Welcome to the first Enforcement Actions Roundup for registered investment advisers (RIAs) and wealth managers. Like our enforcement actions recap for financial institutions (FIs), the Wealth Management Enforcement Action Roundup will cover the latest enforcement actions and offer a deep dive into the order, insights, and key takeaways for RIAs.
Let’s get started.
| Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sept** | Oct | Nov | Dec | |
| AML and OFAC Monitoring | 3 | -- | ||||||||||
| Best Execution | -- | -- | ||||||||||
| Compliance Programs Effectiveness | 8 | -- | ||||||||||
| Conflicts of Interest | 1 | 1 | ||||||||||
| Crypto Assets - Products and Services | -- | -- | ||||||||||
| Cybersecurity | 1 | -- | ||||||||||
| Fees and Expenses | 1 | 1 | ||||||||||
| Fiduciary Standards of Conduct Related to Investment Advice | 2 | 1 | ||||||||||
| Financial Responsibility Rules | -- | -- | ||||||||||
| Form CRS | -- | -- | ||||||||||
| Other | 8 | -- | ||||||||||
| Private Fund Advisers | -- | -- | ||||||||||
| Reg S-ID and Reg S-P | 1 | -- | ||||||||||
| Regulation Best Interest and Suitability | -- | 1 | ||||||||||
| Shortened Settlement | -- | -- | ||||||||||
| Trading-Related Practices and Services | 4 | -- |
*Please note that a single enforcement action may be included under multiple topics.
**The SEC’s fiscal year ends September 30.
The SEC charged a broker-dealer for failing to reasonably supervise its registered representatives involved in the offer and sale of Agency CMO Bonds. The representatives structured bonds using misleading information which, in turn, caused third-party data providers to generate inaccurate information. That misleading information was then sent to customers, resulting in the broker-dealer agreeing to pay more than $40 million in disgorgement, prejudgment interest, and civil penalties.
Having a solid understanding of the products that representatives sell is key to upholding compliance. Be conversant, if not fluent, and ensure that knowledge is represented in tailored policies and procedures. Finally, that familiarity should extend to external interactions; when submitting data to third parties who generate ratings and/or other metrics, have that information go through a secondary or even tertiary review for accuracy.
Date: January 13, 2025
The SEC charged two related broker-dealers with multiple securities rules violations, including: late suspicious activity report (SAR) filings; inadequate policies and procedures for protecting customers from identity theft risk; inadequate response to known cybersecurity vulnerabilities; off-channel communications failures; recordkeeping failures; and inaccurate trading data practices. Those two broker-dealers faced $45 million in combined civil penalties for the violations.
If it’s been a while (or never), consider bringing in an outside expert to thoroughly assess your firm’s compliance program. In addition to providing a roadmap to correct and/or mitigate issues, a compliance assessment may fulfil most, if not all, the Annual Review requirements. If you are new to the Compliance role, this will help you understand what reins have been handed to you. Additionally, AML requirements, Regulation S-P, and Regulation S-ID training cannot be overstated. Violations mean high monetary penalties and result in reputational damage. Operations and trading personnel need regular Regulation SHO training.
Date: January 13, 2025
Twelve firms paid more than $63 million to settle charges for recordkeeping failures. The firms and their personnel failed to maintain and preserve required books and records related to electronic communications.
Do you know anyone who doesn’t text or use messaging apps? Neither do regulators. Off-channel communications are low-hanging fruit for examiners. At a minimum, consider quarterly attestations from Access and Covered Persons that they are not engaging in off-channel communications. Attestations aren’t a cure-all, but they can help mitigate negligence or failure to supervise headaches for CCOs. Consider adding examples of permissible and impermissible communication channels to social media and communications policies. Finally, if/when violations of the communications policy is uncovered, document the discovery and processes to mitigate. Consider engaging outside counsel regarding self-reporting to regulators.
Date: January 14, 2025
The SEC settled charges against three investment adviser representatives for acting as unregistered brokers. The SEC settled charges against the IARs’ firm for requiring clients to execute impermissible liability disclaimers when investing in private funds managed by an affiliated entity, resulting in nearly $540,000 paid in disgorgement, prejudgment interest, and civil penalties.
Ensure representatives are properly licensed to sell—and be compensated for—the products they’re selling. Disclaimers cannot replace required licensing and registration, nor can they absolve advisers of their fiduciary duties. Additionally, ensure OBA monitoring and attestations include all sources of income Access and Control Persons receive (except those categories excluded by law). Supervisory reporting lines must be clear, especially when operating with multiple affiliates and/or entities under common control.
Date: January 14, 2025
The SEC charged an investment adviser with misrepresenting AML procedures and with compliance failures. In documents provided to prospective and existing investors, the investment adviser stated it voluntarily complied with AML due diligence laws, even those not applicable to investment advisers. The investment adviser did not follow its AML program as described and had one of its funds’ assets frozen due to suspected connections to money laundering. A $150,000 civil penalty accompanied these violations.
At a minimum, ensure compliance with AML rules specific to your firm’s industry (e.g., investment advisers, broker-dealers, etc.). However, if your firm chooses to disclose that it follows additional or enhanced AML protocols, ensure that’s really happening—every time. Document any discrepancies and conduct regular AML training that is also documented to present as evidence to examiners if needed.
The SEC charged four individuals with fraud related to trading on Material Non-Public Information (MNPI). The individuals engaged in a multi-year scheme to share and trade on MNPI, which resulted in hundreds of thousands of dollars in profits.
Know which Access and Control Persons have access to MNPI. Without this baseline, it’s nearly impossible to comply with expectations around MNPI. Controls are also important, such as electronic and, if practicable, physical separation protocols. Additionally, systems that detect unusual patterns of trading and/or disproportionate compensation being generated by a small number of representatives’ clients can decrease your firm’s MNPI compliance risks.
