Key takeaways from the SEC’s 2023 enforcement results

In May, August and September, the SEC announced settlements against multiple investment advisers and broker-dealers for widespread recordkeeping failures. The common thread of all these cases was the widespread use of electronic communications that were not being archived. In total, the 23 firms paid over $390 million in penalties.

Among the September cases, one stood out from the pack. One firm had voluntarily self-reported suspected violations to the SEC. As a result, its penalties were $2.5 million, substantially lower than the other firms charged in that case.

The SEC charged nine investment advisers with violating its marketing rule, which took effect on November 4, 2022. Each of the charged firms advertised hypothetical performance to mass audiences on their websites without having the required policies and procedures. Altogether, the firms paid civil penalties of $850,000.

The SEC brought three cases against firms for violating the Dodd-Frank whistleblower protection rule. In the case against an investment adviser, the SEC alleged that an investment adviser’s employment agreements raised impediments to whistleblowing. The provisions in question prohibited the disclosure of confidential corporate information to third parties, without an exception for potential SEC whistleblowers. The firm also required departing employees to sign releases affirming that they had not filed any complaints with any government agency for the employees to receive deferred compensation. The firm paid a $10 million civil penalty, the largest penalty on record for a standalone violation of the rule.

The SEC brought cases alleging a variety of abusive trading practices, such as insider trading, front-running and market manipulation. For example:

• Eight social media influencerswere charged for allegedly using social media to manipulate exchange-traded stocks in a $100 million securities fraud scheme
• Two financial services industry professionalswere charged for allegedly perpetrating a multi-year front-running scheme that generated at least $47 million in illegal trading profits
• An executive of a public healthcare companywas charged with insider trading where he allegedly adopted a 10b5-1 trading plan while in possession of material non-public information and avoided losses of more than $12 million

The SEC charged  a broker-dealer for allegedly making materially false and misleading statements and omissions regarding information barriers to prevent the misuse of sensitive customer information. The litigation is pending.

The SEC charged an investment adviser for making materially misleading statements about its controls concerning ESG products. The firm’s marketing materials stated that it adhered to specific policies for integrating ESG considerations into its investments, but the SEC found that the firm failed to adopt and implement policies and procedures to ensure its statements about the ESG-integrated products were accurate. The firm agreed to pay a $19 million civil penalty to settle the charges.

In another case, the SEC brought similar charges against an investment adviser for policies and procedures failures involving two mutual funds and a separately managed account strategy marketed as ESG investments. To settle the charges, the firm agreed to pay a $4 million penalty.

The SEC brought a number of cases against investment advisers relating to conflicts of interest and disclosure failure, including:

• Charges against a private equity firm for failing to adequately disclose millions of dollars of real estate brokerage fees that were paid to an affiliate owned by the CEO. The firm paid a $6.5 million civil penalty and more than $14 million in disgorgement and prejudgment interest
• Charges against an investment adviser involving a cash sweep program operated by its affiliated custodian and undisclosed arrangements with third-party custodians whereby the firm received of millions of dollars in revenue sharing payments. The firm agreed to pay a civil penalty of $9.5 million and disgorgement and prejudgment interest of more than $8.5 million
• Charges against an investment adviser and its CEO for misleading the trustees of a fund they managed to obtain $20 million in rescue financing to avoid a possible bankruptcy. To settle the charges, the firm and its parent company were ordered to pay a $4 million civil penalty, and the CEO agreed to pay a $400,000 civil penalty and was barred from association with an investment adviser, among other remedial measures