Financial advisors and broker-dealers saw record fines from Securities and Exchange Commission investigations in the 2022 fiscal year.
The SEC reported on Nov. 15 that its investigations resulted in orders to pay nearly $6.5 billion — the most in the agency's history — in fiscal year 2022, which ran from Oct. 1, 2021, to Sept. 30 this year. Those orders arose from 760 enforcement actions, a number up by 9% from the previous fiscal year. But the total penalties increased more than 50%.
The SEC's investigations targeted everything from large institutions such as Goldman Sachs, Morgan Stanley and Bank of America to individual advisors and broker-dealers. In one case cited by the SEC, investment advisor Scott Adam Brander of the Little Silver, New Jersey-based firm Buckman Advisory Group agreed on Sept. 13 to a settlement of nearly $1.2 million for an alleged cherry-picking scheme that saw gains from profitable trades steered into Brander's own accounts rather than his clients. The SEC alleged that Brander obtained more than $800,000 in ill-gotten gains in part by disproportionately allocating losses from his securities trades to clients while keeping the profits for himself. Buckman Advisory Group agreed to a settlement of $400,000 in the same case and Brander's former supervisor, Henry Buckman, agreed to a settlement of $75,000. A representative of Buckman Advisory Group declined to comment.
Another case cited by the SEC involves the first charges the agency has brought against a broker-dealer for violations of Regulation Best Interest. Adopted on June 30, 2020, the rule generally requires brokers to act in the best interests of clients but stops short of barring all conflicts of interest. A case brought by the SEC in June charged Pasadena, California-based Western International Securities and five of its registered representatives with violating Regulation Best Interest for recommending and selling $13.3 million worth of unrated security known as L Bonds to retirees and other retail investors. Among other things, the SEC charged that Western International recommended the bonds to seven investors without having reason to believe the securities were in those clients' best interests. Western International Securities couldn't immediately be reached for comment.
In yet another case, UBS Financial Services agreed to pay roughly $25 million to settle charges for failing to provide adequate training and oversight to 600 domestic advisors who sold a complex so-called yield-enhancement strategy to clients from February 2016 to February 2017. As a result, the SEC alleged, neither the advisors nor the clients fully understood the risks of the strategy, which involves using stock options to give returns a boost at times when the market is stable.
"UBS is pleased to have amicably resolved this matter related to training provided between February 2016 and February 2017 for an options overlay strategy," UBS said in a statement. "UBS appreciates the SEC's acknowledgment that in early 2017, UBS voluntarily remediated the issue by enhancing its risk control framework and strengthening its training program for the strategy."
Securities attorney Bill Singer, a former regulator who writes the Broke and Broker Blog, said the SEC's results would be more impressive if they resulted more from disputes brought to court rather than a string of settlements. As it is, Singer only counts 15 cases in which the SEC pressed its charges at trial.
Singer added that settlements are too often cynically viewed by Wall Street firms and other institutions as a "cost of doing business." That's especially true since most deals reached with the SEC don't require the defendant to admit or deny anything.
"And the monetary penalty the SEC imposes are coming from the shareholders and not coming out of the pockets of the people in the C-suites who are doing all the fraud," Singer said.
The SEC has proposed a rule that would allow companies to "claw back" bonuses paid to executives if the money was found to be paid as a result of an accounting error. Many times, executives are able to receive bonuses only if their companies hit certain performance goals. The SEC's proposal, which is still under review, would require executives to pay back the money when accounting misstatements made it appear as though performance goals had been reached when they in fact had not. Singer said such a rule will be good but is long overdue.
Besides actions against advisors and brokers, the SEC's report called attention to its record auditing firm fine of $100 million against Ernst & Young for auditing professionals' cheating on ethic examinations, crackdowns on Boeing Company and other firms for misleading financial disclosures, work to prevent abuses by lenders of cryptocurrency and awards to whistleblowers who helped it discover wrongdoing.
The SEC's orders of $6.5 billion worth of penalties against companies in fiscal year 2022 was up from $3.85 billion in the previous fiscal year. The 2022 total was made up partly of $4.2 billion worth of civil penalties and $2.2 billion of disgorgement payments, or the return of ill-gotten gains. The SEC's 760 enforcement actions consisted of 462 new actions, 129 actions against issuers alleged to be delinquent in making required filing and 169 "follow-on" proceedings coming in response to criminal convictions, civil injunctions or other orders.
Gurbir Grewal, director of the SEC's division of enforcement, said in a statement that the numbers show the SEC feels a sense of urgency with its duty to "to protect investors, hold wrongdoers accountable and deter future misconduct in our financial markets.
"A centerpiece of those efforts," he added, "is ensuring that we are using every tool in our toolkit, including penalties that have a deterrent effect and are viewed as more than the cost of doing business."
