October 1, 2001

Shop Talk

Enforcement Actions Against Advisers Rise

"The last several years have spawned a significant increase in SEC enforcement activity against investment advisers," Richard A. Levan, of Levan Friedman, LLP told the recent National Symposium on Investment Adviser Regulation. And Levan's got the numbers to make his case.

"Whether the increased focus on advisers is a function of the increased frequency of inspections or simply an outgrowth of an aggressive enforcement policy at the Commission is subject to debate," the former SEC enforcement attorney and assistant US Attorney states in the introduction to his 112-page compendium of SEC actions taken against advisers from 1999 through August 2001. One' thing, however, is clear: "SEC enforcement actions and the resulting penalties are both on the rise."

The trend has been developing for several years. "Between 1994 and 1998, the number of cases filed by the SEC against advisers increased 45 percent, while the number of individuals named in those actions rose 85 percent," notes Levan. "Civil injunctive actions as a whole increased 25 percent during the same period, before dropping off somewhat in 1999."

From 1999 through August 200 1 , Levan breaks the violations into 29 categories, ranging from the scandalous (54 advisers were cited for "misappropriation") to the complex -- eight advisers faced enforcement actions for the use of "hypothetical" data. Among the violations:

Thirty-five faced penalties for their advertising;
Twenty-two advisers ran afoul of books and records rules;
Fourteen were cited for "failure to supervise";
73 had faulty disclosures;
21 had fee/commission violations; and
Eight advisers were cited for soft dollar violations, 27 for trading practices, 10 for suitability, and one for use of testimonials.

The data cited by Levan" is provided purely as a restatement of the Commission's perspective of acts that deserve sanctions and is not intended to reflect any statement as to the actual occurrence or non-occurrence of the incidents included. " Many of the cases were settled, he noted, through consent judgments, in which the adviser neither admitted or denied the Commission's allegations.

Speaking at the same conference where Levan presented his findings, SEC Investment Management Division director Paul Roye noted that "while the great majority of investment advisers are ethical, responsible and maintain a compliance culture, unfortunately there are a few who engage in practices that merit enforcement action by the Commission."