Four New SEC Priorities Since Trump’s Return to the White House

The Securities and Exchange Commission, under President Donald Trump, has signaled a significant shift in enforcement priorities. Specifically, the agency has indicated it would refrain from advancing novel legal theories or pursuing technical violations. The agency has dismissed several pending cases and terminated many investigations reflecting this shift.

The SEC’s enforcement actions against registered investment advisers also provide valuable insights into the agency’s priorities and what advisers can expect. Since January, the SEC has filed more than 17 enforcement actions against registered investment advisers and their representatives.

This recent enforcement activity reflects a few key themes.

Fraud allegations are taking center stage. The SEC is prioritizing what it characterizes as clear-cut fraud—embezzlement, cherry-picking, and deceptive billing. However, the SEC is still bringing selected technical rule-based cases, especially when it views the rule as important for investor protection, such as the Custody Rule.

Fee disclosure and conflicts of interest remain a top priority. The SEC continues to scrutinize fee structures, adviser compensation incentives, and disclosures. Any conflict between what clients are told and what they are charged is fertile ground for enforcement.

Heightened focus on individuals. The SEC is looking to hold individuals accountable whether they are firm owners, individual representatives, or compliance professionals.

Robust compliance programs remain critical. Several cases involve alleged compliance failures by firm personnel. Strong internal controls and compliance programs might help prevent violations or mitigate enforcement consequences.

Fraud Allegations

Most of the SEC’s recent actions target what it characterizes as straightforward fraud—principally misappropriation of client funds.

The SEC sanctioned Momentum Advisors for its executives’ misuse of fund assets for personal expenses. In Kronus Financial, the principal allegedly diverted $17.3 million from vulnerable clients, while El Capitan Advisors involved transfers of client funds to buy a personal residence. And in P/E Capital, the SEC alleged the use of clients’ own login credentials to impose unauthorized fees.

It simultaneously appears that the SEC hasn’t completely turned away from technical, rule-based violations. The SEC charged a firm with including false information in an SEC filing—a strict-liability violation under the Investment Company Act—found a prophylactic Rule 105 violation, and charged another firm with multiyear violations of the Custody Rule, despite no allegations of client harm.

On each of these non-scienter, rule-based actions, the firm settled without admitting or denying the SEC’s findings.

Fee Disclosures, Conflicts

In keeping with its focus on retail investors, the SEC has also charged investment advisers for breach of fiduciary duty when they fail to clearly disclose conflicts of interest inherent in fee structures and charge clients more than what the firm had represented.

For example, in One Oak Capital, the SEC found that a firm representative converted more than 180 brokerage accounts to advisory accounts, raising client fees without adequate disclosure. In Transamerica Retirement Advisors, the SEC found that the firm failed to disclose conflicts tied to rollover incentives, generating millions in extra revenue.

The SEC has also moved against advisers for allegedly overbilling clients despite a promised 2% annual cap. It also found that American Portfolios Advisors failed to fully disclose conflicts, overbilled for alternative investments, and didn’t refund prepaid fees.

One of the SEC’s recent actions involving fee disclosures, TZP Management Associates, involved institutional investors. The SEC charged TZP for allegedly failing to adequately disclose and offset interest on deferred transaction fees and its improper calculation of fee offsets as called for by the relevant limited partnership agreements.

Finally, on Aug. 29, the SEC announced two settled actions against large advisers involving allegedly insufficient disclosures about how representatives were compensated or incentivized for enrolling clients in managed account programs.

In Vanguard, the SEC found the firm’s disclosures were inadequate because while some stated that representatives could receive bonuses for enrolling clients, others stated they were not compensated. In Empower Advisory, the SEC found that Empower Advisory and its broker-dealer affiliate failed to disclose that it tied compensation to enrolling retirement plan participants in managed account services.Vanguard and Empower Advisory settled without admitting or denying the SEC’s findings.

Focus on Individuals

The SEC is broadening its focus to bring charges against individuals, not just firms. Executives, compliance officers, and even representatives have faced penalties, suspensions, or industry bars.

In Momentum and APA, executives and compliance personnel were charged alongside the firms. Two Momentum executives settled, without admitting or denying findings, to an order sanctioning them for their use of fund assets for personal expenses. And APA’s chief compliance officer and its president settled, without admitting or denying findings, to charges that they backdated compliance documents.

Occasionally, the SEC has targeted individuals while ignoring firms entirely.

In Gary Costello, the SEC charged only the individual, finding he reallocated personal trading losses to client accounts. Similarly, in Suzanne Ballek, a CCO was sanctioned for backdating compliance documents.Both individuals settled with the SEC without admitting or denying the findings.

Compliance Remains Critical

Finally, many of the recent cases continue to underscore the importance of strong compliance infrastructure.The SEC has penalized firms when red flags were purportedly ignored, oversight was purportedly inadequate, or records were purportedly falsified.

In contrast, the SEC highlighted instances where it provided credit to firms that had made compliance efforts or improved their compliance policies and procedures. And the SEC’s Costello action may show that a firm could benefit from prompt discovery and response to alleged misconduct. Based on FINRA BrokerCheck records, it appears that Costello’s firm promptly investigated his trading activity and terminated him just two weeks after the last reallocated trade identified in the SEC’s order.

The SEC actions against investment advisers reflect the articulated priorities of the new SEC administration: fraud prevention, investor protection, and individual accountability. Investment advisers with strong compliance and oversight practices should be better positioned to address any inquiries by the SEC.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Jorge deNeve is partner in O’Melveny’s white collar defense & corporate investigations practice group and a former SEC enforcement attorney.

Michele W. Layne is of counsel in O’Melveny’s white collar defense & corporate investigations practice group and a former SEC regional director.

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