The SEC settled charges against two related investment advisers for failing to reasonably address known vulnerabilities in their investment models, failures in the related compliance programs, and for violating the Commission’s whistleblower protection rule. The investment advisers breached their fiduciary duties by not addressing vulnerabilities in their investment models which were identified in 2019. Due to the failures, an employee made unauthorized changes to over a dozen models, which resulted in the investment adviser making decisions on behalf of its clients that it otherwise would not have made. The investment advisers collectively repaid $165 million to impacted funds and accounts and $90 million in civil penalties.
Whistleblower complaints are extremely important. Train employees on how and where to report concerns. Review policies and procedures to ensure they do not violate whistleblower protection rules. Consider engaging outside counsel to review agreements, including separation and/or NDAs, for potential whistleblower rule issues. Above all, if an employee raises concerns—especially in writing—regarding vulnerabilities and/or controls, investigate. Documentation of the investigation is imperative, particularly if it’s determined the concerns are unwarranted.
Date: January 17, 2025
The SEC settled charges for $60 million against three investment advisers for failures to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and rules. The investment advisers’ policies and procedures were not reasonably designed or implemented to evaluate and select cash sweep programs in the best interest of clients or for managing cash in advisory accounts according to the clients’ profiles.
Cash sweep programs have been in the news a lot lately. Although it would be atypical for compliance to have a say in what cash sweep programs are used or how they are evaluated, compliance can raise the topic in risk committee or even investment committee meetings. Verify the meeting minutes reflect Compliance raised the issue. Additionally, forwarding and/or copying designated senior management on communications from Qualified Custodian(s) regarding cash sweep programs can be an effective control to manage risk.
Date: January 17, 2025
The SEC charged a dually registered firm with multiple failures related to its AML program, costing the firm $18 million and requiring improvements to its AML policies and procedures. The firm had a history of failures in its customer identification program and failed to follow its own policies regarding the closure or restriction of high-risk accounts.
Current and ongoing AML training is critical to your firm’s survival. Penalties for AML violations are steep and so is the reputational fallout. If you don’t have the expertise on staff, consider engaging an outside vendor for training. Compliance may benefit from having someone with an advanced designation on staff (e.g., CAMS®). Additionally, best practice dictates that policies and procedures require identifying and regularly reviewing high-risk accounts. Be sure that requirements in policies and procedures are executed, as examiners will hold your firm to its written standards.
Date: January 17, 2025
The SEC charged an investment adviser and his companies with violating the antifraud provisions of federal securities laws. From at least 2014 to 2024, the adviser misappropriated more than $20 million and concealed the fraud by providing fake account statements and tax documents to clients. Through unauthorized transfers from client accounts to his own accounts, the adviser used funds for his own purposes, including paying country club dues and purchasing a portion of a miniature golf course.
This case involved a bad actor, his companies, and no oversight. A system of checks and balances deters prohibited conduct, but it won’t stop someone intent on committing fraud. Consider adding additional controls to your firm’s compliance program. For example: (1) ensure the same person entering money transfers and/or address changes isn’t the same person approving them; (2) ensure any type of statement or performance report prepared by your firm has disclosures pointing to the Qualified Custodian as the official source; (3) subscribe to address change reports or notices offered by the Qualified Custodian. Review changes for unusual or suspicious patterns and follow-up directly with the client. Notify the Qualified Custodian if you are unable to confirm a client’s address change; and (4) be aware of discussions or communications involving outside business activities (OBAs) or private securities transactions and ensure OBAs and/or private securities transactions reports are current.
Date: January 17, 2025
The SEC charged a broker-dealer, its affiliated investment adviser, and their dually registered representatives with fraud, registration violations, recordkeeping violations, and other compliance failures. In addition, the investment adviser’s CCO and General Counsel were charged with compliance failures and various violations of federal securities laws related to fraudulent conduct coverup. The dually registered representatives engaged in the illegal practice of “selling away” and hid the sales by communicating through non-surveilled channels. Once the fraudulent activity was discovered, the CCO obtained settlement agreements from affected clients. The settlement agreements, however, contained allegedly false and misleading statements as well as an illegal broad liability disclaimer.
Clients cannot waive non-waivable causes of action and attempting to make clients waive those causes of action is trouble. If something is illegal, no settlement agreement can make it legal. Consider having settlement agreements reviewed by outside counsel. Outside counsel can confirm an agreement passes legal muster and advise if the events are reportable to regulators. In the referenced case, the CCO aided and abetted the representatives’ misconduct by having clients sign settlement agreements containing illegal liability disclaimers. Finally, know how representatives are getting paid. Understanding the compensation and payout scale provides additional opportunities for spotting red flag conduct (including “selling away”).
The SEC settled charges against a registered investment adviser and one of its former representatives for misconduct related to the conversion of more than 180 commission-based retail client accounts into advisory accounts. The converted accounts resulted in higher fees for the clients and increased compensation for the representative. Many of the accounts were not suitable for advisory accounts, and neither the firm nor the representative adequately considered whether it was in the clients’ best interest to convert. The RIA consented to a civil penalty of $150,000, while the representative agreed to a civil penalty of $75,000 and a nine-month industry suspension.
Before converting from commission-based to advisory-based, review the account’s transaction history. If the account evidences few transactions or low turnover, enhanced suitability determinations may be warranted. With existing advisory accounts, periodically review the trading volume. “Reverse churning” has a low threshold, and examiners are sensitive to retail clients paying advisory fees when trading and/or active management are not evident. Additionally, if your firm is advisory-only and recruits a representative who was last at a broker-dealer or dually-registered firm, be aware of potential suitability issues when onboarding accounts.
There were no announced initiatives or sweep exams in January.
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