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.
Common Examples of SEC Violations for Investment Advisers
Due to their unique role in the financial markets, investment advisers face a unique set of risks when it comes to complying with the SEC’s regulations and other pertinent federal laws. Some of the most common examples of SEC violations for investment advisers include:
- Insufficient Investment Advisory Agreement Disclosure – While investment advisers can use form investment advisory agreements, these agreements must adequately disclose all pertinent information. If they do not, this can serve as grounds for an SEC enforcement action.
- Failure to Disclose Fees and Charges – Investment advisers must clearly disclose all fees and charges to their clients. Failure to disclose hidden fees and charges can lead to fraud allegations.
- Failure to Disclose Conflicts of Interest – Investment advisers also have an obligation to fully disclose all relevant conflicts of interest. As the SEC explains, “investment advisers must identify potential conflicts of interest and either eliminate or expose them, so that clients can understand their advisers’ motivations and conflicts.”
- Unauthorized Custody of Clients’ Funds or Securities – Generally, investment advisers cannot take custody of clients’ funds or securities without adequate safeguards. SEC rules regarding custody are designed to protect investors from fraud, and the SEC takes violations of these rules very seriously.
- Failure to Provide Clients with Investment Advice and Other Information – Investment advisers have a duty to provide investment advice based on their clients’ unique needs, risk tolerance, and other factors. Failing to do so can also lead to fraud allegations, as can failing to provide clients with other information to which they are entitled by law.
- Failure to File Form ADV – Investment advisers must file Form ADV with the SEC and update it annually. Failing to file Form ADV (or failing to file in a timely manner) can lead to administrative enforcement action by the SEC.
- Investment Fraud and Other Investment Schemes – Investment advisers can face SEC scrutiny for investment fraud and other investment schemes as well. This includes investment fraud and other investment schemes perpetuated by others—and investment advisers are “in on it” or turn a blind eye to the fraud or other scheme.
These are just examples. When facing SEC scrutiny, investment advisers must defend against all pertinent allegations by all means available. This starts with identifying all of the specific allegations at issue so that defense counsel can formulate an effective defense strategy focused on protecting the investment adviser to the fullest extent possible.
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
- Suspension or debarment
- 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.
FAQs: SEC Violations for Investment Advisers
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.
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.
