Investment Adviser SEC Violations

What Investment Advisers Need to Know About SEC Violations and Penalties

Investment advisers play a critical role in the financial markets. As such, they are subject to extensive oversight by the U.S. Securities and Exchange Commission (SEC). The SEC heavily regulates investment advisers’ operations, and it maintains a broad mandate to investigate alleged investment adviser misconduct that puts investors at risk.

Investment advisers that violate SEC regulations can face a variety of consequences. These consequences can range from temporary suspensions to federal indictment. As a result, when facing allegations of SEC violations, investment advisers must prioritize defending themselves by all means available.

The SEC’s Mission to Regulate Investment Advisers

The SEC’s mission is to protect investors, maintain fair and orderly markets, and facilitate capital formation. As part of this mission, the SEC is charged with regulating investment advisers. The SEC has adopted numerous rules and regulations that are specifically intended to govern investment advisers’ activities. It also enforces the statutory requirements established in the Investment Advisers Act of 1940, as well as other pertinent federal laws.

For investment advisers, the costs of failing to comply with the SEC’s regulations and other pertinent laws can be substantial. Along with the risks of fines, disgorgement, and other financial penalties, investment advisers can also face criminal prosecution under the Anti-Money Laundering Act (AMLA) and other federal laws. To avoid unnecessary consequences, it is imperative that investment advisers facing SEC investigations work with highly experienced defense counsel.

Potential Consequences of Investment Adviser SEC Violations

When facing SEC scrutiny, investment advisers are at risk for a variety of potential consequences. The specific consequences that are on the table will depend on several factors, including whether the SEC’s Enforcement Division determines that it has grounds to pursue charges. For example, when facing scrutiny from the SEC’s Enforcement Division, investment advisers can potentially face:

• Fines and other financial penalties
• Disgorgement of ill-gotten gains
• Loss of investment adviser registration
• Criminal prosecution under the AMLA or other pertinent federal laws

In many cases, investment advisers can face all of these consequences. Avoiding unnecessary consequences in SEC enforcement actions requires an informed, strategic, and proactive approach. Investment advisers must promptly engage highly experienced defense counsel to deal with the SEC on their behalf, and their defense counsel must be prepared to defend against civil or criminal charges in federal district court if necessary.

How can investment advisers avoid SEC scrutiny?

Investment advisers can avoid SEC scrutiny by establishing and maintaining comprehensive compliance programs. All investment advisers should work with experienced SEC compliance counsel to develop custom-tailored compliance policies and procedures; and, once adopted, these policies and procedures should be updated and implemented effectively. Investment advisers should also engage counsel to assist with ongoing compliance management, monitoring, and enforcement to ensure their continued compliance.

What are the risks of not getting registered as an investment adviser?

Operating as an unregistered investment adviser can lead to scrutiny from the SEC’s Enforcement Division. While the risks associated with failing to register vary, operating as an unregistered investment adviser can potentially lead to criminal prosecution under the AMLA. As a result, all investment advisers must ensure that they are in compliance with the Investment Advisers Act’s registration requirements—and they must register before providing any advice to clients.

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How can investment advisers defend against allegations of SEC violations?

Defending against allegations of SEC violations starts with executing a comprehensive and strategic response to the SEC’s investigation. Investment advisers under investigation should engage experienced defense counsel promptly, and their defense counsel should focus on not only defending against the SEC’s allegations, but also gathering the documentation needed to substantiate the investment adviser’s defense. An informed and proactive approach to dealing with the SEC’s Enforcement Division can be key to mitigating (or avoiding) prosecution.

How long do investment advisers have to respond to SEC investigations?

The SEC’s Enforcement Division can pursue investigations of investment advisers on an emergency basis when warranted. Therefore, investment advisers won’t always have time to prepare a comprehensive and strategic defense. Once facing scrutiny from the SEC’s Enforcement Division, investment advisers should promptly engage defense counsel to deal with the SEC on their behalf.

Will the SEC drop its investigation if I cooperate?

The decision to cooperate during an SEC investigation is a strategic one. While cooperating may help investment advisers avoid unnecessary consequences in some cases, in others, it may have the opposite effect. Before engaging with the SEC’s Enforcement Division, investment advisers should consult with their defense counsel to determine their best path forward.

Speak with a Senior SEC Defense Attorney at Spodek Law Group

Are you an investment adviser facing scrutiny from the SEC’s Enforcement Division? If so, we encourage you to contact us promptly to discuss your situation in confidence. To arrange a complimentary initial consultation with a senior SEC defense attorney at Spodek Law Group, please call 212-300-5196 or tell us how we can reach you online today.

Contact Spodek Law Group today at 212-300-5196 to schedule your confidential consultation regarding SEC investigations and investment adviser defense.

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