Khuzami Says Enforcement is Focusing on ADVs and Poor-Performing Funds
In a recent speech, the SECâ€™s Director of Enforcement, Robert Khuzami, said that the SEC is â€œutilizing data and risk-based analytics to identify the early-warning signs of fraud.â€ For example, the Enforcement Division is reviewing ADVs for â€œhigh-risk investment advisersâ€ to determine â€œwho is lying about their educational achievements, their business affiliations, and their assets under management.â€ He said that the Enforcement Division is also analyzing databases to â€œidentify mutual funds that exhibit poor performance, have relatively high fee arrangements, and sub-advisers.â€ Mr. Khuzami compared his approach to that of Rudy Giuliani in New York: â€œFor Rudy, it was a focus on subway turnstile-jumpers and squeegee-men. For us, itâ€™s advisers who lie about graduating Phi Beta Kappa, conceal their association in a past failed business venture, or inflate their assets under management who might well be the same persons who outright steal your money when the markets turn against them.â€ Separately, the Enforcement Division has indicated that lax compliance programs could also lead to more serious violations.
OUR TAKE: Lying on your ADV, misrepresenting fees, and failing to have an adequate compliance program all violate the Advisers Act. We do not question the Enforcement Divisionâ€™s authority to prosecute these violations. However, we are not sure that there is any empirical evidence that these violations are gateway crimes for more serious violations. We also think that retail broker-dealers and advisers have enough of an image problem without being compared to â€œsubway turnstile-jumpers and squeegee-menâ€ by their primary regulator.