The SEC Looks to the Most Vulnerable

Read Global Regulatory Outlook 2018 

“There’s just no room for someone who ruins someone else’s life using the capital markets to do so,” he went on.1 In fact, though, that’s not true. There’s all too much room; as Clayton noted, the continuing scale of retail fraud is surprising.

Examples are shocking:

  • An adviser who raised more than $6 million from elderly investors, promising to pay their bills, handle their taxes and invest on their behalf, but instead channelc1ed the money to himself, business expenses and friends.2
  • Boiler room cold callers pressuring senior citizens to purchase penny stocks and telling those complaining to “get a gun and blow [their] head off.”3
  • Investment scams targeting online dating sites, offering companionship and love—for a modest investment.4

Clayton is right to condemn such activity, but he was less vocal on why retail fraud remains so rampant. One key reason is, arguably, the Dodd-Frank Act.

With Dodd-Frank, Congress got things completely backward. It directed the SEC to unregister essentially all small retail investment advisers—those managing $150 million or less—to concentrate on larger firms. The logic of doing so, in the aftermath of the financial crisis, was to focus on systemic risks to the financial system. The government wanted greater oversight of large institutional investors and, specifically, private fund managers.

In fact, it’s hard to think of anything done under the Act that has done less to contain or manage systemic risk; rather, activity has focused almost exclusively on increasing institutional investor protection—cracking down on improper allocation of expenses, for example—and other breaches of fiduciary duty.

No one would argue that institutional investors should not be protected from fraud. But, with Dodd-Frank, it was done at the expense of small investors—“Mr. & Mrs. 401(k),” as Clayton calls them. Removing the small advisers who manage their money from federal oversight left them to state regulators, where oversight and enforcement processes are inconsistent at best and nonexistent at worst. That leaves retail investors dangerously exposed, while conversely, institutional investors can now depend upon the government—in addition to their own sophisticated due diligence teams—to detect fraud, mismanagement and waste.

President Trump was elected promising to dismantle Dodd-Frank. We’re not likely to see much material revision to it soon. If the SEC can address its historic mistake regarding retail investor protection, though, it will be an achievement worth noting.

 

Sources:
1 http://videos.uschamber.com/detail/videos/latest-videos/video/5522333805001/a-discussion-with-sec-chairman-jay-clayton?autoStart=true 
2 https://www.sec.gov/litigation/litreleases/2017/lr23995.htm 
3 https://uk.reuters.com/article/usa-crime-boilerroom/u-s-charges-14-over-147-mln-new-york-boiler-room-scam-idUKL1N1K327G 
4 https://www.sec.gov/news/pressrelease/2016-116.html

The SEC Looks to the Most Vulnerable 2018-04-27T00:00:00.0000000 /insights/publications/compliance-and-regulatory-consulting/global-regulatory-outlook-2018/the-sec-looks-to-the-most-vulnerable /-/media/assets/images/publications/thumbnails/global-regulatory-outlook/gro-the-sec-looks-to-the-most-vulnerable.ashx publication {DA6CC51B-740E-439A-B283-2BBFB5326BAA} {DE05ECA4-1852-4BEF-A4E1-491CB497F9CB} {EBC1AB28-1393-493C-AF32-19B3B0B6E171} {1C3CB363-1B9A-40E2-AF19-5C433260F861} {E1E71CC6-CE33-46BD-A6CF-B547EF2D052C} {4FD55120-2DD8-4DB5-8DAA-3D9212C2436D} {4984481D-079C-4B42-B985-EA34752D3CD5} {E8669D15-7AE5-41D4-BE77-6C5E07C03F38} {36EE33A2-B269-45FC-8D7C-A5B66255C61E} {19B96101-31A4-4C6D-9597-A39E0C9E24C8} {910B8B61-AD72-44CF-87C2-BFA5FE119417} {742DB722-E4B5-4E18-A540-4BFA6F8D6843} {AB22E3A7-0FD2-43A7-91E0-C3590E9141B9} {5AA4BE28-97DD-427B-A8CA-7B3BF3B5E4BF} {C9A6FAA4-0FA0-40A8-B4D2-2A0DDD29F14D} {F9A927B5-B65A-4F14-B590-DD46B5DC907A} {063D2ACD-1006-4DAD-8E9F-A8084C7358F8} {2361D727-0847-4B20-B8E9-68E7DBA5C7DC} {06F92A80-3DC4-43D6-B936-0DCE2BB89559} {DAF820AB-1213-4246-A672-5E88174F7D70} {7290AF49-EA68-489A-AE17-153A25C33B81} {0CB8F4F1-E472-4C36-B0B1-F2DB233070CA} {B062D54C-1425-4A04-8F9F-95EA14068E6D} {5BF06FE7-E88C-4627-A701-3E042F076F1F} {65648E61-ED08-40DF-AEE6-DB90ABD49289} {C8894F56-FF6C-4DEA-AB91-58D66A7F0624} {B7CF2537-1DBA-485F-A14F-8BD1524F1A8B} {95D7F66C-11BB-4E7D-B07C-48874A321F98}