SEC Advisor Oversight Zeroes In On Arcane Practice Areas

WASHINGTON – The SEC’s enforcement division has tightened oversight of advisors by focusing on some specific, often-times arcane practice areas, the head of the division said on Wednesday.

In remarks at an event organized by the D.C. Bar, SEC Director of Enforcement Andrew Ceresney noted that investment advisors remain a subject of particular concern at the commission. To get tougher on them, Ceresney said his division was looking into new corners of advisory practices, and working to better understand some of the more arcane areas of advisory work.

"We have been focused on some traditional areas that we have always focused on, like misrepresentation, like valuation issues, like conflict issues, like principal transactions," Ceresney said. "But I think the real change probably in the last few years, as a result of the asset management unit and now the broker-dealer task force, is the creation of some specialized initiatives in the areas where maybe we haven't been focused as much in the past."

The division’s focus includes advisor compliance programs, fees and expenses for private equity advisors, and more specifically potential violations of section 15(c) of the Investment Company Act. The Act provides provisions of the 1940 law that mandate a registered fund's board conduct annual evaluations of advisor fee valuations.

The 15(c) provision requires advisors provide truthful and thoroughgoing information to the board as it considers an advisor's compensatory arrangement. The commission in August charged a North Carolina advisor for allegedly misleading the board of an investment fund about his firm's capacity to conduct algorithmic currency trading.

The case demonstrates where the SEC is going with its increased scrutiny. "I think what you're seeing now is us really down in the areas where maybe we haven't been as much in the past in the asset-management area, and obviously that's a good thing," Ceresney said.

Ceresney's comments come as the SEC has been making its case for increased funding to expand oversight of advisors. Commissioners of both political parties have said the agency has been falling short in its routine examinations of advisors, with just 9% of RIAs having been visited by an examiner last year.

In addition, Ceresney expressed concern about the investment advice for Baby Boomers,  the extent to which tens of millions of workers who are heading into retirement are becoming the target of scammers. "Obviously, older people are preyed upon probably more than others," he said.

For example, SEC enforcement officials have been on the lookout for unscrupulous advisors pitching dubious microcap stocks to older investors. Many of the concerns over bilking older investors, and the "methodologies of fraud," as Ceresney put it, have a long history within the commission.

"You've got all kinds of schemes that have been around for a long time, and I don't know that they are evolving because the retirement population is increasing. Having said that, obviously we're very focused on investment advisory fraud and trying to make sure that investment advisors are fulfilling their fiduciary duties," Ceresney said. "I think our focus is on the areas that would potentially be implicated by folks who are retiring."