The Financial Industry Regulatory Authority and the states traditionally have handled the bulk of retail brokerage investigations, such as the suitability of a retail broker’s investment recommendations or alleged excessive trading within a retail customer’s account. This past year, however, the Securities and Exchange Commission made its own concern clear and formally refocused its priorities on protecting the retail investor. The SEC’s renewed concentration in 2017 portends increased activity in this area in 2018.
The SEC made its stance clear from the outset in 2017 by including “matters of importance to retail investors,” including a special emphasis on “risks specific to elderly and retiring investors,” in its Office of Compliance Inspections and Exams 2017 examination priorities. New SEC Chairman Jay Clayton carried forward this message in numerous public statements in 2017.
Nowhere is the SEC’s renewed focus clearer than in its Sept. 25, announcement of the establishment of its Retail Strategy Task Force. This nationwide effort brings together personnel from the Division of Enforcement, the National Examination Program and the Office of Investor Education, among others, to create targeted initiatives surrounding misconduct impacting retail investors and apply the lessons learned from prior retail cases throughout the agency.
In an Oct. 26 speech, Stephanie Avakian, co-director of the Division of Enforcement, expanded on the Retail Strategy Task Force. She noted that the task force strategically uses data analytics to look for widespread abuses that affect retail investors. The SEC’s use of data analytics — for example, to identify insider trading concerns — is not new.
Now, the use of text analytics and machine learning has enhanced the SEC’s ability to sift through the vast amounts of trade and other data, including the 16,000 tips, complaints and referrals it receives yearly. Avakian cited a number of risks the task force targets, including: charging inadequately disclosed fees; recommending and trading in unsuitable strategies and products; the purchase of mutual fund share classes with higher fees; inadequate disclosure in the sale of structured products to retail investors; and abusive practices such as churning and excessive trading.
Since that time, the Division of Enforcement has reinforced this priority. For example, on Dec. 4, the SEC brought an emergency action to halt an initial coin offering in which the promoters had raised almost $15 million from thousands of individual investors by promising returns of 1,354 percent, while simultaneously misappropriating investors’ funds. As noted by Robert Cohen, chief of the Enforcement Division’s Cyber Unit, the SEC “acted quickly to protect retail investors from the initial coin offering’s false promises.”
Two days later, on Dec. 6, the SEC brought an action against two individual brokers who allegedly made unsuitable investment recommendations and churned their clients’ accounts. As a result of the rapid trading in these accounts, the brokers received approximately $281,000 in commissions. Their clients, however, lost over $573,000. In announcing these charges, the SEC highlighted that this case resulted from an examination of the brokers, and reiterated that it is “intensifying our focus on unscrupulous brokers and their harmful practices.”
These matters follow cases brought by the SEC in January, April and September of this year against brokers accused of excessively trading client accounts. With the advent of the Retail Strategy Task Force, expect the SEC’s examination and enforcement efforts in the retail space to intensify in the coming year.
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