SEC To Scrutinize Advisor Self-Dealing

ARLINGTON, VA. — Enforcement authorities at the SEC are planning to take a hard look at potential instances of self-dealing and other conflicts of interest in the investment advisor space.

In particular, the commission is looking for cases when advisors trade on behalf of clients without written disclosure and consent, or fail to process a trade on the most favorable terms for their clients, Julie Riewe, the co-chief of the Asset Management Unit at the commission's enforcement division, said Thursday at the Investment Adviser Association's compliance summit.

"Thinking about a theme, I think we're looking at self-dealing issues in connection with the registered investment advisor space, so best execution type concerns and principal trading," Riewe said.

For the Asset Management Unit, worries about potential conflicts in the advisor space rank along with a number of other priorities, including scrutiny of the marketing and trading of micro-cap securities and the work of the newly created broker-dealer task force.

Riewe explained that Mary Jo White, who has chaired the SEC since last April, has made a concerted effort to raise the profile of the commission's enforcement division. White, a former federal prosecutor, has talked about the "broken windows" approach to law enforcement, a term popularized by former New York Mayor Rudolph Giuliani. The idea is that no infraction is too minor — not even throwing a rock through a window — to command the attention of the cop on the beat.

SENDING A MESSAGE

From White on down, SEC officials have been talking tough about a reinvigorated enforcement division at the commission. That was the warning Riewe brought to the IAA's conference, where she also acknowledged that there is an important messaging component to the commission's work.

She cited the charges that the SEC brought in October against three investment advisory firms for violating the custody rule, which sets parameters for financial professionals with custody of their clients' assets. The three firms, which each agreed to settle the charges, failed to place their clients' holdings with a qualified custodian or bring in an independent accountant to conduct the required "surprise exams" to verify the assets under management.

By announcing those three cases, which were unrelated apart from the nature of the violations, together, the commission was aiming to put the industry on notice about its new enforcement approach.

"Because the custody rule is part of how we think about Mary Jo White's broken windows initiative," Riewe said, "we brought three cases involving custody rule violations and packaged those cases and put out a press release to try to get the message out to folks that the custody rule's really important."

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