2020 the SEC charged Wells Fargo and one of its former brokers over improper sales practices leading to over $4 million in excessive commissions and fees for clients. Wells Fargo paid over $35 million to settle the charges [2].

Focus on Conflicts of Interest

Conflicts of interest in financial advice and services are a major SEC enforcement focus. Conflicts arise when firms or individuals face competing incentives that may steer clients toward offerings generating greater profits or benefits for the firm but not optimally suited for the client.

Common conflicts-related charges involve:

• Advisers investing client assets in proprietary products generating fees for the adviser’s firm over better options.
• Brokers promoting certain products due to third-party compensation like commissions and revenue sharing.
• Trading desks at banks pushing specific deals and offerings because they are hard to sell or have high inventory.

In 2018, the SEC imposed a $125 million penalty on Credit Suisse for mishandling conflicts related to its retail execution offerings known as pre-released ADRs [3]. This demonstrates the SEC’s willingness to pursue substantial penalties for failures to address conflicts.

Cryptocurrency and Digital Asset Enforcement

With the growing popularity of cryptocurrencies and digital assets, the SEC is ramping up enforcement to address violations in this emerging area. The SEC often treats cryptocurrencies as securities, bringing them under SEC jurisdiction.

Some common cryptocurrency enforcement issues include:

• Unregistered securities offerings related to cryptocurrencies and digital tokens.
• Unlicensed brokers and exchanges dealing in cryptocurrencies.
• Pump-and-dump schemes artificially inflating cryptocurrency prices.
• Misleading claims and omissions about expected cryptocurrency investment returns.
• Ponzi schemes falsely promising high cryptocurrency returns.
• Theft and misuse of cryptocurrency assets.

In 2021, the SEC announced multiple six-figure penalties against cryptocurrency exchanges and platforms accused of offering unregistered securities or operating illegally [4]. Expect aggressive SEC cryptocurrency enforcement to continue.

Individual Accountability

Along with corporate charges, the SEC often pursues enforcement actions against individuals. Executives, managers, brokers, advisers, and other professionals may face penalties for misconduct.

Common SEC charges against individuals include:

• • Making material misstatements or omissions in securities filings and financial reports.
  • Accounting fraud and improper revenue recognition practices.
  • Manipulating market prices through practices like spoofing or layering.
  • Insider trading based on material nonpublic information.
  • Bribing foreign officials to obtain business (FCPA violations).
  • Obstructing SEC investigations.

In 2020, the SEC charged several former Wells Fargo executives individually for their roles in the cross-selling scandals. This demonstrates the SEC’s commitment to holding individuals accountable for misconduct alongside the corporations themselves[1].

The SEC accused former CEO John Stumpf and former head of community banking Carrie Tolstedt of misleading investors about Wells Fargo’s problematic sales practices. Stumpf agreed to pay a $2.5 million penalty to settle the charges against him[2].

The SEC filed a litigated fraud case against Tolstedt. The complaint alleged Tolstedt publicly endorsed Wells Fargo’s cross-sell metric as a measure of success despite knowing it was inflated by unwanted accounts opened without customer consent[3].

In 2022, Tolstedt agreed to settle the SEC charges, paying a $500,000 penalty without admitting or denying the allegations[4]. She also pled guilty to a criminal charge of obstruction related to the fake accounts scandal[5].

The cross-selling scandal involved Wells Fargo employees opening millions of unauthorized accounts in order to meet aggressive sales goals[6]. This enabled the bank to promote inflated cross-selling numbers to investors.

Wells Fargo ultimately paid billions in fines and settlements with regulators and prosecutors over the fake accounts. The scandal also led to the resignation of CEO Stumpf.

Other individuals charged by the SEC for their involvement included[2]:

• • • Former CEO John Stumpf – Misleading investors about the cross-sell metric and sales practices
    • Former head of community banking Carrie Tolstedt – Fraud relating to inflating cross-sell numbers
    • Former chief financial officer Howard Atkins – Misleading statements in filings about cross-selling metrics
    • Former head of investor relations James Strother – Misleading statements at investor conferences

Through these cases, the SEC makes clear that executives and other individuals can face legal consequences for their role in corporate misconduct.

Compliance and Risk Management Deficiencies

When the SEC takes enforcement action against financial institutions, it often cites failures in compliance, controls, and risk management…