FINRA Lawyer Blog
At a recent Securities Enforcement Forum in Washington DC, Stephanie Avakian, co-director of the SEC’s Division of Enforcement, discussed the agency’s future priorities.
Avakian emphasized that the mission of the Enforcement Division, to protect investors, will remain unchanged, but she announced a slight shift in focus areas and resource allocation.
The Division of Enforcement official referred to retail investors as the “most vulnerable market participants,” and confirmed that the SEC will continue to focus on:
- Retail investors,
- Cyber-related issues,
- Misconduct by industry professionals and companies, financial fraud, disclosure issues relating to public companies, and insider trading.
After identifying these three focus areas, the top SEC official referred to the key role of data analytics in identifying threats to retail investors. “There are all sorts of ways to use technology to slice and dice data and apply analytics to look for all kinds of problems – by product, by investor type, by location, by sales or trading practice, by fee, you name it,” she explained.
For some analysts, the SEC’s explicit focus on protecting retail investors is a clear shift from the Obama era’s relentless pursuit of corrupt Wall Street heavyweights.
Avakian referred directly to the question whether a focus on retail implies allocating “fewer resources to financial fraud or policing Wall Street.”
In response to that interpretation, Avakian said, “The premise that there is a trade-off between ‘Wall Street’ and ‘Main Street’ enforcement is a false one,” emphasizing the SEC’s efforts to address misconduct by “institutions of all sizes.”
In terms of protecting retail investors, the SEC believes it can do much more than merely shielding them from “Ponzi schemes and microcap or offering fraud,” expanding the fraud category to include the following problems:
- Steering customers to mutual fund share classes with higher fees,
- Abuses in wrap-fee accounts,
- Investors buying and holding high risk products like inverse exchange-traded funds (ETFs) for long-term investment, including in retirement accounts,
- Failure to disclose fees, mark-ups, and other similar factors with a negative impact on returns,
- Churning and excessive trading that generate large commissions.
Avakian also classified cyber-related misconduct into three different types of violations:
- Hacking to obtain nonpublic data to trade in advance of an announcement/event or to manipulate the market,
- Using hacked brokerage accounts to conduct manipulative trading.
- Using social media posts and other electronic publications to disseminate false information in order to manipulate stock prices
The SEC’s cyber unit will continue to focus on this type of cyber threats. Avakian also warned the industry about the potential consequences of cyber-related disclosure failures.
In the new scenario, cyber risks and cyber-security issues must be appropriately disclosed in SEC filings in order to avoid enforcement actions.
“We recognize this is a complex area, subject to significant judgment, and we are not looking to second-guess reasonable, good faith disclosure decisions,” Avakian clarified.
It remains to be seen how the SEC’s Retail Strategy Task Force will transform the SEC’s high goals into systematic action, and how effective the Cyber Unit will be in protecting investors from an increasingly complex array of cyber risks.
Financial professionals and industry firms now have more enforcement risks to anticipate. If you are an SEC enforcement target or simply need an analysis of policies and procedures, proactivity is the smart move. Talk to a Herskovits PLLC experienced securities lawyer to learn your rights and exposure. 212.897.5410