Regardless of whether a financial advisor is an “investment advisor” or a “broker” or neither under federal securities laws, the advisor might be an agent of the client under the common law of agency. If so, then as a matter of state law the advisor is a fiduciary who will be subject to liability for breach of any of several fiduciary duties to the client. In a recent paper sponsored by Federated Investors that is available for download here, I examine the fiduciary obligations of financial advisors who are agents under the common law of agency. The paper draws on earlier work on the economic structure of fiduciary law.

The debate about whether to impose a harmonized federal fiduciary standard of conduct on investment advisors and brokers notwithstanding, a financial advisor who is an agent under state agency law is subject to fiduciary duties of loyalty, care, and a host of subsidiary rules that reinforce and give meaning to the broad standards of loyalty and care as applied to specific circumstances. In the event of the advisor’s breach of duty, the client will be entitled to an election among remedies that include compensatory damages to offset losses incurred or to make up gains forgone owing to the breach; disgorgement by the advisor of any profit accruing from the breach or compensation paid by the client; or punitive damages. A financial advisor who ignores the possibility of fiduciary status under state agency law acts at his peril.

…continue reading: Fiduciary Obligations of Financial Advisors Under the Law of Agency

In many respects, 2012 was another year of aggressive SEC enforcement. The SEC’s Division of Enforcement again logged a near record number of enforcement actions. More important, the cases reflected a marked increase in the number and proportion of actions against registered investment advisers and broker-dealers, and their associated persons. This increased focus derives from a culmination of factors, including Enforcement’s creation of specialized units for the asset management industry and for structured products, the hiring of industry experts, and the close collaboration between staff from Enforcement and the SEC’s Office of Compliance Inspections and Examinations (“OCIE”). With the expansion of the registered private fund adviser population under financial reform legislation, and the launch of an initiative to conduct focused, risk-based examinations of these new registrants, this trend will likely continue for the foreseeable future.

At the same time, in the latter half of 2012 the SEC confronted significant challenges in litigating previously filed enforcement actions against individuals in cases related to the financial crisis. Whether these cases will cause the SEC to reevaluate its approach with respect to charging decisions in the future is unknown. However, in the short term, Enforcement seems undeterred by individual litigation results in its pursuit of continued enforcement actions.

The last six months of 2012 mark the beginning of another transition for the SEC generally, and for Enforcement in particular. As the year drew to a close, Mary Schapiro announced her departure as Chairman, followed by several division directors. Most notably, on January 9, 2013, the SEC announced that Robert Khuzami would step down as Director of Enforcement. As we look ahead to 2013, a new leadership team at the SEC and in Enforcement will seek to make their own imprint on the SEC’s priorities and processes. In addition, as more time has passed since the depth of the financial crisis, Enforcement’s priorities will shift to more recent conduct and emerging industry risks.

…continue reading: 2012 Year-End Securities Enforcement Update

I plan to speak about the Enforcement Division’s and in particular the Asset Management Unit’s priorities in the hedge fund space. I’ll discuss the importance of specialization and expertise to this effort; the risks for investors; how these risks are informed by the hedge fund operating model; and how a hedge fund manager’s business may be at odds with the manager’s fiduciary duty to the fund. I’ll also discuss the types of misconduct we’ve seen crossing our desks in the Asset Management Unit, and I’ll conclude with certain best practices to avoid the specter of an enforcement referral or inquiry.

…continue reading: Enforcement Priorities in the Alternative Space

I. Introduction

These are uncertain times for our nation’s investors and for those who issue and sell investment products, including variable insurance. A positive sign is that assets in variable annuities, at almost $1.6 trillion, remain near their all-time high. [1] In addition, the retirement income solutions offered by the industry are designed to address the needs of the many investors moving toward retirement in today’s uncertain market environment. However, there are significant challenges facing the business, particularly those presented by the persistent low interest rate environment and by volatile equity markets both here and abroad.

The Division has observed the industry undertaking several initiatives to address these challenges and curtail risk exposure in the contracts being offered. In addition, some insurers have chosen to exit the business. An industry on solid financial footing is important for investors, who rely on insurers’ ability to pay promised benefits. At the same time, some contract changes are not good for investors. For example, many recent changes have reduced benefits for new investors. Other changes have limited the ability of existing contract owners to make additional payments into their contracts in order to take advantage of the benefits of those contracts.

…continue reading: SEC Division of Investment Management Key Considerations

In January 2011, the Commission, with Commissioners Casey and Paredes dissenting, issued a staff report on a study, conducted pursuant to Section 913 of the Dodd-Frank Act, of the effectiveness of the existing regulatory standards of care that apply when brokers and investment advisers provide personalized investment advice to retail customers. In addition to mandating that study, Section 913 authorized, but did not require, the Commission to adopt rules establishing a duty of care for brokers identical to that which applies to investment advisors — in other words, a uniform fiduciary duty for brokers and investment advisors — and to undertake further efforts to harmonize the two regulatory regimes.

…continue reading: Regulation of the Investment Advisers

I. Overview of the First Half of 2012

The first half of 2012 has shown a continuation of the SEC’s aggressive enforcement strategy even after a record-breaking fiscal year 2011 for the U.S. Securities and Exchange Commission (the “SEC” or “Commission”), which resulted in 735 enforcement actions and over $2.8 billion in penalties and disgorgement ordered. During the first six months of 2012, the SEC filed 110 actions in federal court against a collective 308 defendants. It appears, however, that the SEC is beginning to feel the resource costs of pursuing such cases over time. Specifically, the SEC recently disclosed that it is actively litigating approximately 90 cases, which is an increase of more than 50% in the past year. This recent surge in litigation may have been influenced by many factors, including the increased complexity in cases stemming from the financial crisis and a related increase in charges being filed against individuals. Protracted litigation will place an increasing drain on the agency’s limited resources. Nevertheless, as the current administration’s first term comes to a close and as conduct related to the financial crisis becomes more distant in time, we anticipate that the SEC will sustain its aggressive strategy of filing and, if necessary, litigating cases against prominent defendants in order to bolster public confidence in a vigorous enforcement of the securities laws.

Highlights of the past six months include:

…continue reading: Securities Enforcement Update