Advisors in SEC Crosshairs After First Enforcement Action

It’s never too early to read the SEC tea leaves.

The new regime at the Securities and Exchange Commission announced its first enforcement action this month, offering an early look into the agency’s playbook for the years ahead. While the regime of previous Chairman Gary Gensler mostly scrutinized institutional investors, President Trump’s appointees are expected to have a much sharper focus on smaller firms involved with retail investor frauds, and the reps that carry them out. The action, against New York-based One Oak Capital Management, involved some 180 retail brokerage accounts that were allegedly transferred into advised accounts, which came with higher fees. 

“The wealth management industry will see a greater focus than it received from the last administration,” said Igor Rozenblit, a managing partner at the regulatory compliance consultancy Iron Road Partners. 

Something’s Up

The SEC certainly isn’t shying away from enforcement. Churning inside portfolios is expected to be a top priority, as well as buying appropriate mutual fund share classes (not more expensive ones) for clients, according to Rozenblit. Marketing materials targeting retail investors will also be top of mind. A new report from Iron Road highlights just how the new agency’s priorities might shake out:

• Retail Investors: The victims in the One Oak case were retail investors, including elderly individuals. Protecting retail clients seems to be a clear priority, the report found, where Gensler-era enforcement cases were often focused on Wall Street institutions.
• Charging Reps: Not only was the advisory firm charged, but also the representative. The previous regime focused on firms, rather than individuals.
• Clear Fraud: Unlike Gensler cases where no obvious fraud occurred, this case involved “clear deception” that led to direct and measurable financial harm to clients.
• Simplicity: The settlement lacked the complexity often seen in institutional investor cases, Iron Road said.

If the SEC is setting its sights on retail, Rozenblit suggests advisors take a hard look at their communications. “We would advise them to re-focus and invest in their compliance programs, and particularly to make sure that their communications with their own investors is complete, accurate and compliant,” he said.

Hold the Phone. And since we’re on the topic of comms, so much for the dozens of off-channel communication cases that grabbed headlines under Gensler. Those actions involved advisors talking to clients on non-monitored lines, and netted the SEC billions of dollars in fines. Commission Hester Peirce called the campaign a “cash cow” before a congressional committee in September. 

“I doubt we’ll ever see another standalone off-channel communications case again,” Rozenblit said.