On November 15, 2022, the SEC released it’s enforcement results for fiscal year 2022 with a total of 760 enforcement actions including: 462 new enforcement actions, 129 actions against issuers making delinquent filings and 169 continuing administrative proceedings to bar or suspend individuals from certain functions in the securities markets.
SEC enforcement actions in 2022 resulted in a record $6.439 billion in civil penalties, disgorgement and pre-judgement interest; the most in SEC history. According to the SEC: “A hallmark of the Enforcement Program in fiscal year 2022 was robust enforcement through resolutions that imposed penalties designed to deter future violations, establish accountability from major institutions, and order tailored undertakings that provide potential roadmaps for compliance by other firms.”
The following breaches and related enforcement actions may be of particular interest to Canadian securities dealers and advisors:
Recordkeeping violations
The largest penalties levied in 2022 related to recordkeeping violations levied against JP Morgan Securities LLC, 15 other broker dealers, and one investment adviser “for widespread and longstanding failures to maintain and preserve work-related text message communications conducted on employees’ personal devices.” These cases are part of the so-called “off-channel communications” sweep conducted by the SEC in conjunction with the Commodity Futures Trading Commission (CFTC), and which is ongoing with more settlements expected in the current fiscal year.
In addition to $1.235 in cumulative penalties, the firms admitted to the wrongful conduct and acknowledged it violated federal securities laws. They also entered undertakings to remediate past failures and prevent future misconduct including retaining compliance consultants to conduct comprehensive reviews of firm policies and procedures relating to the retention of electronic communications found on personal devices.
Fraudulent and deceptive sale practice
In May 2022, Allianz Global Investors U.S. LLC was charged in connection with an alleged massive fraudulent scheme that concealed the immense downside risks of a complex options trading strategy. According to SEC Chair Gary Gensler "Allianz Global Investors admitted to defrauding investors over multiple years, concealing losses and downside risks of a complex strategy, and failing to implement key risk controls,". The SEC ordered Allianz to pay more than $1 billion in combined penalties, disgorgement, and prejudgment interest.
Insider trading
In July 2022, the SEC charged nine individuals in connection with three separate alleged insider trading schemes that together yielded more than $6.8 million in illegal profits. According to the SEC: “Those charged include a former chief information security officer (CISO), an investment banker, and a former FBI trainee, all of whom allegedly shared confidential information with their friends, who then traded on that confidential information.” All involved related criminal charges filed by the U.S. Attorney's Office for the Southern District of New York. These actions originated from the Analysis and Detection Center of the Division’s Market Abuse Unit, which uses data analytics to detect suspicious trading patterns.
Cybersecurity and compliance
The SEC brought a number of enforcement actions related to failures by major firms to comply with core obligations including record-keeping and safeguarding customer information including:
Charges against J.P. Morgan Securities LLC, UBS Financial Services Inc., and TradeStation Securities, Inc. for insufficient policies and procedures to protect investors from identity theft, in violation of the SEC’s Identity Theft Red Flags Rule (Regulation S-ID).
Charges against Morgan Stanley Smith Barney for extensive failures, over a five-year period, to protect the personal identifying information of approximately 15 million customers.
According to the SEC, these cases reflect the critical importance of firms ensuring that their policies, procedures, and practices keep pace with technological developments.
Private funds
The SEC commented on the significant growth in recent years in the amount of assets managed by advisers to private funds and stated that “unique features of private fund investment may lend themselves to certain recurring issues including undisclosed conflicts of interest, fees and expenses, valuation, custody, and controls around material non-public information.” Actions related to private funds included:
Litigated and settled actions charging Allianz Global Investors U.S. LLC and three portfolio managers with a fraudulent scheme to conceal the downside risks of its “Structured Alpha” complex options trading strategy, which caused billions of dollars in losses to more than 100 institutional investors, including pension funds for teachers, clergy, bus drivers, and others.
Charges against nine registered private fund advisers for failing to comply with the Custody Rule or update their Forms ADV to accurately reflect the status of their private fund clients’ financial statements.
Charges against a fund adviser and its sole owner for allegedly fraudulently raising tens of millions of dollars in a private fund, misrepresenting the fund’s performance to investors, and misappropriating investor funds for personal use and to make Ponzi-style payments to other investors.
An action charging registered investment adviser Global Infrastructure Management, LLC for failing to properly offset management fees charged to private equity funds it managed and for making misleading statements to investors in those funds about fees and expenses it charged.
Complex products
The SEC brought significant enforcement actions in fiscal year 2022 for violations involving the misuse of complex products and strategies. Key cases included:
Charges against UBS Financial Services, Inc. for fraud relating to its “Yield Enhancement Strategy (YES),” whereby UBS’s failure to adequately train its financial advisors and advise them of the risks associated with the strategy resulted in surprise losses to clients.
Angel Oak Capital Advisors for misleading investors about delinquency rates in the firm’s “fix-and-flip” loan securitizations.
Charging the owner and other senior officers of Archegos Capital Management, LP, as well as the firm itself, alleging that they orchestrated a massive fraudulent scheme that resulted in billions of dollars in trading losses to Archegos’s counterparties.
While the SEC enforcement actions involved US firms, the Canadian regulators have similar regulations regarding recordkeeping requirements and off-channel communications, fraudulent and deceptive sales practices, insider trading, cybersecurity, private investment funds and complex products.
Firms seeking guidance on these or other matters can contact us at:
Email: info@sgdcompliance.ca
Phone: 647-967-5980.
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