5 highlights from the year in enforcement

Despite regulators' making it clear in 2023 that advisors and brokers should be very careful about how they use WhatsApp and similar services to chat up clients and business partners, many companies apparently didn't get the message.

One sizable contributor to the Securities and Exchange Commission's more than $5 billion regulatory haul this year was firms that failed to abide by the regulator's rules on so-called "off channel" communications. Speaking on Dec. 12 webinar organized by the compliance systems firm SMARSH, Brian Rubin, the co-head of securities enforcement practice at Washington, D.C.-based Eversheds Sutherland, the numbers have caught plenty of people's notice.

All told, he said, there were 23 cases involving violations with electronic communications in 2023. Firms paid more than $400 million in total for those infractions, he said.

"Which is obviously huge, and that's why it's getting everybody's attention," Rubin said. 

Generally speaking, the SEC requires all discussions of business between advisors or with clients to be recorded for compliance review if needed at a later date. 

WhatsApp, Signal and other messaging services make this difficult because they send information in encrypted form. Some even delete chats shortly after they go out.

That the SEC views all this as a big "no-no" can be seen in the size of some of the fines it imposed throughout the year. In August, the regulator imposed $289 million in penalties on Wells Fargo and eight other firms and their affiliates over their alleged failures to track and record messages sent by employees reaching as high as the senior executive level. A month later, the SEC hit six firms, including Baird and Interactive Brokers, and their affiliates with nearly $80 million in penalties for similar alleged infractions.

Of course, 2023 had plenty of fraud cases that had nothing to do with new messaging systems or digital assets. As in previous years, garden-variety fraudulence unfortunately continued to make up a big part of what kept regulators busy.

This year once again saw the elderly as common targets of scams. One of the more shocking cases involved a former LPL advisor who pleaded guilty in March to stealing nearly $3 million from a couple in their 80s but now remains a suspect in the death of the wife, Betty Cabral. The advisor, David Del Rio, is now serving a 15-year prison sentence while investigators look to see if they have a homicide case against him.

In another case showing the elderly population's susceptibility to abuse, an advisor in the rural California community of Orcutt stands accused of ingratiating herself with older women as part of a scheme to siphon off their assets. Julie Anne Darrah, who sold her firm Vivid Financial Management to Wealth Enhancement Group in 2021, is believed to have stolen $2.25 million from clients who sometimes viewed her as "the daughter they never had." Perhaps the lowest point of all was hit by a former Morgan Stanley vice president who was accused by the SEC in June of stealing $1.7 million from his elderly mother and mother-in-law.

But it wasn't just fraud cases that took up regulators' time. They also found themselves levying some hefty fines against large institutions found to have been a little too careless about how they were charging customers. 

In July for instance, state regulators fined two brokerage affiliates of Raymond James Financial more than $12 million over allegations that they had overcharged customers for hundreds of thousands of equities transactions over a five-year period. In September, Deutsche Bank agreed to pay $25 million over failures related to environmental, social and governance investing, or ESG, and its anti-money laundering policies. And in November, Bank of America was hit with a $24 million fine for failing to catch a "spoofing scheme" two former employees in its securities department had run to manipulate the market for U.S. Treasury bonds.

Regulators slowly started accelerating their enforcement of a rule meant to make sure broker-dealers are always looking out for their clients' best interests, whether they have conflicts or not. The SEC's Regulation Best Interest, in effect since June 2020, was meant to give brokerage customers protections similar to those enjoyed by investors working with fiduciary advisors.

Reg BI, as the rule's known for short, may not have insisted on as thorough an elimination of conflicts of interest as does the stricter fiduciary rule for investment advisors. But at least it went beyond the brokerage industry's former conduct standards by making it clear that brokers ultimately work for their customers.

Despite warnings that enforcement was coming, the number of cases citing Reg BI violations has resembled a trickle more than a flood. In May, the Financial Industry Regulatory Authority — which the SEC has deputized to regulate the brokerage industry — did reach an important milestone: It invoked Reg BI for the first time in a decision to boot a firm from the industry.

To skeptics of Reg BI, one common theme in this latest spate of cases is that most, if not all, of them could have been brought under the SEC's previous suitability conduct standard for broker-dealers. That standard, which was replaced by Reg BI, had merely called on brokers to make sure any investments they were recommending were well-suited to their clients' needs and goals.

Michael Edmiston, a former president of the Public Investor Advocates Bar Association and a securities lawyer at Jonathan W. Evans & Associates in Studio City, California, said he's still waiting for a Reg BI case that clearly defines what regulators mean when they talk about clients' best interests. He's also curious to see how FINRA and the SEC will treat wealth managers' duty under Reg BI to show they've considered alternatives to any risky investment they might recommend.

Will regulators, Edmiston asked, try to make sure advisors didn't just list the names of other investment opportunities? Will they look, he said, to see that they took the additional necessary step of investigating their fees, likely returns and other traits?

"We have not seen that kind of case yet," Edmiston said. "I know it's coming. It's just a matter of when."