Following the 2016 election, it has been widely assumed that the SEC’s Division of Enforcement would no longer pursue the “broken windows” policy implemented under then-SEC Chair Mary Jo White. Under that approach, the Division of Enforcement intentionally pursued smaller, non-fraud cases in an attempt to improve the overall compliance culture within the securities industry. Pronouncements this fall by the Co-Directors of the Division of Enforcement, Stephanie Avakian and Steven Peikin, on their face confirm that assumption, suggesting an end to “broken windows” as a broad-based strategy focused on street-wide sweeps for strict liability and other non-scienter conduct. However, signs persist that the Enforcement Division will continue to pursue some varieties of non-scienter cases, particularly where there exists, even indirectly, the potential for harm to retail investors.
At the Securities Enforcement Forum on October 26th, Peikin, speaking in a panel discussion, indicated that “broken windows” may be coming to an end, noting that “it may be the case that we have to be selective and bring a few cases to send a broader message rather than sweep the entire field.” As for what the new priorities will be, he echoed a widely-reported priority for this new Commission, that the Division will prioritize rooting out intentional wrongdoing. This in and of itself is hardly surprising.
Yet in her keynote speech at the same conference, Avakian indicated that the focus may not be so narrow. To be sure, Avakian outlined an enforcement strategy that heavily emphasized protections for retail investors, acknowledging that such a focus has traditionally been most associated with Ponzi schemes and microcap frauds. Moreover, she repeatedly emphasized that the Division would focus on “incidents of widespread misconduct.” However, Avakian also made clear that she viewed the remit of investor protection more broadly than shutting down traditional frauds, and she laid out a series of potential areas for enforcement actions—areas that have often been associated with precisely the type of negligence-based charges pursued by the White-era Enforcement Division. Thus, Avakian noted that “when we talk about ‘retail’ . . . we are also thinking about conduct that occurs at the intersection of investment professionals and retail investors.” Indeed, the specific priorities mentioned appear to include a focus on the quality and appropriateness of investment advice. Avakian pointed to investment professionals steering customers toward higher-fee investments instead of lower-fee options, failures to fully disclose all trading-related fees, as well as the appropriateness of selling certain types of complex products to retail investors as areas of concern.
Thus, while street-wide “sweeps” focusing on smaller, negligence- and strict liability-based violations may be a thing of the past, what seems less clear is whether the Enforcement Division is going to slow down or stop bringing negligence-based actions against specific investment professionals. Two settlements suggests that the immediate answer may be “no.” On September 21, 2017, the SEC settled with Platinum Equity Advisors, LLC, a registered investment adviser managing private equity funds, for inadequately disclosing the allocation of $1.8 million in broken deal fees. On October 27, 2017, UBS Financial Services, Inc., a registered broker-dealer and investment adviser, settled claims that it had improperly recommended more expensive classes of mutual fund shares to approximately 15,000 clients “when less expensive share classes were available,” resulting in $18 million in unnecessary fees and expenses. In both cases, the Commission charged respondents with acting negligently as opposed to with fraudulent intent. Moreover, the Platinum Equity Advisors matter focused on a private equity firm’s disclosures to its presumably sophisticated limited partner investors. This demonstrates that the Clayton-led Commission is still willing to approve non-fraud enforcement actions without direct harm to retail investors. While these cases may, in the end, constitute the last gasps of the prior Commission’s enforcement priorities, such a conclusion seems premature given that both actions reflect conduct—investment professionals failing to disclose the full picture about fees as well as the availability of alternate, less expensive investment options—that Avakian highlighted in her speech.
Stepping back, the Division may actually focus on fewer enforcement actions and prioritize cases alleging intentional misconduct. Indeed, should the expected head count reduction come to fruition, this outcome may be a practical necessity. However, at least for now, the Enforcement Division seems willing to continue to take on negligence-based cases, particularly where retail investors are deemed at risk.