In the wake of the 2008 financial crisis, the U.S. Securities and Exchange Commission (SEC) has brought charges against nearly 100 business entities and individuals in the financial services industry for misconduct that led to or arose from the crisis. More than $1.2 billion in penalties have been levied through SEC enforcement action, and dozens of individuals have been barred from the industry or had their commissions suspended.
Some of the charges directly involve compliance issues, and others do not. As SEC Enforcement Division Director Robert Khuzami said in November 2011, “not all compliance failures result in fraud, but many frauds take root in compliance deficiencies.” This “simple truth,” as Khuzami put it, redoubled SEC efforts to identify and charge individuals and firms that fail to maintain sufficient corporate compliance programs.
This FAQ is part of SearchCompliance.com's IT Compliance FAQ series.
Table of contents:
What types of misconduct has the SEC sought to address, and what penalties have been assigned?
Most of the SEC enforcement actions in the wake of the financial crisis relate to risky mortgages, and they fall into three main categories:
- Concealing risk in complex structure products;
- Misleading investors about mortgage-related risks; and
- Concealing the extent of risky investments in mutual funds and other financial products.
The Goldman Sachs Group Inc. agreed to pay a $550 million penalty in July 2010 to settle charges that it misstated and omitted facts regarding a subprime mortgages product just as the housing market was about to implode. It was the largest penalty a Wall Street firm had ever paid the SEC. Under the settlement, $300 million of the penalty was to go to the U.S. Treasury, and $250 million to harmed investors.
In January 2011, Charles Schwab businesses agreed to pay more than $118 million in penalties to settle charges related to misleading statements about a mutual fund heavily invested in risky securities.
The SEC also charged Bank of America with misleading investors about billions of dollars in bonuses paid to Merrill Lynch executives when the bank was purchasing Merrill Lynch. As a result, Bank of America agreed to not only pay $150 million in penalties, but also to strengthen its governance and disclosure practices. The settlement required Bank of America to maintain seven “remedial undertakings” for three years, including hiring an independent auditor for disclosure controls.
What executives have been charged under SEC enforcement actions?
Dozens of CEOs, CFOs and other senior corporate officers have been charged by the SEC, including the chief executives from American Home Mortgage Corp., BankAtlantic Bancorp Inc., Countrywide PLC, Brooke Corp., Brookstreet LLC, and Taylor Bean Whitaker.
Countrywide CEO Angelo Mozilo (as well as the company’s chief operating officer and chief financial officer) was charged with deliberately misleading investors about significant credit risks. In its complaint, the SEC said that Mozilo wrote in an email that the company was “flying blind,” and in another email he referred to one of the company’s products as “toxic.” In October 2010, Mozilo agreed to pay a $22.5 million penalty to settle the charges. He was permanently barred from serving as an officer or director.
Lower-level managers have been the subject of SEC charges as well, including an asset management portfolio manager at Bear Stearns. An employee of Morgan Keegan & Co. was charged with fraudulently overstating the value of securities backed by subprime mortgages, and was barred from working in the securities industry as part of a settlement.
How has the SEC improved its ability to enforce compliance and prevent fraud?
In recent years, the SEC’s Office of Compliance Inspections and Examinations (OCIE) has undergone a series of initiatives to improve its work, which includes the process of examining firms to improve corporate compliance programs. SEC compliance examiners look at a firm’s books and records, interview employees and analyze operations to test the firm’s compliance with laws and regulations to determine the safety of client assets.
In a February 2012 report, the OCIE noted that typically it looks at the quality of a firm’s compliance systems and its internal control environment when deciding what areas to review. Usually firms are contacted before OCIE staff show up on the doorstep, but sometimes they are not.
In 2012, compliance is the OCIE’s main focus area. The exam program (officially titled the “National Examination Program”) will look at whether corporate compliance programs and risk management processes are able to identify potential weaknesses, such as the impact of cost cutting, mergers and acquisitions. The program will check whether there is adequate oversight of outside business activities and sufficient compliance at branch offices, independent contractors and remote locations. It will also be on the lookout for whether there is effective compliance and risk management processes for complicated investments and strategies.
What is the SEC’s Asset Management Unit, and what is its compliance enforcement role?
In the last few years, the SEC’s Enforcement Division has made a number of structural changes. The division created new, specialized groups to investigate enforcement issues, including an Asset Management Unit dedicated to investigating hedge funds and investment advisors.
The Asset Management Unit targets fraud by taking steps to prevent investor harm before it takes place. In November 2011, it took action against three separate investment advisory firms for compliance failures: Utah-based OMNI Investment Advisors Inc., Minneapolis-based Feltl and Company Inc., and Troy, Mich.-based Asset Advisors LLC. All three firms agreed to penalties and other conditions to settle the charges.
How do SEC enforcement actions affect chief compliance officers?
The SEC is taking steps to identify compliance deficiencies before they lead to fraud or other misconduct that can harm investors. When SEC compliance examiners warn a company about deficiencies and the warning is ignored, the company -- and potentially its officers -- can expect action against them.
The compliance provisions in the Investment Advisers Act require firms to implement policies and procedures to prevent, detect and correct securities law violations. It requires them to name a chief compliance officer who is responsible for administering the policies and procedures. An annual review is required as well.
When the SEC charged OMNI Investment Advisors in November 2011, it also charged company owner and chief compliance officer Gary R. Beynon. According to the SEC, the firm had not implemented corporate compliance policies and procedures even after examiners warned of the deficiency. To settle the charges, Beynon agreed to pay a $50,000 penalty and be forever barred from serving in a compliance or supervisory role in the securities industry, as well as from “from associating with any investment company.”
How has the SEC reacted to the recently passed JOBS Act, which reduces financial regulations?
In March, the U.S. House and Senate passed the Jumpstart Our Business Startups (JOBS) Act, legislation that would roll back fundraising and financial regulations for some companies. The Jobs Act is designed to lower regulatory hurdles for “emerging growth companies” trying to raise money through public stock offerings.
Prior to the passage of the JOBS Act, SEC Chairman Mary L. Schapiro criticized the legislation in a letter to the Senate banking committee. Schapiro said the definition of emerging-growth companies “is so broad that it would eliminate important protections for investors in even very large companies.” She added the bill would “weaken important protections” put in place after the past decade’s financial scandals.
President Obama signed the JOBS Act into law on April 5.